Analysis of Rent control as a Tax on Housing

1. [SubmittedBy Ms.Prajakta Sawant
Roll No :- 2013022] Page1
Case study on Rent control
Name :- Ms. Prajakta Sawant
Roll No - 2013022
Subject:- Managerial Economics

2. [SubmittedBy Ms.Prajakta Sawant
Roll No :- 2013022] Page2
CASE STUDY ON RENT COTROL IN THE SHORT RUN AND THE LONG RUN
It is a common example of price ceiling. In many cities, the local government places a ceiling on
rents that landlords may charge their tenants. The goal of this policy is to help the poor by
making housing more affordable.
Analysis of Rent control as a Tax on Housing
Simple rent control is usually viewed as a Tax on the return to housing Capital.
Model of Rent control as price control, where the price per unit of housing charged by landlord
is reduced.
Price move from P0 to P1. If rather than being reduced, rents are frozen at existing levels, price
inflation leads to divergence between equilibrium and controlled prices.
In the short run, landlords have a fixed number of apartments to rent, and they cannot adjust
this number quickly as market conditions change. Moreover, the number of people searching
for hous-ing in a city may not be highly responsive to rents in the short run because people take
time to adjust their housing arrangements. Therefore, the short-run supply and demand for
housing are relatively inelastic. Supply and demand are inelastic, initial shortage is small. the
primary effect is to reduce the rents.
The long-run story is very different because the buyers and sellers of rental housing respond
more to market conditions as time passes. On the supply side, landlords respond to low rents
by not building new apartments and by failing to maintain existing ones. On the demand side,
low rents encourage people to find their own apartments. Therefore, both supply and demand
are more elastic in the long run. The result is large shortage of housing.

3. [SubmittedBy Ms.Prajakta Sawant
Roll No :- 2013022] Page3
Rent Control as Expenditure Control
An alternative view of rent control is expenditure control,. In this model rent control lowers
rents to P1- P0. Rent is fixed at P1Q0. In intermediate run, landlords can vary quantity of
housing respected but Supply curve.
Indeed the final price per unit of housing services can exceed the original uncontrolled price.
Under this model there is excess demand for housing. However, under expenditure control
model, the demand curve is not relevant for new equilibrium.

4. [SubmittedBy Ms.Prajakta Sawant
Roll No :- 2013022] Page4
Dynamic Models of the Effect of Rent control on Maintenance
Rentcontrol overa longperiodisgenerallyassumedtoresultinreductionsinthe qunatityof housing
servicessupplied.Dynamicmodel of profitmaximizinglandlordshave providedsome insightintothis
process.
In thishe real rent fallingbyarate of general price inflationnotoffsetbymaintenance inthe Rent
control.
Rentcontrol reducesmaintenance onthe housingunit.However,if arentordinance increasedthe rent
ceilingif the unitisupgradedanddecreaseditif the unitisallowedtodeteriorate.
If the rewardsforupgradingandthe penaltyfordowngradingare sufficientlylarge.
Building the Case for Rent Controls
On grounds of equity :-
• High rents hit low income families
• Affordable renting will reduce poverty
Rent controls may have further adverse effects. First, on equity grounds it is somewhat
arbitrary as to who gets and who does not get housing at the lower rent. Second, in the long
run, those landlords who still keep their property available for rent may cut maintenance costs
and let their property fall into disrepair.
On grounds of efficiency
• Affordable rents improves labour mobility
• Encourages smaller homes to be built
Targets monopolistic Landlords
• Exploiting the consumer / low price elasticity
• Will free up properties for the government to buy

5. [SubmittedBy Ms.Prajakta Sawant
Roll No :- 2013022] Page5
Counter-Arguments
Rent caps causes supply contraction
• Less incentive to build or convert homes
• Lower spend on property maintenance
Creates Incentive for Black Market
 Landlords may find other ways to get money
 May worsen to tenancy security
Rent Cap doesn't tackle bigger Issue
 Need to build more homes
 other policies might be more effective

6. [SubmittedBy Ms.Prajakta Sawant
Roll No :- 2013022] Page6
Results of Rent Controls
1. Housing shortages will develop (Qd > Qs) and black markets will result. Example: Rent is $500
month, but the tenant pays a $2000 "key charge" as a way around the price control.
2. The future supply of housing will decline, since there is no incentive to build rental
housing AT market prices if the rental income will be BELOW market prices.
3. The quality of rental housing will deteriorate. Landlords will respond to rent controls by
reducing quality of rental housing, fewer repairs, less remodeling/painting, etc.
4. Inefficient use of housing. Rent control results in extremely low turnover of
housing. Nobody wants to give up a rent-controlled apartment, it becomes a valuable
asset. Example: Family with a 4BR apartment, kids grow up and move out, the parents don't
need a 4BR apartment but won't move from their rent-controlled apartment.
5. Long term renters with rent-controlled apartments benefit at the expense of newcomers. If
we move to NYC today, we may not be able to find housing because all affordable housing is
already taken by the existing tenants

7. [SubmittedBy Ms.Prajakta Sawant
Roll No :- 2013022] Page7
Improving rented housing supply
The ways to improve probleminSupplyof RentedHouse
 Relaxationof planningcontrols
 Tax incentivesfor“buildtorent”
 Release of surplusland
 Incentivesforbuildinginnovation
 Buildmore social housing
Conclusion
Those in favor of rent controls counter these arguments by claiming that the demand and
supply curves of rented accommodation are very inelastic. Take the case of the demand
curve. People have got to live somewhere. If rent control is abolished, people will just have
to pay the higher rent, or become homeless; and given that people will only sacrifice their
home as a last resort, demand remains inelastic, and rents could rise to a very high level.
Despite its intentions to benefit tenants and create affordable housing, the overall effects of
rent controls are generally disastrous for most tenants - housing shortages, declining quality of
housing, inefficient use of housing, increases in discrimination, etc.