Are rental markets competitive?
The Week in Housing 23/09/22
Before diving in to today’s Newsletter, just a quick note to say that I am interested in taking on PhD students interested in undertaking research on housing or any aspect of urban political economy. If this something you are interested in please get in touch.
We’re sticking with the PRS this week, but switching the focus to more theoretical questions. Specifically, I want to look at how we can theorise rental markets. As a researcher, we sometimes have the uncanny experience of finding a book or article from the past which seems to be addressing the exact questions we have been attempting to puzzle out, and which we often thought were specific to our own context. This was the case for me when I can across a 1987 article by the botanically named Gilderbloom and Appelbaum, called Toward a Sociology of Rent: Are Rental Housing Markets Competitive?
The article argues that rental markets do not function in a competitive fashion, meaning that rent levels are not determined by the interaction of supply and demand, at least not in the sense understood by economists. Instead, they take a sociological perspective:
“[We] contend that social relations - among landlords, and between landlords and tenants -significantly limit the ability of metropolitan rental markets to respond freely to changes in the supply of housing… That is, some basic conditions of competition assumed in the economic model are altered or constrained by the structural relations and organizational arrangements among participants in these housing markets”.
Their starting point is the conditions that would need to pertain for the rental market to function as a competitive market, which they set out as follows:
1) Both buyers and sellers of housing services are numerous;
2) The sales or purchases of individual units are small in relation to the aggregate volume of transactions, and so do not by themselves significantly affect total supply;
3) Neither buyers nor sellers collude;
4) Entry into and exit from the market is free for both producers and consumers;
5) Both producers and consumers possess perfect knowledge about the prevailing price and current bids, and take advantage of every opportunity to increase profits and utility respectively;
6) No artificial restrictions are placed on demand for, supplies of, and prices of the "bundle" of housing services, or the resources used to provide such services;
7) Housing service is a homogeneous commodity
I’m not going to go through all of these, but I want to pull out three key issues which I think continue to be particularly relevant today: market concentration; freedom of exit and entry; and market information.
Market concentration
Market concentration is not an inherent feature of rental markets, but it is something that may occur. If ownership of rental properties is concentrated among a small number of landlords, rental prices may be determined in an oligopolistic fashion. The authors cite some evidence from the US here suggesting that ‘the greater the concentration of ownership in a suburban market area, the higher the rent’.
However, they note that while concentration of ownership creates the possibility of price coordination, the latter doesn’t automatically occur. Two further conditions must pertain for it to be so: ‘a tight rental housing market, characterized by relatively low vacancy rates’; and a ‘set of formal and informal networks among property owners which provide the coordinating mechanisms’.
To what extent the Irish, or even Dublin, rental market is characterised by market concentration is an open question, we don’t have much evidence to go on one way or another. Concentration of ownership is low at a national level, as the sector is dominated by small landlords. But with the growth of institutions and their concentration in certain urban areas, local market concentration is certainly possible. Moreover, what role do management companies and estate agents play? They may be in a position to coordinate price structures within a particular location or development, depending on their level of market penetration.
Freedom of exit and entry
To my mind, what Gilderbloom and Appelbaum describe as ‘freedom of exit and entry’ is the most interesting aspect of their analysis. The housing choices of households are of course constrained. Humans cannot chose to not consume housing. Moreover, in the current conditions access to social housing and homeownership are severely constrained for many households. This means that for many households the options will be either renting a PRS unit, doubling up in a PRS unit (with other individuals or families), doubling up in some kind of extended family scenario, e.g. with parents, or presenting as homeless. As such, the only way to form a household of one’s own, for many, will be in the PRS.
There are, moreover, additional constrains. One such constraint is discrimination. Discrimination against ethnic minorities, lone parents, children and rent subsidy recipients is well documented in both the international qualitative and quantitative literature (as well as in Ireland, see here and here). This in itself suggests a degree of irrationality among landlords which raises other questions about the competitive nature of rental markets (actors in a competitive market are supposed to use all available information to rationally pursue economic gain, and arbitrarily discriminating against certain households is an irrational form of behaviour). But it also means that some households have limited choices.
