In the aftermath of the London fire, in some ways my heart isn’t in writing much about housing. Disasters don’t often get to me, but this one has.
Nonetheless, the Dominion-Post led with housing this morning, and when I saw that the first word in the entire article was “greedy” (followed by that other emotive term “landlords”) it wasn’t promising. Just because people scoff when Fox News talks of being “fair and balanced” doesn’t mean the rest of media should abandon the aspiration.
Faced with rising demand for rental accommodation – in a city where central and local government have again combined to make housing supply not very responsive to changes in demands – owners (or their agents) of residential rental services businesses have faced excess demand for the limited stock available. The typical response you might expect would be for rents to rise.
There are different sorts of pricing structures used for different goods and services. Typical dry goods in a supermarket will have a fixed price, and occasionally the supermarket runs out of stock – which can be mildly annoying to you or me, but is presumably easier to manage for them. The value of New Zealand dollar (the exchange rate) is constantly changing, typically by quite small amounts, as pressures from potential buyers and sellers ebb and flow. Even at a retail level, petrol prices now change very frequently. There are whole literatures on the reasons why different structures are adopted in different markets (and I’m certainly not expert in that field).
Housing is typically nearer the variable pricing end of the spectrum. In the market for actual house purchases, fixed price adverts, “buyer enquiry over”, tenders, and auctions all co-exist. In the last two, the seller can reconcile supply (one house) to demand, simply by using the amounts bid. In a fixed price advert, if there is more than one interested party, the seller might have to use some other decision criterion (although I imagine that typically even then one bidder will offer more).
It is, as I understand it – not owning rental property, and not having rented one in this country for many decades – customary to advertise rental properties with a fixed rental price. Holiday home websites operate that way too – and, in effect, they just operate on a “first come, first served” basis. In a normal market, it probably often works quite well – if there are plenty of people offering rentals, and plenty of potential tenants, even if one misses out on one property, there is another not far away. If the property owners sets his or her price too high, they find there is little or no interest in renting their property, and eventually have to re-evaluate and revise the fixed asking price.
But the current situation seems to be one where lots of people are enquiring eagerly about almost any rental property on offer. Fixed asking prices are, in that sense, too low to clear the market. Over time you’d expect that those fixed asking prices would rise – and thus take care of that particular element of the problem – but that doesn’t deal with the property owner’s issue on the day: when 20 people want one rental.
Wellington Central MP Grant Robertson knew of two cases of renting tenders in Wellington – both from around the start of the year when students were returning to the capital.
“I think it is barely legal,” he said.
At one, would-be renters turned up to view a flat with an advertised price. “When they got to the property they were asked, ‘how much are you prepared to pay?'”
At the other there was no advertised price and would-be renters were simply asked how much they were prepared to pay.
“I think it is abhorrent. It is exploiting the fact we have a real shortage of rental homes in Wellington at the moment – exploiting people in vulnerable positions.”
So how is the property owner or agent supposed to respond? Just ignore the excess demand and draw straws to determine who should get the flat at the – evidently – too low advertised price? It is a market, and the property owners aren’t running charities for the homeless, but private businesses.
As is noted in the Dom-Post article, auctions aren’t always an ideal mechanism – as an owner you are likely to care about the quality of the tenant as well. But simply drawing straws doesn’t seem to have any particular merit – moral or practical – in this climate.
Don’t get me wrong. The housing market in New Zealand is, in many, respects a scandal, and the problems flow largely from the choices of successive waves of central and local governments. Since we are talking about right now, in this case it means the National-led central government, and the Labour-dominanted Wellington City Council. But attacking a symptom – rising rents, and alternative techniques to reconcile supply and demand – isn’t a particularly meaningful response. Owners of rental properties are, in many respects, the last people who should be being blamed here.
But I also learned something new from the article. The journalists approached, and got some comment from one of their officials
Ministry of Business, Innovation and Employment national manager tenancy compliance and investigation Steve Watson said the practice was allowable under the Residential Tenancies Act.
