The nightmare that is renting in this country continues to bring new horrors, with reports from Wellington that landlords are explicitly operating tender processes on their rentals in a bid to drive up prices...
Because what tenants aren’t free to do is escape the market altogether – already flat viewings across the city are attracting hordes of applicants, thronging in the streets and clamouring for a place to sleep as much as a full month before university begins for the year.
“I was at one the other day and there were people everywhere streaming up and down the street. Someone came out and asked us what was going on on their street because apparently there’d been like a hundred people walking up and down. It’s been pretty hectic.”When you have "hordes of applicants" that suggests to me that there is excess demand (a shortage), and when there is excess demand you would expect prices (in this case, rents) to increase (a point that I have made before). However, Eric Crampton has a slightly different take, explaining why we wouldn't necessarily expect the rent to rise so far that it would eliminate the excess demand:
Suppose it's hard to evict a bad tenant. It'll take a long time, it'll be a hassle, and the tenants might destroy the place while you're going through the tenancy tribunal. If you set a high price and if it's hard to monitor and police what's going on in the flat, you might have problems. The high bidder might be the one expecting this to be a short-term game.
Landlords would want to evaluate a potential tenant's bid across a pile of hard-to-specify and possibly illegal-to-specify (but impossible to police unless you're dumb enough to write it in the ad) non-price margins. If you want that, you want to have excess demand at the posted money price so that you can clear on the other margins.This idea of landlords offering 'below-market' rents in order to have the pick of tenants could be termed an efficiency rent (the rental equivalent of an efficiency wage - see here for more on efficiency wages), which I wrote about back in 2016:
As noted above, there is a moral hazard problem for landlords - tenants' incentives (to look after the property) are not aligned with the landlord's incentive (to keep the property in top condition). If the landlord instead offered an efficiency rent (a rent below the equilibrium market rent), then they would have many potential tenants applying for the property, allowing the landlord to pick the best (the least likely to damage the property). It also gives the tenants an incentive to look after the property after signing the tenancy agreement, because if they don't they get evicted and have to find another place to live at a much higher cost.
Maybe landlords offer efficiency rents already and we just don't realise it? There is certainly plenty of evidence for excess demand for rental properties (see here or here for example), so maybe rents are below equilibrium (though they are rising quickly so it's possible that the observed below-equilibrium rents are simply in transition to a higher equilibrium level). Excess demand by itself is pretty weak evidence for efficiency rents. I'd want to hear landlords telling us they offer lower rents to attract good tenants before I found it believable. There's not a lot of evidence in the academic literature on efficiency rent either (see this paper by Basu and Emerson as one example, ungated here).I'm still waiting for some clear evidence that efficiency rents are a good characterisation of what drives excess demand in rental housing markets. In the meantime, we are left to ponder the situation. What is clear though, is that by now no one should be surprised that house rents increase in January.