No easy answers for renters
The rental market doesn’t behave like we think it should, Shamubeel Eaqub writes.
Happy New Year, except for flat hunters in Wellington. There is a rental crisis in Wellington – because there aren’t enough new homes. Wellington rentals are a good lesson in supply and demand, imperfect markets and complexities of interconnected policies and behaviours.
When there aren’t enough homes, the price of both renting and buying a house increase.
Over the past year the number of rentals in Wellington fell slightly, in contrast with a usual increase of between 500 and 1000 a year.
At last count, the population of Wellington city was rising by over 2 per cent annually.
It is a classic case of increasing demand and falling supply. No doubt asking rents will increase massively, and we may even see rental auctions, where the highest bidder secures the property or room.
Wellington’s rental market is so tight that the situation encourages landlords to kick out existing tenants if they can, as new tenants are likely to pay much higher rents.
High rent is not the only issue. When there is limited stock, even high prices may not secure the location, amenities or quality desired. The range is simply not there.
Sudden increases in rents will inevitably raise the spectre of rent controls. Some forms of rent control are common. In commercial property for example, there are usually some years of agreed rent increases per year, followed by a market re-set at a predetermined time.
This gives certainty to the tenant, and comfort for the landlord that they will not miss out on market rent movements forever.
But our residential market is traditionally more likely to have annual rent reviews, or when there is a new tenant. This makes rent increases erratic, which can cause financial headaches for many.
Rent controls are common in some parts of world, for example, in notoriously expensive San Francisco. But the evidence to support such a policy is not great.
Rent controls in San Fran keep rental costs low for people already in rent-controlled apartments, but it usually increases rents for those who are not, and landlords supply fewer units.
Worse, to get around rent control rules, owners redevelop and convert rental stock into owner-occupied stock.
Unless rent controls work in a place with a good supply of new houses, the benefits accrue to existing renters but mount costs on renters who missed out and landlords.
Society is likely to be worse off unless the housing supply is increased alongside rent controls.
A simplistic view would be to suggest that the market should be allowed to set prices. Over time, an increase in price should encourage more supply, because it is more profitable.
But the housing market does not function perfectly. Even when there are strong price signals, housing supply does not keep up – as our experience of recent decades has shown.
There are many reasons why housing supply is slow. Land use policies, particularly planning rules and infrastructure supply (and how they are paid for), have not kept pace with housing demand.
When combined with other policies and behaviours, like bank lending rules and their appetite to lend to apartment and medium density developments, the result is a pathetic new supply of housing that simply is not responsive to price signals and changes in demand.
Wellington’s housing market is in crisis. There aren’t enough new houses. Increases in rents will not be enough to encourage new supply, when so many other parts of the housing market remain broken.
Hopefully, a blistering summer of rent increases and temperatures will stoke some urgency for bureaucrats and policy makers.
They need to devise some way of smoothing shocks in rents, but more importantly, make sure we are building enough houses where people want to live.
We’d love to hear your story about the rental market and what issues you think we need to explore. Email us at newstips@stuff.co.nz