In 2014, back when Alberta’s economy was booming, Calgary and Edmonton’s residential vacancy rate was tied for the lowest in the country, at 1.4 per cent. The average rent for a two-bedroom apartment in Calgary was $1,267, trailing only Vancouver.
These housing difficulties drew commentary from public officials and newspaper op-ed pieces. In October 2014, Mayor Naheed Nenshi said landlords in Calgary are “gouging” tenants, sparking debate over the possibility of rent control. (A rental control is a regulation on how much landlords can charge or hike rents by. Alberta ended rent control in 1980. Rental increases in Alberta do require three months’ notice and only one increase is allowed per year.) An op-ed piece said, “Relying on the free market is not the answer. Yes, property owners and investors have the right to make a return on their investment but people have the right to have a roof over their head as well and rent control is one of the ways government can help make that happen.”
Use a demand-and-supply model of the rental housing market to analyze the following situation when there is no rent control.
a. An economic boom causes an increase in the demand for housing. Show the short- run impact of the boom on the quantity of rental housing and the rental price of housing.
b. In the long-run an increase in rental housing occurs. Show the long-run equilibrium quantity and price of rental housing.
c. Now suppose there is a ceiling on the price of rental housing, set equal to the price that existed prior to the boom. Determine the size of the long-run housing shortage that results from the rent control policy.
d. Describe what sorts of individuals are hurt by rent controls and who gains from rent controls.