Philippa Howden-Chapman: Without standards, renters get less for more
OPINION: How can you tell in summer how warm the flat you're looking at will be in winter? When there's a queue of people ahead of you to see a flat, would you risk asking the agent if there is insulation in the ceiling and under the floor?
Most prospective tenants know less than the agent or landlord, who lets out and maintains the property. This gap is what economists call "information asymmetry": the landlord knows more than the tenant about their property and may also have got information from the Tenancy Tribunal about whether the tenant has complained about a previous landlord.
The second-hand car market tells us a lot about rentals. George Akerlof and others jointly received the Nobel Prize in economics for their work on information symmetry. Akerlof noticed there were difficulties in determining the quality of used cars and showed that "the bad drives out the good," i.e. sellers of good quality cars tended to withdraw from the market. Where there is no independent way of measuring quality, owners of well-maintained cars with good performance, for example, find it hard to realise a better price for their cars.
This deceptively simple observation has major implications for other markets, such as the private rental market, which, like the spot market for cars, is not well regulated.
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When prospective tenants cannot tell by a cursory look whether a rental property is good value, there is little incentive for decent landlords to improve their properties, because important but not apparent improvements may not be appreciated by prospective tenants. While some features of any rental will be clear, other aspects of the quality of residential properties are more difficult for tenants to judge.
This uncertainty and information asymmetry in the rental market make it difficult to distinguish the good rentals from the poor ones, unless there is independent information on hand. Yet, better regulation of rental housing quality has been rejected as unnecessary by the small percentage of landlords represented by the Property Investors Federation.
Minimal existing legislation is sufficient, according to them.
The rental WOF developed by Otago University and the NZ Green Building Council was recently introduced by the Wellington City Council. The Rental WOF sets minimum standards for energy efficiency, health and safety for all residential rental properties, but federation members think it will raise rents and make some landlords quit the market.
Yet, if both landlords and tenants accept the rental WOF, the condition of the property is likely to be more transparent all round and if all landlords comply with these standards, then standards overall will be raised. The closest parallel is health certificates for restaurants, or warrants of fitness for cars.
Depending on supply and demand, landlords may need to direct their maintenance budget to the areas covered by the Rental WoF and absorb the modest $250 cost of a three-year warranty, which works out at only $1.60 a week.
Several local economists have already disputed the validity of federation claims that rents will automatically rise if any regulation or standards are introduced into the market.
Very few landlords are likely to be so highly leveraged that they cannot absorb the modest cost of the Rental WoF. The co-benefits of raising rental standards are likely to be significant in preventing the housing-related hospitalisations for conditions such as asthma and childhood pneumonia of 30,000 children each year.
Retrofitted insulation up to 2008 standards will also reduce energy costs and save on carbon emissions.
Better rental standards mean better information for tenants, and therefore a better-functioning rental market, with less risks of renting a lemon and the overall quality of renting further falling.
Philippa Howden-Chapman is a professor of public health at Otago University, Wellington.
The Dominion Post