Modelling of market rent equilibrium and consequences of housing policy tools' application

Martin Lux, Petr Sunega

Abstract:

Housing-policy research in European Union countries distinguishes between two kinds of rent control: non-targeted "first-generation" rent control and targeted "second-generation" rent control, the later which better reflects housing market relations. The article demonstrates the drastic consequences of first-generation rent control in the Czech Republic, using criteria of social effectiveness and economic efficiency. The autors present the results of an econometric simulation model on the determination of equilibrium market rents after rent deregulation. Due to a sharp decrease in housing affordability in the Czech Republic, the autors simulate the application of two housing-policy instruments: social housing and housing allowance. A cost-benefit analysis shows that rent deregulation and the application of effective policy instruments would substantially increase the income of landlords, decrease the level of currently biased market rents, and maintain the relative affordability of housing.