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Workability Of Rent Control To An Economy

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Question:

Discuss about the Workability of Rent Control to an Economy.
 
 

Answer:

Introduction

Rent regulation by the government is a strategy of improving the affordability of houses on an economy. The landlords are pricing their rents at a very high prices which is making it very costly. This has greatly increased the costs of living. Houses especially near urban areas are too expensive for the low income people (E.H, 2015); to avoid this inequality caused, the government is opting to regulate the prices charged by landlords. However, it is not clear whether this implementation would succeed in supporting the intended goal of the government. This research will try to come up with a clear insight of what may happen after such an implementation is put in place. The two parties involved in this case are the landlords and the tenants. The paper will also identify the losing party and the party that will benefit from this policy. It will also be determined whether it is worthwhile for the government to go ahead and implement the policy, or rather to do away with it.

The prices for houses new large cities are soaring resulting in the medium and small income people being pushed out of the market as shown in fig 1 below. Whereas the prices have risen greatly on cities, it has also gone up in other dwelling places as shown in fig 2 below. In order to ensure that everyone could survive in this area without much income squeeze, the government is implementing a cap on the maximum rent that a tenant could be charged by a landlord (Munger, 2012).

Higher prices means that the current equilibrium price is very high. The highest proportion of Australia population live is a housing stress as shown in fig 3 below. Thus, the imposition of such a cap is on a price lower than the equilibrium price (Merritt, 2017). This make the demand for apartments to increase. Why? When the prices were initially higher, most people could not afford the rent and thus avoided the areas’ rent; however, a reduction in prices could draw in some other households who can now avoid at the lower prices.

In economics, suppliers are not willing to supply more at lower prices, therefore, after such a price cap impose, the supply is expected to remain the same as no other investors could be attracted by the lower prices (Block, 2008). When supply remain constant as the demand rises, a situation of an excess demand is created in an economy.

The higher initial equilibrium price Pe and quantity Qe is unaffordable. The cap is set at Pc causing the quantity supplied to be Qc. However, the demand at price Pc is higher at Q2 creating an excess demand. The cap increases consumer surplus, reduces producer surplus and creates a deadweight loss (Taylor, 2006).

The automatic mechanism of supply and demand is hindered by the cap. Thus, a clearing equilibrium cannot be achieved (Block, 2008). One fact is that, the landlords are profit maximizers; this is the reason why an imposition of a rent cap causes the prices of houses in the said area to charge similar prices. The landlords aim is to maximize wealth by charging the highest price possible; the cap in this case is the highest price possible. Since the construction of houses differ in quality, charging a common price way be detrimental to the housing quality as the landlords may cat their costs of maintenance (Tucker, 2008). Investors could avoid building very expensive and spacious houses since this would not attract a better rent than would be the case is the cap was not imposed.

The excess demand would cause a shortage of supply in the housing market and landlords may use this as an advantage to practice the black-market business. This is where the landlords would hold their houses empty whereas there are people willing to pay the cap rent. They do this so as to get some people who are willing to give some extra compensation above the cap rent. Pareek (2017) argued that this explains why there are waiting lists on the acquisition of houses. This makes the house haunting a big hassle. Some may advertise vacancies but there after decline to accept while others decline immediately. The extra money is payable in secret and is made separately from the stated rent so that this couldn’t be known by anyone to avoid facing regulatory charges by the government.

 

The losing party here are the landlords especially those who had constructed very expensive and spacious houses with an intent to charge higher prices. The winning party are meant to be the tenants since they are made able to afford houses in better areas at a lower price. However, this comes with an increased costs of house hunting. The new investors to this industry may construct apartments that are of lower quality and less spacious as a strategy to cope with the low rent prices. A rent cap according to Block (2008) is the worst policy as it diverts investment away from the housing sector.

Conclusion

A rent cap imposition by the government do not only affect the owners of the apartment, it also increase the apartment hunting on the tenants’ side. The main goal of the rent cap was to assist those with the limited budgets to afford houses, however they goal can be said to have failed since only those who can afford a compensation above the fixed rent could be able to get the houses freely. This implementation causes additional problems on the housing issues and it needs other policy actions to make it work effectively. Alone it may result in an increased cost on the side of the government since it requires monitoring to ensure that the policy is observed. With excess demand prevailing, the lower cap rent could not be sustainable in the future.

Recommendations

The cap rent imposition may be effective if the government would create an initiative to help the residents of the area with the capped rent to understand their rights to rent houses at the stated price and to report any landlord who requests for anything above the set price. Also, the government should also fixed the standard quality of the apartments to prevent the investors from distorting the quality as a strategy to survive under lower rental prices. Otherwise, the government should completely avoid such a rental cap implementation.

 

References

AHURI. (2017). Consumer choice, welfare reform and housing assistance. [Online] Available at: https://www.ahuri.edu.au/policy/welfare-reform [Accessed 21 Apr. 2017].

Block, W. (2008). Rent Control: The Concise Encyclopedia of Economics: Rental Control. [Online] Econlib.org. Available at: https://www.econlib.org/library/Enc/RentControl.html [Accessed 11 Apr. 2017].

E.H, (2015). Do rent controls work? [Online] Economist.com. Available at: https://www.economist.com/blogs/economist-explains/2015/08/economist-explains-19 [Accessed 11 Apr. 2017].

Kusher, C. (2017). Deteriorating housing affordability in Sydney and Melbourne due to both demand and supply. [Online] Propertyupdate.com.au. Available at: https://propertyupdate.com.au/deteriorating-housing-affordability-in-sydney-and-melbourne-due-to-both-demand-and-supply/ [Accessed 21 Apr. 2017].

Merritt, C. (2017). Explanation of the Difference between a Price Floor & a Price Ceiling. [Online] Smallbusiness.chron.com. Available at: https://smallbusiness.chron.com/explanation-difference-between-price-floor-price-ceiling-69422.html [Accessed 11 Apr. 2017].

Munger, M. (2012). Price Controls, Price Ceilings, and Price Floors: Supplementary resources for college economics textbooks on Price Controls, Price Ceilings, and Price Floors. [Online] Econlib.org. Available at: https://www.econlib.org/library/Topics/College/pricecontrols.html [Accessed 11 Apr. 2017].

Pareek, A. (2017). Living Economics: Rent Ceiling. [Online] Livingeconomics.org. Available at: https://livingeconomics.org/article.asp?docId=122 [Accessed 11 Apr. 2017].

Taylor, B. (2006). Price Ceilings. [Online] Economics.fundamentalfinance.com. Available at: https://economics.fundamentalfinance.com/price-ceiling.php [Accessed 12 Apr. 2017].

Tucker, I. (2008). Survey of economics. 6th ed. Mason: South-Western Cengage Learning, pp.74-76.

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