Housing is fundamental in satisfying the basic need of shelter – a fact that makes economists to regard it as a key strategy in the promotion of homeland security. Developing an understanding of how housing market functions and the effects of government policies that target the market plays a crucial role in safeguarding the tenants from extortion and exploitation from dishonest landlords who have a habit of taking advantage of the housing crisis by increasing the cost of rent at will.
Housing forms an important market segment. Mankiw (2014) argues that it is the single most crucial component of household expenditure and consumption. This has led to an increase in government involvement in the housing business through provision of subsidies and establishment of regulations that govern the industry at various levels of the government with an aim of ensuring that the rights of tenants are upheld while at the same time protecting the landlord from risks resulting from controlling the cost of rent. According to McDonald and McMillen, establishment of various interventions by the government to control the cost of housing is regarded by economists as a specialized form of price control since the consequences of this strategy are substantially synonymous to those of price control. The control of renting costs in the United States is always imposed as a general price control tool which is guided by special regulation that mandates various government agencies to keep the housing market to check (McDonald, 2014).
Government control on the cost of renting can be useful in the event of war or a natural calamity, where massive destruction of property and housing makes people to move to the nearby town to seek alternative housing. The huge influx of people increases the demand for housing units, thus making the landlords to hike the cost of renting apartments. Mankiw (2014) explains that there is a high likelihood of the landlords exploiting desperate tenants in the event that there are no tangible government regulations governing the engagement between the tenant and the landlord (Mankiw, 2014). The rationale behind government control is guided by the argument that supply of housing units is static. Powell and Randall support the discussion by noting that the shortage in housing cannot be fixed immediately despite hiking of renting prices by landlords (Powell, Benjamin, Randall & Holcombe, 2014). Therefore, he is contented with introduction of checks and balances in the housing industry to prohibit exploitation and extortion of tenants.
Economists are critical of the government involvement in controlling the cost of housing. Mankiw reiterates that controlling renting cost has encouraged the waste of useful space since many investors in the industry are discouraged from setting up of new housing units as a result of the lack of autonomy in setting up of prices that can assure them maximum returns from their investments (Mankiw, 2014).The discrepancy between government regulations and expectations of the landlords subsequently results to shortages in housing. Powell and Randall depict that the shortage in housing is necessitated by the fact that no new houses are being developed because the market does not provide incentives to do more construction (Mankiw, 2014). Also, the increase in the cost of construction as a result of inflation makes the older building nonprofitable a fact that will make investors to channel their recourses to other sectors of the economy which have fewer control systems.
A study by Mankiw on housing markets reveals that rent control does not provide a level field for all tenants (Mankiw, 2014). He says that the law tends to favor older occupants because they tend to get a lifetime reprieve even when they have the financial means to afford the new housing market rates. For instance, a professional will prefer to remain in an old apartment with low fixed rents he acquired while he was a struggling graduate so as to save on the cost regardless of how big his family becomes. Economists argue that such habit tends to discourage mobility as they contradict the principles of social stratification. Those landlords who own older buildings also looses a big chunk of money from dishonest tenants who breaches initial contracts between them and the landlords by subletting the housing units and letting out .
Enactment of legislation that impose rent control strategies has led to restricted profits that make landlords to have limited capital to invest in more housing units. Unrealistic rent controls have also resulted in poor housing conditions because the landlords not only lack economic incentives to refurbish the housing but also have limited access to financial resources to aid renovation. Furthermore, the deplorable conditions of the houses attracts minimum returns, leading to creation of a bad feeling between the landlord and the tenant as they will blame the poor condition of housing on failure by the owner to make necessary repairs.
The foregone discussion can be summed up by noting that controlling the cost of renting plays a pertinent role in safeguarding tenants from exploitation from landlords in the event that the demand for houses exceeds the supply in the housing market. However, care has to be taken while formulating rules that govern rent control to ensure that the investor gets the value for his money. There is a need to strike a balance between the two stakeholders in championing the intended purpose of the noble activity, such that the objective is realized without oppressing the investor.
Holcombe, R. (2009). Housing America: Building out of a crisis. New Brunswick [N.J.: Transaction.
Mankiw, N., & Hakes, D. (2004). Principles of economics study guide (3.rd ed.). Mason, Ohio: Thomson/South-Western.
McDonald, J., & McMillen, D. (2007). Urban economics and real estate: Theory and policy. Malden, MA: Blackwell Pub.