Government Intervention In The Housing Markets: Regulation On Rental Prices

Choose one government intervention (by type) in housing and critically discuss intervention affects the housing market. 

To identify the government intervention 

To investigate the effect of the intervention to the housing market

The Importance of Housing

1.Housing is essential for all nations. One of the most overwhelming trend on governments concern is the rapid urbanization; poverty level in nations is deepening as a result, there is degradation of the environment, and the number of slums is increasing. With all this issues, the government is left with a challenge of providing adequate shelter for all. Human settlement challenges cannot be met by civil society, private sector or the government alone. All aspects of the society are important in minimizing this challenges. Human generally are interested in living in houses near their work places so as to minimize the delays that may result from travelling for distance places. One of the greatest challenge in the housing market is that; houses near urban areas are very expensive and only affordable to a specific income group. Most of the affordable houses are located distance away from the urban areas. Again, even with houses being affordable in areas distance from urban areas, there still exist the challenge of fare prices. The prices are always very high especially during morning hours where most people are getting to work places, and evenings when they are going back home.

There are many types of government intervention in the housing market; some of this may include; making houses more affordable (Wong and Zhang, 2011), regulation on rental prices, regulation of transportation prices, encouraging multiple housing, etc. However, this paper will be reliant on the intervention involving the government regulation on rental prices. According to Bosvieux (2012), most of the time rental control involves the freezing or rental-prices.  The paper shall discuss the benefit and demerits that usually results in the housing market as a result of this intervention.

The government is obliged to facilitate the affordability of sufficient shelter for the voters. While many nations have adopted the policy of making homes affordable; this is buy making mortgages available at a lower rate, people have bought homes. However, not all investors are legible for being given the mortgages by banks since most people are not able to provide securities to back up their mortgages. Thus, many people are left with just a single option which is to rent. Thus, given the fact that most people engage in rental activities, it’s thus important for the government to regulate the rental business since private owners of flats and self-contained rental houses will always take advantage of the high demand for rentals and charge higher prices that eat into the pockets of those who use the buildings. Many people who are employed or are running their own small business are living in poverty because most of the revenue they earn goes to rent.

Thus, regulating rental prices and making housing cheaper is one important strategy that can help in the reduction of poverty level in an economy. Households after paying less for housing will be left with sufficient income to improve their living standards since they can now manage to buy other goods. Phillips (2014) argued that most of the times, renting is considered cheaper than buying, thus most nations have a culture of assuming that most people will access accommodation through renting rather than buying homes. Melican (2015) noted that the fact that there are laws in place that protect tenants from being kicked out of the house in a whim, renting is the best option. Furthermore, there are also laws that require continuous property maintenance and thus most people tend to run to renting to avoid such costs (Connolly, Collinson and Burgen, 2018).

Types of Government Intervention in the Housing Market

According to Reed (2015), renting in Germany is accepted as the long term suitable means of accommodation; long term intervention by the government in the housing market has led to Germany having 54.1% of its households as renters. Households who rent in Berlin are the highest 84.4%. It is a challenge to provide this amount of accommodation without intervention by the government. For example, the housing allowance paid by the German government in 2012 was approximately to 783,000 households; this is equivalent to 1.9% of its private households. The single person households were allocated 57% of this funding; these single persons were those that had no ability to compete with the multiple income households in the open market.

The above graph is a representation of people who own homes. In most of these state, the percentage of home ownership is below 50% meaning that most people are renters. In average only 45.9% of households own homes. Movimentgraffitti.org (2018) noted that mostly high rental prices affects the elderly, the low-income groups and the youths; the youths have not yet gathered much revenue that they could use to buy homes and thus have no option but to rent. There are some nations that have acknowledged the gap that exist between what tenants can pay and what is charged by the landlord. An example is the US where the gap is bridged by using a voucher system in which private landlords receive subsidies for rent payment. The US government funds this system, and ensures an access of affordable housing that are of minimum quality by all the tenants.

