Price Ceilings on Rental Accommodation - Essay Example

Price Ceilings on Rental Accommodation Price ceiling is defined as the rate that a seller is allowed to charge on a particular product or service that he provides to the customers. Price ceiling is fixed by law, which restricts the pricing system for ensuring reasonable and fair business practices. Price ceiling are usually fixed for specific and essential purposes such as rent ceiling. Rent ceiling is defined as the maximum price that the landlords may charge from tenants. It is set by law and imposes a limit on how much the rent may rise in a specific area. Governments have been trying their level best to set minimum or maximum prices since ancient times. The protest of people for controlling price is understandable. Even though price control is understandable but still the government may be able to protect only some of the consumers while imposing negative impact of price control on others. However the aim of the government is to protect the group that usually gets pressed hard because of inflation. Thus charging high interest on different loans is to protect people who are forced to borrow out of desperation. Similarly the maximum price of eatables, such as bread, is to protect poor ones who completely depend on it for their survival and the rent control is for protecting the landlords at times when the demand for the apartments exceed the supply (McEachern, 2012). The New York State legislators are seen defending the Protection Act of War Emergency Tenant in order to cater the housing shortage related to war. The war that has been addressed in this law is not the Vietnam War or the war of Iraq but it is the World War II, which is considered to be the starting of rent control issues in America. Although war has not much to do with the shortage of apartments, as the shortage are more likely to occur due to rent control; which is considered to be the supposed solution for making accommodation readily available. Gotham is the only city of America which embraces rent control; however many other cities have surrendered to the blarney of this legislative fix (Christ, 2009). Like all the other mandated price control of the government, rent control is also considered to be a law related to the fixation of maximum price or “rent ceiling”, which explains that what exactly the landlords must charge from the tenants. In order to make the rent ceiling work, the rent must be placed below the rate that would be prevailed otherwise. For example, an enactment prohibiting landlords from exceeding the apartment rent from $100,000 per month would have not been beneficial for the tenants as they would not be willing to pay this amount in any case. If the rent is established at a rate below the equilibrium levels, then the demand will exceed the quantity supplied, and therefore the rent control would lead to shortage of space. In such a competitive market where the demand of space is much greater than the amount supplied, the prices will eventually rise and eliminate this shortage. Price control prevents rents from the attainment of market clearing which then results in shortage of apartments available for rent (Anon., 2014). Economists virtually concluded that rent control has been destructive for economies. Despite of the fact that price control is practiced quiet frequently; economists are not really satisfied by this as they usually oppose this practice with exception to some brief time period during certain emergencies. In a survey conducted in the year 2000, majority of the economists agreed to the fact that ceiling on rent tends to decrease not only the quantity but also the quality of housing available (Salins, 2012). Myrdal once stated that rent control practices maybe considered as one of the worst examples of government’s poor planning and its lack of courage and wisdom. His fellow economist Assar Linbeck also added to it that rent control is the most inefficient technique that can be used for destroying a city. The cities such as New York have not been destroyed as the result of rent control because rent control practices have been relaxed in the recent years (Taylor, 2007). Rent stabilization that is being practiced in case of newer buildings is less restrictive than the old notion of rent control. Also the boom that occurred in housing market of New York for almost a decade is not considered to be rent stabilizing or a form of rent control unit, but it would rather be defined as cooperation or condominium housing. However these two types of housing gained much significance as a way of getting over rent control. (Anon., 2013). Economists also argue that rent control may often divert new investments that would have otherwise gone to the rental sector for making it more greener- greener with reference to the needs of the consumers. Economists have also demonstrated that rent control may lead to fewer repairs, less house deterioration and less maintenance. Research suggests that 29 percent of the houses under rent control in USA have deteriorated, out of which only 8 percent of the units were in the state of getting repaired. Similar statistics were also cited by Herbert Franklin and Joel Berners from France and England (Tucker, 2013). The fact that the rent control policy of the government did not work in the long run during the World War II has some straightforward economic reasons behind it. One reason behind it can be the oversight of the