Rent auctions linked to constraints on inner city development

A story in mX yesterday afternoon highlighted an unnecessary law against so-called rent auctions:

Brisbane’s rental squeeze is forcing prospective tenants to offer landlords extra cash to secure a place to live.

As competition for properties in the inner city heats up, Tenants’ Union of Queensland co-ordinator Penny Carr said many renters were “up-bidding” above the advertised rental price in order to nab a home.

The practice becomes illegal in Queensland when potential tenants are asked to take part in an informal auction to see how much they are prepared to pay to have their application approved.

“People do it quite often, whether they are baited into doing it or feel like it’s the best way to get the property they want,” Carr said…

…Under laws introduced in 2009, agents must advertise a fixed rental price, can’t ask for offers or put a property up for rent auction.

This law is silly and should be repealed. It will result in inefficient outcomes because some people will miss out on rental properties they really like and are willing to pay a higher rent than other people for. If there is a problem with rents being too high in the inner city, it is not due to rent auctions, but limited supply of rental properties relative to demand, possibly due to constraints on development in the inner city. Rent auctions are merely a symptom of relative under supply, and are obviously not the cause of the under supply and consequent high rents.

A good start to addressing any rental supply shortfall would be for Brisbane City Council to review its heritage protection to determine the extent to which it is constraining development in the inner city – development which could boost the supply of rental accommodation and put downward pressure on rents.

The impacts of heritage protection on inner city development were previously discussed in a guest post by my colleague and friend Brad Rogers:

Guest post – Old Queenslanders in a New City

I’ve also discussed constraints on inner city development previously:

Where is residential development occurring in the Brisbane metro area?

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8 Responses to Rent auctions linked to constraints on inner city development

  1. Craig Wilson says:

    Gene, this is amazing.  is there really such a law?

  2. Jim says:

    Gene

    I agree that laws preventing rental auctions don’t make a lot of sense. But don’t assume a market solution (auctions) will necessarily achieve an optimal outcome either.

    Many rental auctions have exploited the asymmetric nature of information between the listing agent and the prospective tenant. For example, agents talking up interest and prospective bids from other parties that may or may not be factual, but certainly cannot be verified by any prospective tenant. Hence, prospective bidders inflate offers based on bogus information provided by agents who have a commercial incentive to have inflated bids.

    Clearly there is some need for consumer protection. Real estate agents do not have a good reputation when it comes to ethics, and much of this is probably justified. Can you think of another industry that has successfully achieved a situation where the level of product disclosure they are required to provide for a $4 million transaction (a house) is less than that required for a $4 loaf of bread?

    Public auctions (like most sales) would have excessive transactions costs. The solution is to establish and enforce some robust ground rules for rent auctions. I’d suggest a simple tender model (accurate description of property and rental conditions up front, written offer, closed bid, set closing date etc). Then you get an efficient allocation of resources, and an appropriate degree of consumer protection.

  3. Katrina Drake says:

    My friendly Toowong Rental Property manager tells me that weekly rental prices for houses are stagnant, and house and gardens are difficult to rent. Yet, most inner city rental houses cannot be demolished for townhouse and apartments developments due to planning regulations. Yet Tenant’s preference is for apartment living, it is much more affordable and closer to transport and conveniences. It is far easier to find tenants for apartments.

    I like your idea of a simple tender model, although I think it is happening informally already in the real estate rental process. Tenants are asked to complete rental applications indicating what rental price they are pre-pared to pay. And are then shown through apartments ‘in the range’ before a rental price is agreed.

    However, I must say that maximising weekly rental price is not everything when it comes to investment properties. Long staying, reliable tenants, on a lower weekly rent, can be a much better investment than short term, high-wear, high paying renters.

  4. Chris says:

    According to this report;

    http://www.brisbanetimes.com.au/queensland/innercity-rentals-off-to-sluggish-start-20140202-31v0k.html

    some rental stock has been added to the market recently and vacancy rates are at 4.1 per cent (described as a slight oversupply). Maybe less need to review heritage laws in the short term?

    • Gene Tunny says:

      Thanks Chris, that’s interesting data. I still think the law against rent auctions should be repealed, but it’s possible I was too hasty in linking the rise of rent auctions to hertiage protection. Let’s wait and see what happens to the vacancy rate in coming months in case it has only increased temporarily.

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