The misery of a stifled housing market
Only one thing can really protect renters, and it isn’t the coming changes to the Residential Tenancies Act, says Eric Crampton
The Government can pass whatever legislation it likes regulating the relationship between landlords and tenants. Some of it might make sense; some of it might wind up harming the people it’s intended to help.
But all of it misses the point.
The only real protection for renters is substantial competition among landlords for tenants. Housing shortages give landlords power.
Charles Dickens quipped that an annual income of twenty pounds would result in happiness if annual expenditure were six pence less than twenty pounds, but misery if expenditures were instead six pence over twenty pounds.
Housing is a bit like that.
If we had 600,000 dwellings in Auckland and some 580,000 households needing housing, the result would be happiness. Instead we have about 540,000 dwellings and 580,000 households needing housing, and the result is obviously miserable.
Landlords always compete with each other for tenants, and tenants always compete with each other for places to live. But in housing markets stifled by rules and processes guaranteeing that housing supply cannot keep up with increases in demand for places to live, outcomes will not favour tenants.
It is easy to see that by contrast with the car market.
If you wish to enter into a long-term rental agreement for a car in New Zealand – a lease – there are plenty of suppliers from car dealers to specialist leasing companies.
Toyota’s standard lease agreement, the one I could most quickly find online, includes a lot of provisions that would not be allowed under either current or proposed housing rental regulations.
If you lease a car, and do not hold up your end of the bargain when it comes to maintenance and insurance, the car’s owner can do it for you and charge you for it. If you return the car at the end of the lease and it has more than normal wear and tear, you do not just forfeit a deposit – you also have to pay to bring it up to spec. If you do not make your lease payments on time, if you have violated any of the terms of the agreement, or if the lessor has reasonable belief that you will damage the car, they can take the car back and charge you fees for early lease termination. And any costs Toyota incurs in the process will be sheeted back to the renter.
But despite all of those contractual provisions that seem to give the car’s owner a lot more power than its renter, you just don’t hear of companies like Toyota repossessing cars because someone’s nephew is moving back into the country and would like to use it six months before the lease runs out. There’s no bidding war for leases when a car comes onto the leasing market. The cost of the lease is set for the period of the lease – there is no annual or semi-annual review of the lease price. And, if the car breaks down, you’re unlikely to be waiting for months for repairs.
Rental markets for housing are not that friendly to renters.
540,000 dwellings in Auckland and 580,000 households, and the result is misery no matter how you try to square things through tenancy regulation.
The difference isn’t because of anything innate to cars and houses.
And it certainly isn’t because of consumer protection regulation that does more to help car renters than it does to protect house renters.
The difference instead comes back to that tweak on Dickens’ dictum: you get happiness because there will always be more cars available than people wanting them at current prices, and plenty of people competing to lease them to you. Any hint of a shortage would just see more cars imported. If one company started treating its customers poorly, word would get around – reputation matters.
But 540,000 dwellings in Auckland and 580,000 households, and the result is misery no matter how you try to square things through tenancy regulation.
Tenancy regulation will not build more houses. It can only address some of the current symptoms of a fundamentally broken housing market.
Worse, it is the kind of move that makes the most sense if the Government is pessimistic about its chances of fixing the real underlying problem – making it easier to get new housing built.
Let’s walk through why that is the case.
Until the Government strikes the root of the housing shortage ... tenants will be denied the most fundamental protection consumers enjoy in any market –competition among suppliers
Suppose building new housing in Auckland were impossible rather than just difficult.
In that world, making it harder to be a landlord would not push up rents very much – it would instead reduce the amount that investors would be willing to pay for rental properties. Landlords would take more of the cost hit through the value of their properties.
There would still be some adverse consequences for renters. Tenants with a more chequered history would have a harder time finding places to live if landlords expect it to be harder to end a bad tenancy. And some rental housing will likely shift over to the owner/occupier market, which would make the rental market tighter. But there would be offsetting benefits for renters with greater security of tenure.
The effect of regulation protecting tenants would change if it became much easier to build new housing. In that case, making it more expensive to be a landlord discourages potential landlords from building new apartments, terraced housing, or standalone homes – and tenants would take more of the hit through higher rental costs.
You can think about it this way: if regulation made it harder for car leasing companies to protect their vehicles, they would not be willing to bring cars into New Zealand to rent out unless prices increased to cover the costs.
Until the Government strikes the root of the housing shortage by reforming infrastructure financing and the perverse incentives that lead councils to treat residential growth as a cost to be minimised, tenants will be denied the most fundamental protection consumers enjoy in any market –competition among suppliers to provide them the best service at the lowest cost.
Tenancy protection provisions may provide some palliative, and hopefully without too many side-effects. But they do not get new housing built.
Until there are more houses available than families in need of housing, the results will be miserable.
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