New tenancies, furthermore, are also typically higher rent than exiting tenancies, which means moving to a cheaper unit may be difficult, especially in a tight rental market. There are also substantial costs involved in moving including ending utility contracts early, moving furniture, substantial time invested in seeking a new house etc. In addition, ‘moving entails such noneconomic costs as broken social ties, lost neighbourhood attachments, and the uprooting of children to different schools.’ As a result of all these issues, Gilderbloom and Applebaum argue that ‘tenants have very little leverage in the determination of rents’.
I would add that housing is very much not a homogenous commodity, and this is relevant for tenants’ ability to choose alternative accommodation. To begin with, each location is unique. More importantly, tenants do not rent houses, they rent homes. As I’ve argued before (and as argued by Madden and Marcuse), the home is created through the everyday activity of the tenant, through which they invest in the physical structure of the dwelling such that it becomes a home, e.g. establishing routines of care work and social reproduction, organising furniture and objects, creating a sense of security and safety etc. While a tenant can find an alternative house, the home they create in a specific dwelling cannot be replaced, is entirely unique, and is thus subject to monopoly ownership by the landlord.
When faced with a rent increase, therefore, the tenant can either accept, or move out and thus lose the enormous amount of value they have created through their home-making practices, as well as the home itself which cannot be replaced. They can not chose a similar alternative commodity, and hence there is no competition in this specific sense.
Landlords are also constrained. Tenancy lengths and conditions of termination, as well as rent reviews, are determined by legislation and policy. As such, landlords do not set rent prices in the manner assumed by theoretical market models.
Market information
Market information is a key feature of competition. Tenants and landlords do not have perfect information about rent prices. Gilderbloom and Applebaum argue that there are biases in the information that is available to rental market actors, and that this skews rents upwards. Although they were writing in a context in which newspaper adds were the main way in which tenants searched for housing (God be with the days), they note that less expensive units are often passed on by word of mouth and existing tenancies typically have lower rent levels than new tenancies. Hence asking rents, as depicted in our day in Daft (and also rents on tenancies, reflected in the RTB rent index), do not give an accurate depiction of rent levels across the market. In the Irish context, this is made worse by constant talk about housing crisis and high rent levels, which adds to the feeling of panic experienced by tenants, and indeed the feeling of opportunity for landlords.
Professional landlords are likely to have much better market information, especially institutional landlords. The authors argue that: ‘In contraposing tenants as poorly informed (hence, weak) consumers to well-informed and well-organized professional landlords, we are again arguing that the former are at a competitive disadvantage vis-a-vis the latter. This, in turn, makes rents less responsive to changes in supply’.
Although I am not an economist, my understanding is that housing economics has become more nuanced since the 1980s. Nevertheless, as far as I can see from our policy debates here in Ireland, the view of rental markets as competitive and the role of supply and demand in determining prices continues to be dominant, even among policy makers. So the arguments set out above continue to be relevant.
Events
A reminder that the Housing Agency in conjunction with the Geary Institute have a really interesting forthcoming series of seminars on the politics, economics and policy of land. You can register here for the upcoming Threshold seminar on ‘renting and risk’ that I mentioned last week. October’s Focus Ireland lunch time talk is on hidden homelessness in Northern Ireland.
What I’m reading
Rory Hearne has just published a new book - read an extract here. Substack have created a new app for readers (link below). Some Substacks I follow include Cameron Murray’s Fresh Economic Thinking, the Georgist Progress and Poverty, and Adam Tooze’s Chartbook. I haven’t gotten my hands on it yet, but this new edited volume on the political economy of land looks great. And finally, the latest ESRI Quarterly Economic Bulletin contains a section on house prices, arguing that they are overvalued to the tune of 7% and exploring some of the reasons for this.