The major reason why renters have increased rapidly is due to the growth of property prices. An example is Malta. Due to the unavailability of rental policies in Malta, tenancies have been found to be stable and the landlords raise prices without considering individuals, society or even the economic impacts. Rent regulation should be mainly done on the supply side, the government should also provide social housing. The increased supply of housing may end up driving rental prices down due to inadequate demand. There are different types of rental regulation in European economies; one is the initial prices control present in Austria, Netherlands, France, Denmark and Sweden (Oecd.org, 2016). In Sweden, rental prices and increments are negotiated at the municipal level through annual collective bargaining. This is done between Swedish Tenant Union (STU) and the representatives for private landlord and the municipal housing company (Oecd.org, 2016). Another is regulating rent-price increment and contract length present in Germany and Belgium (Movimentgraffitti.org, 2018). In some cases, the regulation may forbid the tenant from raising the rent price until the price is reviewed. In some other regulations, the regulation may allow the tenant to raise prices annually but not to exceed the increase in living costs provided by the authorities.

2.Equilibrium in the housing market initially is at the intersection of demand for houses and supply for houses (Q*R*). For a rental-price cap to be binding, it has to be set under the equilibrium rent; this is after taking into account that the current equilibrium rental price is very high. The setting of maximum rent price creates a shortage in that only Q1 housing are supplied, while demand increases to Q2 (Riley, 2012). It creates pressure on the suppliers side since the price they are willing to take by supplying Q1 is R1, but what they are actually offered is Rm. Thus it can be said that, maximum rent setting only discourages investment in the housing market.

On the other hand, it makes it less profitable for those already owning rental houses and thus creates a disincentive for maintenance and development. This makes some rental houses to be left in poor condition that may be of physical threat to tenants. Another issue that may arise is that of people who were charging lower rent prices pushing their price up to the maximum price, this could be of great advantage to many. Thus it can be concluded that, rental price capping can only be implemented together with other policies in order to be efficient; alone it can bring unintended results in the market. Such policies may include mandatory maintenance, the government may also include a subsidy for landlords.

References

Bosvieux, J. (2012). Rent control: a miracle solution to the housing crisis? [Online] Metropolitiques.eu. Available at: https://www.metropolitiques.eu/Rent-control-a-miracle-solution-to.html [Accessed 4 Oct. 2018].

Connolly, K., Collinson, P. and Burgen, S. (2018). Renting property: how does it compare around the world? [Online] the Guardian. Available at: https://www.theguardian.com/money/2018/apr/21/renting-property-how-does-it-compare-around-the-world [Accessed 4 Oct. 2018].

Melican, B. (2015). Germany: the country where renting is a dream. [Online] Telegraph.co.uk. Available at: https://www.telegraph.co.uk/expat/expatlife/11417359/Germany-the-country-where-renting-is-a-dream.html [Accessed 4 Oct. 2018].

Movimentgraffitti.org (2018). A Proposal for Rent Regulation in Malta. [Online] Movimentgraffitti.org. Available at: https://movimentgraffitti.org/A-Proposal-for-Rent-Regulation.pdf [Accessed 4 Oct. 2018].

Oecd.org (2016). Rental Regulation. [Online] Oecd.org. Available at: https://www.oecd.org/els/family/PH6-1-Rental-regulation.pdf [Accessed 4 Oct. 2018].

Phillips, M. (2014). Most Germans don’t buy their homes, they rent. Here’s why. [Online] Quartz. Available at: https://qz.com/167887/germany-has-one-of-the-worlds-lowest-homeownership-rates/ [Accessed 4 Oct. 2018].

Reed, R. (2015). Here are five ways governments can intervene in the market to create affordable housing | CityMetric. [Online] Citymetric.com. Available at: https://www.citymetric.com/politics/here-are-five-ways-governments-can-intervene-market-create-affordable-housing-1173 [Accessed 4 Oct. 2018].

Riley, G. (2012). Unit 1 Micro: Revision on Maximum Rents in Housing. [Online] tutor2u. Available at: https://www.tutor2u.net/economics/blog/unit-1-micro-revision-on-maximum-rents-in-housing [Accessed 4 Oct. 2018].

Wong, G. and Zhang, X. (2011). Government Intervention and Impact on the Housing Market in Singapore. The Journal of Comparative Asian Development, 2(1), pp.115-132.