The 1995/1996 Household Income, Expenditure - (PDF, 101 mb ...

VI.II
consumption of housing. Assuming that housing units are homogeneous,
equilibrium under rent control can occur only at points on or below this pq s
1l curve.
Figure VI.2b depicts supply when rent control is imposed: below the
constraint, supply follows SRMC; at prices above the rent constraint, supply
coincides with the rectangular hyperbola. Landlords constrain supply to the
lowest cost/highest revenue point, along the rent constraint. (Note that there
would be no incentive for landlords to supply at E A housing units as opposed
to E B because revenue would be the same and costs would be higher.)
Assuming that landlords stop paying for maintenance altogether and supply
immediately constricts, equilibrium will occur at E l , the intersection of market
demand and the rent constraint. Renter costs are higher than they were
before rent control was imposed. However, in the short run, supply is not so
elastic; it takes time to establish controls, and time for the cutoff in
maintenance to effect supply. Equilibrium will settle at somewhere between Z
and E l : there is excess demand, and prices can be lower or higher than they
were at free market equilibrium.
A general, dynamic model for a housing market model under rent control
would have to account for stock adjustment (through construction and
abandonment, especially), the rate of deterioration to maintenance over time,
and quality differentiation among housing units. Such a treatment is beyond
the scope of this paper. Instead, a simpler model is presented below,
incorporating only differences in quality under two different renter
arrangements, assuming an imperfect market.
The regulatory environment in Egypt compounds the limited competition
commonly associated with housing markets. The market for dwelling space
rarely fits the theoretical conditions of perfect competition. Housing units are
not homogeneous commodities, and consumer taste is idiosyncratic. These
characteristics make for a thin market: it is difficult to pin down exactly what
is being demanded and by whom. Landlords can act as discriminating
monopolists by pricing above marginal costs. High search costs ("apartment
hunter" fees, for example), along with generally limited information about
vacancies, constrain consumer access. There are a limited number of
suppliers,18 and significant barriers to entry and exit. Scale economies rarely
exist. Imperfections in labor and capital markets reinforce these housing
market imperfections. Marks (1984) makes the point that prices for housing
characteristics in markets which are not permitted to clear may fail to show
expected relationships. Rent controls in an imperfect market will cause a
decline in the quality of the rent controlled unit and change the prices for
characteristics which make up that rent. It becomes possible to have high
vacancy rates occurring simultaneously with excess demand. Of course,
housing stock deterioration does not have to be the result if the incentive to
maintain, repair and improve the dwelling passes wholly to the tenant.
18 Most landlords in Egypt are 1) small-scale - Serageldin's (1993) study
estimated that 76% of landlords had less than ten tenants, and 2) inactive ­
almost half of the landlords had been renting their buildings for more than 30
years, and only 5% had begun investing in the last 10 years.