Price Ceilings on Sky-rocketing Rents. A Double-edged Sword?

In a recent article, rents was said to have already peaked by 4.3% over the past year and probably will increase even more for the reason of “scarcity” of mortgage finances and good quality properties running short. Insufficient mortgage finances and the high rate of deposits required by lenders are barriers to homeownerships and have to be brought to attention in hand with the shortage of further supplies coming into the market. The result of the upward-driving rents has made the would-be buyers to be trapped in the rental sector, disabling them to raise a deposit nor be able to meet the lenders’ mortgage requirements. Suggestions of why people chose to rent rather than owning a property was that the surrounding housing market is uncertain.

            Homeownerships are somehow income elastic, i.e. a rise in the price with other things remaining the same will cause a decrease in the quantity demanded and the movement up along the demand curve. The law of demand states that the higher the price of a good, the smaller is the quantity demanded (ceteris paribus) and vice versa. Therefore, rent is the substitution or rather, next best choice to buying homes. The substitution effect is that when the relative price, or known as the opportunity cost, of a good or service rises, people seek substitutes for it. So the quantity demanded of the actual good or service will drop. Whilst the other result of the law of demand is the income effect. When the price of a good or service rises relative to income, people cannot afford all the things they previously bought or want-to-buys. So the quantity demanded of the good or service will lessen.

            Recently, rents have been said that it should be expected to raise between 50 to 200 percent. Tenants who have unpredictable profits were troubled by this. Rent demands which are expected to hike (and naturally the price of rents will follow) did not move the income to increase. Wages and salaries was not seen to have keep up the pace but property business people have seen to be heartless when it comes to not able  to bring its profit to the maximum level. Therefore, people are trapped in neither affording to own a home nor renting.

            Prima facie a price ceiling on rents should be placed, i.e. the intervention of the government in regulating the price (a.k.a. rent ceiling) so that it is illegal to charge a price higher than a specified level.This suggestion is mainly that if there is no control over the prices of renting, the middle-lower or even, the middle-upper class would encounter homelessness, or face greater financial threat. Other social issues such as the psychological health of individuals of the country, or other external factors (which would then be a macroeconomics concern) would rise. However, rent ceilings are somehow a double-edged sword. If a rent ceiling is set above the equilibrium rent (price which the tenant is willing to give and the landlord is willing to exchange his property for), there is no effect and the market works as if there were no ceiling. On the other hand, if the rent ceiling is set below the equilibrium rent, it might cause a housing shortage. Landlords will be reluctant in supplying spaces to rent and therefore worsen the situation as compared to the effort in trying to sell houses. In explanation, when there is a problem in the demand in the house-buying market, people still can rent spaces to solve the problem of having a roof on top of their heads. And this will lead to some other who is able to afford to buy houses, to buy houses. Here, the demand is slow, but it is still a moving market. However, if even the rent prices are so high that it is no longer affordable for the lower income society, they might have to flee their shelter rented because landlords are more willing to let the spaces to be empty than to rent out by the price lower than what they have set in mind.

            Besides that, three apparent issues will arise if there were to be a price ceiling below the equilibrium is set. A rent ceiling will decrease the quantity of housing supplied to less than the efficient quantity. This will cause a rise to the deadweight loss, producer and consumer surplus shrink, and there is a potential loss from the increase search activity. An “increased search activity” is the time spent on looking for someone who is able and willing to do business with.  When a price is regulated and there is a shortage, this will increase. Search activities are costly and the opportunity cost of housing is the same as the regulated rent in addition to the opportunity cost of the unregulated search activity. The reason to this is that the quantity of housing is less than the quantity in an unregulated market, and the opportunity cost of housing will deem to exceed the unregulated rent. Moreover, there will be an inefficient underproduction of housing services. The marginal social benefit from housing services is deem to exceed its marginal social cost and a deadweight loss will arise. The next issue is the existence of black market, i.e. an illegal market which operates alongside a legal market in which a price ceiling or other restriction has been imposed. Illegal arrangements are made between renters and landlords at rents above the rent ceiling, generally, would have been an unregulated market. Therefore, according to the fair rules view , rent ceiling is unfair because it barricades the voluntary exchange in the market and it generally does not benefit the poor. Therefore it is submitted that it will be a factor of the housing quantity decrease and the scarce housing is allocated by either lottery, first-come-first-served or discrimination.

            All in all, an alternative yet effective solution to this problem is yet to be discovered but in the meantime, a short-term-slightly-below the equilibrium rent might do the favor. 
                     
                                                                                                      - by: Chong Ai Sim (1101F12341)