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Rent control and distortions in market prices within the housing market
Households who cannot find dwellings on rent are forced to turn to substitutes in the uncontrolled owner-occupied sector of the property market. Since Real Estate in India is now being priced on the higher side, people with small and marginal incomes cannot afford to own properties in the key urban areas. Property values have already doubled or even trebled in the key urban areas. These developments are likely to continue for a long time until demand meets supply.
Assume a fixed stock of buildings. Everybody wanting a dwelling is in a queue, with people randomly distributed as regards preferences and income. Alternatively it can be assumed that all people have identical incomes and preferences. Further assume that a proportion of the demand, say one-half, is allowed to optimize consumption of housing at the particular controlled rent ceiling. Since people at the head of the queue will take up one-half of the housing demand at any given price, the other half will represent people who have had to bid for dwellings in the free sector.
If there were no division in the market, total demand would equal the fixed supply at an equilibrium rent. If rent, however, is controlled at a particular point, demand in that half of the market can buy more from the available supply. Since this quantity of dwellings is supplied from the total stock, it leaves only little for the free market. The result is that free-market renters will have to pay a higher rent. That is, those who are not fortunate enough to obtain rent-controlled dwellings are forced to pay a higher rent than if the whole market were completely free.
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