government to delay the investment in the rental units. For example, suppose a person has $10 million to invest and he is allowed to put the fund in the industry of his choice. In other businesses his firm will be exposed to limited control and taxes but if he is investing his money in rental housing then he may have to face one additional hurdle that is the rent control authority. (Hazlitt, 2013). The size of the apartments available for rent at the time of rent control has been smaller than otherwise. This does not only happen at the time of the World War II but whenever this legislation has been imposed by the government. The rent control is enough to impose a negative effect on the investments in the rental sector. However everything else existing there in the real estate industry was being built i.e. hotels, warehouses, condominiums, office towers, commercial space, etc. The only reason behind this is that such sectors have never been subjected to rent control and therefore no one fears that they ever will (Block, 2002). There are many rental control ordinance present that exempt new rental units from any kind of coverage as investor are often way too cautious to put their faith in rental housing. There are numerous cases present in which the housing units were forever exempted from controls and were not even brought under any provisions of law because of some emergency. Rental control has also been responsible of destroying the whole section of the sound housing present in South Bronx of New York that leads to the abandonment throughout the whole 5 boroughs of the city. Although the exact statistics are not present on abandonment of apartments, however according to William Tucker almost 30,000 apartments in New York have been abandoned from 1972-1982 which resulted in incurring a loss of around million units in the period of eleven years (Tucker, 2009). The government proposing the idea of rental control during the World War II shows that the government really thinks about the best interest of its people and for some reason it was determined for employing control that would be considered completely opposite to imposing rent control. Government at that time must have tried controlling the price of other products and services apart from the residential apartments, as it would have helped in diverting the resources out of the other opportunities present. If at the time of the World War II the government really wanted to help the poor and therefore wanted to control the rent, then it could have controlled the rent on luxury rentals as it would not have imposed much negative affect on the economy (Block, 2012). Conclusion The negative consequences related to the rent legislation during the World War II turned out to be preserve and massive, which made many of its former supporters speak against this critical notion. When the tenants outnumber the landlords; the landlords usually get convinced that rent control will be in their best interest and therefore they invest considerable amount of their political energy for maintaining the rent control legislation. Convincing landlords for buying these allies of reforms can be considered politically effective way of ending rent control. Government usually thinks about the interest of the tenants while employing rent controls. However this act of the government may result in full scale socialism (the system which made the Europeans suffer grimly because of the rent control ordinance). Paying property owners for escaping the law has victimized most of them for almost years now. This is not at all considered to be an effective way of making them satisfied that rent control will not be present in future. The safest way of encouraging private investments in the housing sector is by convincing the investors that rent control will not exist in future. One of the most effective ways of eliminating the rent control is by the amendment of the state constitution that forbids this notion. Paradoxically, granting economic freedom to the landlords is one of the best ways of helping the tenants. Bibliography Anon., 2013. Price Controls and Their Effects. [Online] Available at: https://www.e-education.psu.edu/ebf200up/node/161 [Accessed 29 March 2014]. Anon., 2014. Price Ceiling. [Online] Available at: http://education.howthemarketworks.com/glossary/price-ceilings/ [Accessed 29 March 2014]. Block, W., 2002. A Critique of the Legal and Philosophical Case for Rent Control. Journal of Business Ethics, pp. 75-90. Block, W., 2012. Rental Control. [Online] Available at: http://www.econlib.org/library/Enc/RentControl.html [Accessed 29 March 2014]. Christ, C., 2009. Floridas Unnatural Disaster. [Online] Available at: http://online.wsj.com/news/articles/SB123371173559046209?mg=reno64-wsj&url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB123371173559046209.html [Accessed 29 March 2014]. Hazlitt, H., 2013. Economics in One Lesson. [Online] Available at: http://steshaw.org/economics-in-one-lesson/chap18p1.html [Accessed 29 March 2014]. McEachern, W. A., 2012. Economics: A Contemporary Introduction. Mason ed. s.l.:Joe Sabatino. Salins, P., 2012. The Ecology of Housing Destruction: Economic Effects of Public Intervention in the Housing Market.. New York: New York University Press. Taylor, J., 2007. Principles of Economics. s.l.:George Hoffman. Tucker, I., 2009. Economics for Today. s.l.:South-Western. Tucker, I., 2013. Microeconomics for Today. s.l.:Canagage Learning. Read More