Rental rationing

Louis Houlbrooke has an eye for interesting questions.

The crazy thing about the current rental squeeze: queues outside flat viewings suggest that landlords are *under-pricing* flats. We're still early in the student season, how long before landlords reading the news savvy up and hike rents further?

— Louis Houlbrooke (@louishoulbrooke) January 16, 2018

Why wouldn't rentals simply clear on price?

The credit rationing literature points to one potential answer. In that literature, the market for loans doesn't clear just on interest rates because the people willing to borrow at the highest rates know that they're very risky types. So instead you get interest rates a bit below what would otherwise clear markets and lenders choosing among applicants to get borrowers who are good bets.

Application to rental markets? 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.*

Implications:

• The harder it is for landlords to evict problem tenants, the more we should see this kind of non-price rationing;
• The harder it is for landlords to specify their actual requirements in a for-let ad, the more we should see queuing. Otherwise, you'd see less queuing and more clearing on prices among those who meet the landlord's other requirements;
• Non-price rationing should be more common for flats where landlords are more worried about there being problems. 
• The burden of non-price rationing will be felt hardest by people who would be good tenants but who landlords can't distinguish from risky tenants. They'll keep bidding on flats and keep failing to get one;
• If you're in the market for renting, and you're of the type that landlords would prefer to rent to, you'll do better by finding a way to credibly signal as much. 

Meanwhile, Dan Rowe over at The Spinoff complains simultaneously that rents in Wellington are too high and that there's too much queuing and non-price rationing and that tenancy protection laws are too weak. This is what happens when you don't structure your thinking around an underlying economic model. Price increases and non-price rationing through queuing are both outcomes of demand exceeding supply at the prior price. 

Unless you address the underlying shortage, all you can do is choose among various ways of rationing scarce supply - whether prices or queues. Doing it through prices at least provides investors with incentive to build new rental stock and provides homeowners with a reason to put up with the hassle of having a tenant in the spare bedroom. Doing it the other way doesn't. 

It is depressing how many people still like rent controls, despite the evidence against it. 

* Please remember that this is a positive rather than a normative analysis. Not saying that any of this is good, just that it's how we should expect incentives to play out.