Rent Control and Virtual Prices: A Case Study for Interwar Belgium

Abstract

After World War I rent control became a cornerstone of housing policy in many European countries, resulting in quantity constraints on the demand for housing. The theory on complete demand systems provides a framework for analyzing the effects of these policies on consumption. As a test case, a demand model is estimated to calculate virtual rent prices for interwar Belgium. The results are well in line with historical evidence, providing insight into the extent of rationing Simulations with the demand model show that the severe rent restrictions especially favored expenditures on food.

Virtual prices and the impact of house rationing in Belgium on consumer choices

“…The Rotterdam demand system using virtual prices is estimated based on the free demands for goods and services and can be used to estimate the effects that rationing had on demands for the unrationed goods. This is in contrast to the methods employed in other studies which estimate a demand system in which the rationed good appears on the right hand side as an explanatory variable, often in an asymmetric manner from the unrationed goods, and a bi-sample approach as discussed in Deaton (1981) and Bettendorf and Buyst (1997).…”

“…The system of rent control in Belgium during the interwar period was complex with regulation significantly restricting how landlords set rents across various types of dwellings, as described in Bettendorf and Buyst (1997). After World War I, the housing shortage in Belgium was very severe causing an upward pressure on rents.…”

“…Huffman and Johnson (2004) examine welfare changes resulting from Poland's transition into a market economy. The impact of extensive rent control during the interwar period in Belgium was examined by Bettendorf and Buyst (1997). In the early days following World War II, the effect of ending U.K. rationing control on goods and services was the subject of much research by Stone (1945Stone ( , 1954, Stone andRowe (1954, 1966), Tobin (1952) and Houthakker and Tobin (1952).…”

“…Estimating virtual prices from a demand system is complicated as discussed in Deaton (1981) and Bettendorf and Buyst (1997). An alternative way of measuring the virtual price is to use substitute price data.…”

“…For example, Bettendorf and Buyst (1997) use Belgium data from 1920 to 1939 in conjunction with the Belgium data from 1953 to 1993 to estimate the virtual price of rent during the interwar period 1920-1939. In using a bi-sample approach, the methodology assumes that preferences over the 1953-1993 period can be used to estimate virtual prices over the 1920-1939 sample.…”