Regulated rent - help for the socially weaker, or just subsidies for the chosen ones? Step by step, let's take a look at what today's regulated rent causes.
Let's look at the picture above. I'm from Prague, I've lived here my whole life. A few years ago, I lived with my older sister and mother in Spořilov in Prague 4. The apartment was 55 m ^ 2. An equally large regulated apartment in Prague's Vinohrady costs about CZK 5. Our apartment in Spořilov - in a much less lucrative location - cost unregulated CZK 300.
How is it possible? We already know why an apartment in such a lucrative location as Vinohrady in Prague costs so little - it is regulated. But why is an apartment in Prague's Spořilov so much more?
In an ideal world full of good and nice people, which… Well good, now seriously: in the standard situation on the market is a certain supply of apartments and a certain demand for apartments. So we have Mrs. Michael, a single mother with two children, looking for a cheap apartment. She doesn't have to be big enough to afford it. It has its personal demand for apartments that meet a certain offer of apartments. She finds an apartment, pays for it. At that moment, the supply corresponded to her personal demand.
Like Mrs. Michaela, many other people are also looking for flats, each of them has "their" demand for flats, each of them suits a different offer of flats. It creates all these individual offers and demands market supply and demand, which we can see in Figure 1.
But then something happens - the state decides to regulate the rental price, sets the maximum rent. It starts period of rent regulation. What will the situation look like afterwards?
The price ceiling is shown in Figure 2 by a yellow line. As we can see, the price cap is below the market price (which is where green supply and red demand intersect). If we look at the X-axis, which represents the quantity, we find that there is a gap between the quantity offered and the quantity demanded. Less is offered of flats for rent than how many are requested - there is a shortage of apartments on the market.
So here we have Mr. Alfons, the owner of a house in town. It has two options: either rent the space in the house as apartments, or rent it as office space. What will he choose?
The location is quite lucrative. The city is developing, growing, new companies are coming here to invest. Many people from the area who are looking for are also moving here housing. The price of rents thus grows, the higher price causes the growth of profits for homeowners and so more and more houses and flats are built…
Mr. Alfons might decide to rent a house for living on the standard market (Figure 1) - the premises are close to the center, probably the leaders of companies located in the center would move here. Mr. Alfons would certainly earned. However, as we have stated, the state (or the city, it does not matter) has set a maximum price for rent, so it is regulated. Mr. Alfons finds that the maximum price is too low, he would earn more in the standard market. And so the spaces leases on a standard, unregulated office market.
Likewise, developers who would otherwise build new apartments suddenly find that the regulated price is too low. It is not worthwhile to build apartments, so it is simply not built.
And Mrs. Michael? Because there are few flats, it is hard to find. Because they are cheap, no one even wants to move anywhere. Can you get an apartment? Not found.
The lack of flats and the need to commute to work from elsewhere (from places where there are flats) undermines the development of the city. Investors are not building new offices, people are not increasing, new jobs are not being created. The situation is the same throughout the state.
There is relatively much pressure on the government. Many people want to do something about the lack of flats. So the government will do: abolish the regulation of rent for new apartments. He will leave it on the old one.
Of course, we can say that now the problem will be over. New flats will fill a gap in the market, flats will be just right, the regulation of old flats does not harm anyone. Or not?
Let's look at Figure 3, which indicates the situation when the state cancels the regulation. There are no new flats, they are still just the old ones, regulated. At this price, people are looking for a certain number of apartments. However, this quantity will be built only if the price is much higher - if the price is at such a level, when it would interrupt the green offer. But this is not the case - so far they are only regulated byty!
We have three young people here after school - Sasha, Petr and Ondřej. Each of them wants to leave their parents and live. Each of them so looking for an apartment for himself, because flats are cheap (regulated).
Michael's single mother, who did not find the apartment above, lives with her grandmother in her apartment. After the prices of new flats are released, Michaela decides to move from her grandmother to her own, because there will finally be new flats! And apartments are cheap (regulated), why wouldn't she?
The requested number of flats is huge.
In this situation, the quantity demanded is of flats one that corresponds to the price shown by the dark blue line. It the required number of flats will be built, but at a much higher than possible market price. We must realize that the problem is not included. The price corresponds to reality - people demand a certain number of apartments that are worth building for a certain price. The problem is in the quantity demanded, which is greater than the real possibilities of people who, in a standard situation, would demand a smaller number of flats, the price of which would also be lower, in the real possibilities of people.
Let's ask ourselves a question: so why is the number of flats in demand so large? The answer is simple: because there is a significant part of the flats that is still regulated.
Saša, Petr and Ondřej are looking for an apartment each. Michaela wants to move away from her grandmother. Everyone wants an apartment.
Developers are building, Mr. Alfons will start offering expensive apartments in the center. Construction mania starts, boom - after all, everyone wants an apartment, everyone is willing to pay for it!
So a quantity will stand of flats, which is in demand, but at a price that few are willing to accept. A very interesting hybrid will emerge on the housing market: a surplus and a shortage of flats that will not be disrupted.
At the price shown by the dark blue line, only the offered quantity can be effectively offered, which is shown by a purple line on the graph. All byty moreover, they are redundant in this price, almost no one will rent / buy them for this price.
The required amount will be constantly high as long as there is a large group of regulated flats. Expensive surplus flats will therefore continue to be built. However, a large part of them are "bad investments", so they will be converted into offices, for example, or no one will ever buy / rent them, they will just drown their money.
For example, in Prague we can find several new apartment complexes with hundreds of flats, where about 20 of them are sold after a few years.
Regulation as a subsidy
Those who accept the higher price of unregulated flats thus de facto pay the reduced price of rented regulated flats in the increased rental price. It is a form of redistribution, it is a subsidywhich causes an unhealthy boom in construction, the growth of bad investments (small investments).
It is also good to note that as regulated rents grow, so do the problems of construction companies and developers. In the last few years, the growth of regulated rents has been offset by many investments in infrastructure, but as the current crisis has struck and how savings need to be made, the true strength of the construction bubble caused by regulated rents is emerging.
The monstrosity of this subsidy is all the higher if we notice the person who lives in regulated rents. Often the socially weaker subsidize housing for example, Czech legislators - deputies or senators. Regulated rents, even in the form that exists here, are certainly not fair, they are not beneficial, they are not positive. It is a tool of monstrous redistribution, a tool for creating bubbles, a tool for liquidating the economy, a tool that throws money out the window.
The longer the deregulation, the worse the result. Let's deregulate as soon as we can. The damage is already too high today.
Do you live in unregulated? So to whom do you subsidize the rent?