In some cities around the world (e.g. Berlin, New York, and Stockholm) rent control is used to ensure housing is affordable. Using the Market model, conduct an economic analysis of rent control. Use the analysis as a basis for providing recommendations regarding its introduction in London.
“Rent control, like all other government-mandated price controls is a law placing a maximum price, or a “rent ceiling,” on what landlords may charge tenants. If it is to have any effect, the rent level must be set at a rate below that which would otherwise have prevailed” (Walter Block).
The Market Model (figure 1) shows that there is a gap between supply and demand. This is demonstrated by two curves which are the demand curve and the supply curve. Consumers of a product are encouraged to increase purchasing when the government decreases prices and as price rises to decrease purchasing, whereas, suppliers are encouraged to increase production when prices are high and decrease production when prices fall. The market model shows that at one point the demand curve and the supply curve intersect. This is called the equilibrium price where production is equal to demand thus there is no surplus and no shortages. Figure 1 can also describe a Pareto efficient economy. This is “where all possible Pareto improvements have been made: where, therefore, it is impossible to make anyone better off without making someone else worse off“(Sloman, Wride and Garratt, 2012, p 318).
Many argue that Rent
As if all of the more or less hidden fees were not bad enough, young, single, and poor families able to find a rental property are often discriminated against. Landlords tend to use factors such as income and credit history in determining who gets their rental property Richer families end up doing better with rent control laws because of this. Poorer people who make up a larger part of the population end up out of a house to live in.
Rent control first appeared in the United States in the early 1900s as a way of dealing with exorbitant rent prices brought about by wartime housing emergencies and tight housing markets. During this time, rent control was handled by the federal government. In the late 1940’s, the federal rent control system was gradually scaled back
When the recession happened, and the housing market crashed in Los Angeles a few years back many people lost their homes. The foreclosure crisis displaced many homeowners, drove up demand, and rental prices increased. Now, it is almost two years later, and the dramatic rent increases continue to soar. There would be no issue with cost of living increase except; the increases in income have yet to make the same shifts. “In many cities, rent is rising out reach of
Housing is the biggest factor in the cost of living difference. Which would explain why for many of us it is significant to our everyday lives, and daily decisions. But are housing costs out of control? With constant wages, high rates of unemployment, combined with the gap between affordable housing and the cost of living constantly increasing annually, housing cost has become inflated throughout the years. Although housing cost is simply a product of the functioning free market, along with supply and demand the implications are constantly affecting society.
A report prepared by the Economic Roundtable, Rental Housing 2011; The State of Rental Housing in the City of Los Angeles, noted that the city’s rental property had increased due to foreclosures that had started during the 2008 recession and been converted to rental property. Although this increased the options for renters, the incomes of family households had been decreasing since 1990. In this report, Daniel Flaming and Patrick Burns state, “Over the past decade, rent as a share of income has shifted from being barely affordable to predominantly unaffordable for renters (2012). They also note that the majority of renters in this area pay 30% to 50% of their income on rent. This is compounded by the problem of the increase of
This adjustment will continue until equilibrium is reached between the new demand curve and original supply curve. At the new equilibrium, the rental rate is higher than before, and the number of apartments demanded and supplied has increase (University of Phoenix, 2003).
It is argued that rent needs to be related to cost of living. By using this argument, it becomes such an important issue it cannot be left to the unfair marketplace.
