This is what happens when you have shortages of rental property

On Tuesday, Hawkes Bay Today reported:

A Napier woman was shocked to see the price of a rental home increase by $10 in just one day.

Mandy Clayton of Tamatea, who has rented for three decades, fears people are bidding on rental properties out of sheer desperation.

"I saw it advertised in the morning at a price and then later that night when I decided to apply for it, it had gone up - and that's honestly not the first time I'd seen it [a price increase]," she said.

Clayton, suspecting applicants had offered to pay more, asked the landlord about the price increase but said they told her the first price was incorrect.

A Tenancy Services spokesperson said there was nothing in the Residential Tenancies Act 1986 that precluded a tenant indicating what they would be willing to pay for a rental property.

"The process of rental bidding reverses the offer/acceptance role that usually occurs. It is the potential tenants who make the offer - it is then the decision of the landlord which offer they accept.

"This process removes the landlord from the rent-setting equation and allows the prospective tenant to be an active participant in the setting of 'market rent'."

To be clear, this doesn't remove the landlord from the rent-setting equation. However, this is exactly what we would expect to happen if there is a shortage of rental housing, based on the simple model of supply and demand - when there is a shortage of a good, the price should rise.

As shown in the diagram below, if the current rent (R1) is below the equilibrium rent (R0), the quantity of rental properties demanded (QD1) exceeds the quantity of rental properties supplied (QS1). There is a shortage. In other words, at least some of the tenants who want to rent at the current market rent (R1) miss out on a property. So, what do they do? If they are willing and able to pay a higher rent, they could find themselves a willing landlord, and offer to pay slightly more than R1, to ensure they don't miss out. So, tenants will bid the rent up, until eventually the market reaches equilibrium at R0, where the quantity demanded and quantity supplied are both equal to Q0.

Other than tenants bidding up rents, what else might we see? Tenants might be willing to pay 'letting fees' or 'key payments' to secure their rental property. They might pay the landlord to have their references checked, or they may pay more weeks of rent in advance, or pay a higher rent that has a 'discount' after six months. Tenants may agree to cover costs like lawn mowing or simple maintenance that often the landlord would pay for. There are lots of ways that additional payments to secure a rental can be 'hidden', all of which makes Labour's plans to ban letting fees somewhat of a joke. There are so many alternatives, and it isn't only the landlords to blame - they wouldn't charge those fees if tenants were not willing to pay them to secure a rental property. And tenants wouldn't feel the need to pay those fees if there wasn't a shortage of rental housing.

Read more:

• 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?