A Model of Regulation in the Housing Market

This paper develops a theoretical model to study the effects of regulation on the housing market. Our model emphasises the following specific features of the housing market : product heterogeneity plays an important role, search costs are high, switching (moving) costs are substantial, and the possibilities to price discriminate are important. We show that in an unregulated housing market rents will increase at the time of renegotiation as a result of the "hold-up" problem. A regulation which limits the owners' possibilities to increase his rents for a certain number of years leads to lower equilibrium rents and higher social welfare. Our model strongly suggests that a policy which consists of indexing rents may be socially preferable to a simple laissez-faire solution.