The paper intends to discuss on the microeconomic theories related to rent control. The overall market structure for the housing industry has been analysed in the paper. In addition, the paper has also critically evaluated the impacts of the policies adapted for the purpose of controlling rents.
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.
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