The housing market plays a crucial role in the growth and development of the metropolitan cities all over the world. Development of a city starts with the process of urbanization, the migration of the people from rural to urban and building of new houses (Begg, et al., 2011). As the population of the city increases, the number of houses also rises as the individuals prefer to build their own houses that in turn contribute to the progress of the nation. However, the future growth of the number of household is expected to be very high due to the increasing in demographic trends. There are cases when the owners build the houses in order to offer these in rents to the individuals so as to meet the increasing demand for housing (Besanko and Braeutigam, 2013). The owners fix the rent for the houses in order to earn some profit but there is a concept of rent control that imposes a ceiling on the rent in cases when the owners charge an exceptionally high rent (Besanko and Braeutigam, 2013). Hence, the paper aims at carrying out a study on the market structure of the housing market and the impacts of the policies adopted for rent control. The paper also offers a scope to understand the microeconomic theory related to the rent control.

Market structure of the Housing Market

The structure of the housing market is based on the model that considers various aspects such as the availability of cheap credit that in turn increases the demand for houses in the international market (Glaeser and Luttmer, 2003). As a result, there is a relative price of the houses due to low availability of the houses. However, there was a high availability of low quality houses which forced the investors to raise the prices of the houses in order to earn high profit. These features are essential for the Life-Cycle model of Housing where the prices of houses match with the quality of the houses available in the international market (Krugman and Wells, 2012). On the contrary, the characteristics of the buyers willing to purchase the houses differ based on the age, wealth and income they earn. In order to bring in equilibrium within the market, the prices of the houses are equalized with the quality of the available houses and also it is based on the demand and supply aspects in the housing market. Thus, the study suggests that the distribution of the houses depends on the numbers of buyers as well as the quality of houses available in the market.  Further, the suitability of the available houses to the buyers is also an essential factor that increases the number of buyers willing to purchase houses.

Figure 1: Equilibrium in the Housing Market
(Source: Krugman and Wells, 2012)

The price elasticity of the supply of houses plays a key role in the availability of houses on the international market (Perloff, 2013). The fact is that when there is a low supply of houses, the prices of the houses rise due to the increasing demand. However, due to the rise in price of houses, there is a fall in demand for houses and the situation comes back to equilibrium. On the contrary, due to the recession that takes place in the economy there is a rise in price of houses which in turn leads to fall in demand as people have low income in their hands (Sloman, Wride and Garratt, 2012). The study reflects that in the short run, the prices of houses are considered to be volatile and as a result these prices react swiftly to the changes in economic conditions. The supply of houses responds more slowly with the price due to the time consuming process of planning, constructing and selling the houses at affordable rates.

Figure 2: Chart showing number of houses built in UK between 1998 and 2010
(Source: Sloman, Wride and Garratt, 2012)

Impact of Policy on Pareto Efficiency

The implementation of the Pareto-efficiency in housing market involves the knowledge of only traded quantities and market prices and the rent control system plays a key role in achieving Pareto efficiency. Nonetheless, in absence of such knowledge there is another concept of price stabilization that is considered to be faced by the buyers. The phenomenon of price stabilization comprises of fixed relative prices. However, the price stabilization in the housing market does not lead to first-best efficiency but it leads to Pareto improvements as well as the production efficiency (Kemeny, Kersloot and Thalmann, 2005). Additionally, the aspect of production efficiency is based mainly on the price stabilization and not on the quantity stabilization. On the contrary, there are several other concepts of the price stabilization such as partial equilibrium condition as well as the general equilibrium that leads to the elimination of rent control system.

In case of the partial equilibrium, there is a simple model of rent control and a little knowledge is required regarding the housing market, whereas, in case of the general equilibrium considerable knowledge is required in order to understand the situation of Pareto Efficiency (Zheng, Fu and Liu, 2006). For example, the owners in the housing market must have the relevant information regarding the quality and the prices at which the buyer is willing to purchase the house. This would help them to understand the Pareto Optimal situation in order to ensure Pareto improvement in the housing market (Besanko and Braeutigam, 2013). However, the quantity stabilization allows the owners to maintain rent control and rent the houses at market prices fixed in the economy. The study reflects that the quantity stabilization verifies the property rights of the buyers or tenants allowing the Pareto improvements to take place.

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