NB: costs are not the only factor in rents

State houses at Arapuni.  Source: Wikimedia Commons

State houses at Arapuni. Source: Wikimedia Commons

A child died, and a coroner has argued that her death was due at least in part to living in a cold, damp home. Shamefully, her home was a state house.

The rental property stock in New Zealand, including state houses, is very, very poor. Many houses are cold damp nasty holes, and it’s no surprise that people living in them are vulnerable to life threatening illnesses.

The Labour party has proposed a “Warrant of Fitness” for rental properties, and they have resubmitted a bill to the ballot to achieve this.

But, Bill English says a warrant of fitness for all homes would drive up rent and push housing stock out of the market.

Really? Drive rents up? English seems to think that the only factor determining rents is landlords’ underlying costs. But that’s a mistake. We know that landlords don’t really mind making losses on rental properties, and that they quite happily wear extra expenses. After all, many of them are quite happy to leverage up their properties as far as possible, and pay large amounts of interest. The evidence shows us that landlords just pay up on expenses. Obviously, there is a relationship between expenses and rents, but it can’t be all that’s going on.

So what else drives rents?

Umm… (and really, this ought to be staggeringly obvious to Mr English and the (alleged) top-knotch business people in his party), it’s the MARKET.

If a landlord sets too high a price on her or his property, then the renters will go elsewhere. End of story.

And even if expenses do go higher than the amount that can be earned in rent, the all that will happen is that the MARKET will operate to drive some over-geared landlords out of the MARKET, which in the longer term might help to calm house prices down.

If renters can’t go elsewhere, because there isn’t sufficient supply of houses so they must simply pay the price asked by landlords, then there won’t be a problem with the rents being high enough to cover expenses either. And if that results in some families living in substandard homes, then perhaps the government might like to acknowledge that there has been a MARKET FAILURE, and they need to act.

Alternatively, we could take this as an instance of the MARKET performing perfectly, but not achieving the social aims that we think are important.

Either way, if we think that living in warm, dry homes is a social goal that we should be aiming for, then the case for government action is clear, and there’s nothing stopping it, except for Mr English’s on-going protection of landlords.

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