If rent increases are capped at 7% per year, landlords will have an incentive to increase it at the max, because that gives them more flexibility the next year.
For example, let's say the free market would raise rents 5% this year, and 8% next year. A cap of 7% means the rent will rise 7% this year, as the landlord won't want to have caps permanently reduce future rents.
This is a weird argument. Would this still happen if rent increases were capped at 10%/year, what about 50%/year? At some point no one is going to rent at the rates you're asking and you're going to have to stop.
It all comes down to business risk. For example, with all the trillions being printed and stuffed into the economy, I'd be afraid of a return to 20% inflation like in the 70's. If my rates were capped at 7%/year, you can bet I'd raise it now by 7% just so I don't get caught next year with 20% inflation and only a 7% rate increase.
Yes, right now, I'd risk fewer tenants with 7%, but balance that against what might happen next year when I'd be full and still lose money because of the cap that year.
They already had an incentive to increase it at the max, because it's more money in their pocket.
For this to be true, they would have to either (1) under present conditions, not be raising the rent to maximize profit or (2) under the scenario, raise the rent past maximum profit
Landlords in a free market will usually act to maximise longer term profit not rent. Increasing rent in the short term by too much (even if the resultant rent is below market) only to see a tenant leaving soon afterwards can be a net loss due to void periods and the costs of finding a new tenant etc. Eventually the gap to market rent may grow to the point where the risk is worth it and then an increase makes sense.
In the presence of a cap this strategy becomes riskier so it forces landlords to think about a shorter term horizon.
There's also a signalling effect of the cap which may mean tenant reactions to an increase at the cap are different.
> They already had an incentive to increase it at the max, because it's more money in their pocket.
They'll set it based on supply & demand. But caps increase the business risk to the landlord, and therefore increases the price as risk always translates to an increased price.
For example, let's say the free market would raise rents 5% this year, and 8% next year. A cap of 7% means the rent will rise 7% this year, as the landlord won't want to have caps permanently reduce future rents.