The following text is taken from the Introduction to Economics, a book by Robert Holman and D. Pospíchalová.
Rent regulation - reactions of bidders
One large city is experiencing economic prosperity. Many companies come there, the demand for various job professions is growing in the city moving many people. No wonder there is a high demand for rental apartments. In response to high demand, rents are rising rapidly. Previously, the rent for a standard two-room apartment was CZK 1 per month, now it is CZK 500.
If the market was given time, the offer would certainly respond to the growth in rents. For example, real estate entrepreneur Schwarz would invest in the construction of a new tenement house, because high rents promise economic findings. Mr. Vondrák, the owner of an older house, would reconstruct the ground floor of the house and turn it into apartments. Mr. Landa would move to his holiday cottage and his apartment would be offered by the landlord to another person. The offered number of flats would grow and the growth of rent would stop.
But the market is not given time. City Hall is concerned about the growth of rents. What should people who do not have enough money for high rents do? Where can they get cheaper housing? And so in the end city proceeds to rent regulation - sets a rent ceiling.
But once the price cap is set, the offer will stop responding. Mr. Schwarz will lose interest in investing in rental apartments because such an investment will not pay off with regulated rent. He would rather invest in the construction of a shopping center where rents are not regulated. Mr. Vondrák will also lose interest in adapting non-residential space to apartments. And Mr. Landa is not moving to the cottage. People who live are happy - they pay low rents. But where will people live who did not get a rental apartment? And who do not have several million for a family house.
Rent regulation - response of demanders
The price cap on the rental housing market will also influence the response of demand. With low rents, many people want to live in rental apartments. For example, Mrs. Černá lives alone in a large three-room apartment. Upstairs, a family of four is cramped in a one-room apartment and would like to exchange with Mrs. Černá. But she refuses because she is used to her apartment and she doesn't want to move. Why would she do that too when rents are so low.
Young Nováks could live with their mother, but when the rent is so low, they ask the city to allocate a rental apartment. They have two children and a low income and housing is a necessity.
And so the number of people looking for apartments at low rents is growing.
As a result, there is a shortage of rent housing in the range of millions of square meters.