An Auckland agent says more prospective tenants are flocking to house viewings than ever before as a photo posted to social media showed up to 50 people snaking their way through a Remuera rental this week.
One city tenant, aged in his 60s, said he and his wife were shocked when the first home they viewed - a three-bedroom Greenlane house with a rent of $830 per week - also had 50 people present.
The man - who only wanted to be known as Chris - had been keen to move out of his current rental because the landlord tried to bump the rent up by $20 per week.
But after seeing so many people in Greenlane, Chris and his wife - who own a property in Australia - decided to stay in their current rental and negotiate a lesser rent increase of $10 per week.I have just two words to say: excess demand. Ok, I lied. I have more than two words. Excess demand happens when the market price is below the market-clearing equilibrium price. So, if you have lots of people looking for houses to rent, and not enough houses to go around, it's because the rents are too low. Normally, we would expect markets to adjust, but for some reason the rental market seems to be perpetually in a state of excess demand. In a 2016 post, I pondered whether efficiency rents might be an explanation for the persistently low rents:
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?This year, I had a student working on this topic for their ECON499 research project, based on a survey of landlords. I'll post in more detail on the results later, since I am re-analysing the data, but the student's simple analysis showed that landlords are more likely to offer below market rents to existing tenants, but offer market rents to new tenants. At least, that's what the landlords say they do. Which suggests that efficiency rents are not a strong explanation for the excess demand in the rental market. Maybe landlords are not good at setting rents? Seems unlikely - most landlords have a lot of experience and many properties.
Maybe what we're observing isn't really excess demand at all? If we think about the traditional excess demand in the goods market, the number of goods available is not enough to satisfy all buyers. So, some buyers go away from the market empty-handed, even though they were willing to pay the market price. However, in the rental market, most 'buyers' are already tenants somewhere else, so they aren't going away empty-handed - they are just going back to their previous property (as the example of Chris from the quote above shows).
A better way to think about this might be a search model of the rental market, in the same way that search models have been applied to understanding labour markets (where workers might be searching for a new job even though they already have one). Something to think about in future. In the meantime though, expect a flood of media coverage about rents every January.
Read more:
- That January tradition... rent increases, Wellington edition
- This is what happens when you have shortages of rental property
- Students, rental shortages, and renting over the summer
- January tradition continued... Rent increases again
- A January tradition - complaints about rising rents
- Out-of-control rent increases in Auckland - why?
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