Case Study 3 - Rent Controls

Question 1

Price Mechanism (1.2.7)

How does the rise in UK rents to 28.8% of income (Page 1) illustrate the functions of the price mechanism?

Answer 1

• Rationing: Higher rents price out lower-income tenants (e.g., 31.7% of income spent in London, Page 2), reducing demand.
• Incentive: Rising rents encourage landlords to rent out properties (“incentive to property owners,” Page 4) but also prompt landlords to sell, reducing supply (Page 2: “landlords selling their properties”).
• Signalling: High rents signal a need for more housing supply (“boost home building,” Page 2) and deter excessive demand.

Question 2

Government Intervention in Markets (1.4.1)

What arguments for and against rent controls are presented in the case study?

Answer 2

For:

1. Address unaffordability (e.g., London rents exceed 30% of income, Page 2).
2. Protect tenants from “unreasonable” rent rises (Page 2: Labour’s proposed regulations).

Against:

1. Supply reduction: Rent controls “reduce the supply and quality of rental housing” (IEA, Page 2).
2. Investment deterrence: Government avoids controls to retain institutional investors (Page 2: “keen to deliver rental housing at scale”).

Question 3

Government Failure (1.4.2)

How might rent controls lead to government failure, according to the case study?

Answer 3

Unintended consequences:

1. Shortages: Rent caps below equilibrium (e.g., diagram on Page 5) create excess demand (QD - Qₛ)
2. Quality decline: Landlords cut maintenance due to lower profits (IEA, Page 2).
3. Reduced mobility: Tenants stay in controlled units, limiting labor movement (Page 5).

Example: IEA warns rent controls cause “misallocation of the existing rental housing stock” (Page 2).

Question 4

Price Mechanism (1.2.7)

How does the 8.6% annual rent increase (Page 2) reflect market forces?

Answer 4

1. Demand factors: Remote work increases demand (“spare bedroom to work from home,” Page 2).
2. Supply factors: Landlords exiting market reduce supply (“regulatory changes… landlords selling,” Page 2).
3. Equilibrium shift: Rising prices signal scarcity, rationing tenants and incentivizing limited new supply.

Question 5

Government Intervention in Markets (1.4.1)

What alternative policies to rent controls does the UK government propose?

Answer 5

1. Supply-side: “Boost home building” (Page 2).
2. Regulation: Ban “no fault evictions” and “unreasonable” rent hikes for existing tenants (Page 2).
3. Avoid controls: To maintain investor confidence (“institutional investors… keen to deliver,” Page 2).