Saturday, 4 February 2017

Students, rental shortages, and renting over the summer

The simple model of supply and demand teaches us that, when there is a shortage of a good, the price should rise. This is easily explained. As shown in the diagram below, if the current rent (R1) is below the equilibrium rent (R0), the quantity of rental properties demanded (QD1) exceeds the quantity of rental properties supplied (QS1). There is a shortage. In other words, at least some of the tenants who want to rent at the current market rent (R1) miss out on a property. So, what do they do? If they are willing and able to pay a higher rent, they could find themselves a willing landlord, and offer to pay slightly more than R1, to ensure they don't miss out. So, tenants will bid the rent up, until eventually the market reaches equilibrium at R0, where the quantity demanded and quantity supplied are both equal to Q0.

Now, consider this story from the New Zealand Herald from earlier this week:
Student tenants have paid thousands of dollars over summer for empty flats and apartments in a bid to secure their accommodation for 2017 as Auckland faces a growing rental shortage.
Occupancy levels reached a record high at Ray White's city branch with tenants continuing to pay rent when they returned home for holidays rather than lose their accommodation.
"A year ago students would end their tenancy in November, go home for the summer and return in February to rent another apartment," Delanie Horrobin of Ray White said.
"Now they are staying on because they are concerned they won't have somewhere to return to."...
"Our waitlist is at a record high of 50 and it is going to get worse with February and March our busiest months."
Peter Thompson from Barfoot and Thompson said there was inevitable price increases whenever rental accommodation was in short supply.
He said the start of the year was always more expensive as students scrambled to find accommodation and families settled for the school year...
"January is always busiest for us and the shortage means rent increases," Thompson said. "Come March the prices should come down."
Whenever students come back into university cities, the demand for rental properties increases, and shortages become apparent (we see the same stories about rents every January, as I have remarked on many times). Rents go up for everyone, but as in the story above, by March the rents have gone down again.

Why would a student be willing to rent over the summer, when they aren't even there? As noted in the analysis above, we expect the rent to increase when demand is high. And if you consider the rental 'price' as the rent paid over a whole year, this is another example of this (albeit somewhat hidden). If in order to secure a rental property a student tenant now has to pay for 52 weeks of rent instead of 40 (because now they pay for November-March as well as the rest of the year), then the annual rent paid by a tenant for that property increases (assuming it would otherwise be both vacant and un-rented over the summer). And we should expect nothing less from landlords. Why would you rent a property to students for 40 weeks, if there are willing tenants ready to rent for the full year?

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