Macroeconomic Analysis: Rent Control - Example

Macroeconomic Analysis: Rent Control Introduction On 26th of April, it was announced by the Labour Party of the United Kingdom that if they are elected in the next election, the party will re-module the rent control system. Though as per the report of opinion poll, 59% of the respondents supported their notion strongly, such initiative has been criticised by majority of the experts and economists. George Osbourne explained the initiative as “economically illiterate”, whereas, Assar Lindbeck elucidated it as ‘Next to bombing, rent control is the most effective way to destroy a city” (Extracted from the Case Study). In this paper, analysis will be done on whether the rent control system proposed by Labour Party will bring efficiency into the system or it will cause for economic demolition in the light of macro- economic theories. Discussion The Structure of Housing Market The market structure of the United Kingdom is considered to be the most volatile in the whole world. Such volatility arises out of a number of issues such as low-income households being priced out of the housing market and structural variations in the demand for housing and policy responses associated with the concern (Kondor, 2011). Importance of the housing market is characterised by the following aspects. First, as the house signifies the largest single consumer wealth, housing market indicates the purchasing power of the UK citizens. Secondly, as rent or mortgage loan are the source for a large chunk of individuals in the UK, unit change in housing prices leaves considerable impact on the rent market of the economy (Besanko and Braeutigam, 2013). The structure of the UK housing market is as follows: (Author’s Creation) The structure of housing market in the UK can be broadly classified under four segments. Privately Owned Properties As per the statistics of 2013, the privately owned property in the UK can be classified under two systems viz. freehold or leasehold. Freehold ownership indicates the system where both the land and the housing property on the land are possessed by the owner, whereas, in leasehold, the original land is not the property of the owner; the owner purchases the right to use the property for a certain period of time (Begg, Vernasca, Fischer and Dornbusch, 2011). Generally, the tenure of such lease tends to be for a longer period of time such as 100 years. At the end of the tenure, the ownership is reverted to the landlord. The UK citizens generally opt for freehold and leasehold properties through long term mortgage loans. The concept of securitization also has helped many parties to opt for privately owned properties in the United Kingdom (Besanko and Braeutigam, 2013). Privately Rented Properties In privately rented properties, the owner of the property tends to engage in agreement with the tenants for renting out the property for a comparatively shorter period of time, for example, for six to eleven months. The contract can be renewed as per the agreement of the both the parties, at the time of completion of the tenure. As a large chunk of UK population relies on such privately rented properties, increment in the price level of housing market largely affects the rent market (Begg, Vernasca, Fischer and Dornbusch, 2011). Local Governmental Authority Rented Property The rented properties offered by local authorities and governing bodies are made available at a subsidised rate which is below the ongoing commercial market rate. The tenants are obligated to pay the rent on weekly or monthly basis. Such housing properties are allocated on the basis of the needs of the individuals. As the demand for such properties is very high and rent is available at a subsidised rate, increase in the housing market price in turn increases government expenditure in terms of public finance (Besanko and Braeutigam, 2013). Housing Association Property Housing association properties are those affordable properties that are available on partly-ownership and partly-rental basis. A recent study has shown that approximately 9.5% of the UK residents opt for this kind of housing property (Besanko and Braeutigam, 2013). The Impact Of the Rent Control On Allocative or Pareto Efficiency Rent control is a policy adopted by the government, similar to the price control system in which a ceiling is being imposed on the maximum rent price that the owner of the housing property can charge from the tenants. Apparently, such initiatives are taken by the government in order to secure the interests of the citizens, mainly of the vulnerable group of the society. However, in reality it has been experienced that as the rent price decreases from its equilibrium level, the quantity demanded by the dwellers automatically increases from the amount supplied. Generally, in a competitive market, if the demand outnumbers the supply, the price level tends to increase and the properties are allotted to individuals, depending upon their affordability. However, in the presence of rent control system, rents are prevented to reach the market clearing levels and the shortage becomes prominent (Krugman and Wells, 2012). Due to the presence of shortage in the controlled sector, the excess demand shifts to the non-controlled upper-bracket rental units due to the spill over effect. However, as the size of the non-controlled sector is considerably small, amounting demand, small supply quantity and fear of implementation of rent control, paradoxically boost up the rent price in this segment as well (Krugman and Wells, 2012). Pareto efficiency is defined as a system of allocation of resources in which it becomes impossible to better off an individual without worsening off any other individual. When resources such as housing property are distributed in such a manner in which at least one individual is better off without worsening off any other individual, the situation is called Pareto improvement (Sloman, Wride and Garratt, 2012). Pareto optimality is attained when there is no further scope for improvement. The micro-economic concept, rather than emphasising on overall efficiency or well-being of the society, largely concentrates on the practical economic instance. Allocative efficiency indicates the situation where goods and services are produced up to a certain point where marginal benefits to the consumers become identical to marginal cost of production (Glaeser and Luttmer, 2003). Under rent control system, the highest ceiling price (Pmax) imposed by the local government definitely lies below the competitive price level (Pe). That means, Pmax Read More