Rent control goes back to the days of World War I. During the years following the war, the United States was experiencing a large shortage of housing. John W. Willis, author of the article “Short History of Rent Control Laws” wrote, “Housing shortages, however, are not new, and it should not be surprising therefore to find that modern attempts to intervene in the relationship between landlord and tenant find precedents going back hundreds of years” (Willis 54). The war was a reason because the wives of the soldiers acquired jobs in manufacturing plants, factories, and other places. This caused a surge in population, which then increased the demand for housing accommodations near places of
Housing quality is major disadvantage of rent control. Since their income is limited due to rent control, landlords have little motivation to make improvements or upgrades on their property. However, a landlord has a specific time period to make repairs and if they do not make the repairs fast enough the tenant can pay for the repairs and take the amount they paid out of their rent (LandlordBlog). A tenant can take advantage by subleasing to other people and charging more than the rent costs, which allows them to make a profit
Australia, more specifically Sydney is number 18 on the world’s most expensive rental cities list (Global Property Guide 2015). This in addition to other factors such as location, are the causes for housing stress. Housing stress can be faced by any age group and any socio economic class, that spends “over 30% of their income on housing costs and that affects how much they have left over to purchase food, clothes and other necessities” (Tanton and Phillips 2013). Another problem is that Australia lacks any form of rent control meaning “that those who are dependant on the private rental market for their accommodation, are constantly subject to the fluctuation of the market” (Morris 2007). The supplies of rental housing options are
As mentioned previously, at about the start of the 20th century during the First World War, rent controls were put in place to limit the initial rent that a landlord could charge as well as any subsequent increase in response to housing shortages. The Rents Act 1915 was passed to provide security of tenure and to restrict rents in the PRS and remained in play for most of the 20th century. The rent acts contributed as a significant interference with the property
One way the legislators tried to remedy the problem of affordable housing was by setting a price ceiling via rent control. According to a LA daily news article, the Rent Stabilization Ordinance (RSO) was enacted in Los Angeles in 1978 and applies to properties built on or before 1978. Shortly after its implementation, in 1981, the city paid the RAND Corporation to study the impact of rent control on the housing market. “In the long run,” the findings warned, “it may create the very housing shortage it was designed to alleviate.” And in many ways, they were rights. RSO can create a reluctance on the part of owners to build new apartments out of fear that rent control laws will be extended. It can also create a tendency of owners to defer repairs and renovations because of the potential for limited return on their investments. RSO can also have a job-killing effect too, because if landlords aren 't hiring as many carpenters, painters, electricians, plumbers, roofers and landscapers the demand for those jobs also decreases. Rent control ordinances are associated with lower growth rates in the supply of rental housing and with higher rental price growth in the broader market. Research done by Beacon Economics found that rent control decreased the supply of rental housing because investors might fear that new rental units will eventually be covered under future rent control ordinances, given that there is already a policy in place.
A shift of the demand curve is referred to as a change in demand due any factor other than price. A demand curve will shift if any of these occurs:
Important to realize, around the time of the recession in 2007, consumers were very reluctant to purchase homes. Considering the fact there were many foreclosures. Ever since then, the economy has been improving, and now homeownership has grown to an extraordinary level. Unfortunately, it´s bad news for the rental market where most consumers especially the start-up workers thrive of. Before, when homeownerships have been declining, rent prices were rose to an insane amount, faster than even the pace of inflation due to high demand. At this instant, the census bureau last week has reported ownership has increased to 63.9% in the third quarter, the highest level since 2014. The rate
A shift on the supply and demand curve will subsequently effect pricing, an example of this is the increase of coffee supply in 1998. Using data collected by the ICO, it is found that supply of coffee increased from 99,550 (in thousand 60 kg bags) in 1997/8 to 108,858 (in thousand 60 kg bags) in 1998/9. This can be explained due to an increase in suppliers with the addition of Yemen, Guyana and Loa, this will affect total production by increasing coffee producing countries, whilst simultaneously adding competition to the market consequently encouraging other exporting countries to increase productivity and therefore increasing supply. This increase in supply with an unchanged demand shall lead to a decrease in price. Alongside this 1998 saw the beginning of a decline in labour costs, information obtained by the ICO states that, the price paid to growers of coffee in Tanzania was at 90.70 (US cent/lb) when previously in 1997 it was up at 118.52 (US cent/lb). This could potentially be due to the boost in supply increasing competition between exporting countries for the steady incline in demand. Alternatively, it is possible the cheaper labour encouraged importing countries to invest in higher quantities of coffee from exporting countries whilst labour prices where on the decline. Furthermore, consumer demand in coffee in importing countries only marginally increased from 64,904 in 1997 to 66,566 in 1998. This incline can be explained by an increase in population and customer