“Any party who feels that they are being asked to pay rent that exceeds ‘market rent’ has the ability to apply to the Tenancy Tribunal who can review and determine the appropriate amount of rent for a residential property,” Watson said.
Really? I know there has been centuries of philsophical and theological debate around concepts of “just prices”, but have we (or rather our Parliament) really legislated to provide for cases where some arbitrarily determined “market price” differs from a price being paid in….well…the market. It seems that our politicians had done just that.
Here are the relevant bits of section 25 of the Residential Tenancies Act
25 Market rent
(1) On an application made to it at any time by the tenant, the Tribunal may, in accordance with the succeeding provisions of this section, on being satisfied that the rent payable or to become payable for the tenancy exceeds the market rent by a substantial amount, make an order reducing the rent to an amount, to be specified in the order, that is in line with the market rent.
(2) Notwithstanding anything in subsection (1), no application may be made under that subsection in respect of the rent payable under a fixed-term tenancy later than 3 months after—
(a) the date of the commencement of the tenancy or (in the case of a tenancy that was subsisting immediately before commencement of this Act) the date of the commencement of this Act; or
(b) the date of the last review of rent,—
whichever is the later.
(3) For the purposes of this Act, the market rent for any tenancy shall be the rent that, without regard to the personal circumstances of the landlord or the tenant, a willing landlord might reasonably expect to receive and a willing tenant might reasonably expect to pay for the tenancy, taking into consideration the general level of rents (other than income-related rents within the meaning of section 2(1) of the Housing Restructuring and Tenancy Matters Act 1992) for comparable tenancies of comparable premises in the locality or in similar localities and such other matters as the Tribunal considers relevant.
Initially I wondered if this might be some historical provision to deal with, say, a situation in the Great Depression where there was a long-term fixed rent, and the general price (and wage) level fell sharply. But that can’t be – at least for fixed term tenancies these provisions can only be used within three momths of the tenant taking up the tenancy, or of the most recent rent review.
It just looks like an extraordinary piece of “feel good” law. The standard (in 25(3)) is the rent that “without regard to the personal circumstances of the landlord or tenant, a willing landlord might reasonably expect to receive and a willing tenant might reasonably expect to pay, for the tenancy, having regard to the general level of rents”.
It isn’t clear at all why the “personal circumstances” should be irrelevant. If someone desperately wants to live on a particular street, because they want to be close to aged parents (say) why shouldn’t that be something that can reflected in the price they pay for a rental tenancy? One bag of flour might be much the same as the next one. But except perhaps in high-rise blocks, almost every rental property is different from the others, even if only by location – and location preferences are often quite idiosyncratic and personal.
I have no idea how often this provision is used – perhaps more often now having been highlighted on the front page of a major daily paper. Various readers have a lot of exposure to running rental businesses, and I’d be interested in any perspectives they can offer. But you also have to wonder why the MBIE official felt it appropriate to add in this information when he commented. After all, the one common element, agreed (it would seem) by all parties in the story, is that the rental market in Wellington is very tight. The general level of rents is presumably rising. (And if, perchance, someone does agree to pay a level of rent “above the market rent”, it was a contract voluntarily – even if grudgingly – entered into: not great perhaps, but better – for the renter – in their own assessment, than the alternative.)
I was interested to see Grant Robertson stating that Labour will soon be announcing a package to “strengthen renters’ right”. There may well be merit in some of that. But the best way to protect the position of renters, and all others coming into the accommodation market (whether as renters or buyer) is surely to fix up the land use and housing supply markets. Abundant responsive supply in the face of changes in demand is the best assurance of genuinely affordable and secure accommodation.
(On which note, a reader sent me a link the other day to a stimulating piece on housing and land markets from a UK academic. I don’t agree with everything in it, but for those interested in the debate – and in recognising the similar issues in other countries – it is worth reading.)