In a recent post I explained how home rents are mostly wasted spending arising from futile price-competition amongst potential tenants. I likened this to Richard Dawkins’ analogy of energy used to create tree trunks being waste from the perspective of the tree, because the only purpose of the trunk is to win the futile competition for sunlight through investment in height amongst a group of uncooperative forest trees.
I explained how tenants could instead cooperate, by unionising, and exert their bargaining power on landlords to cooperatively reduce rents. This post will look at some examples of how the rental canopy is lowered in practice, and how price-competition amongst tenants can be limited by well-written regulations.
The best place to start is wartime. Is such times economic efficiency is a priority, and laws and regulations that cut off wasteful competition are more easily passed.
Almost universally, strict rent controls were put in place across Europe, the US, and Australia, during the major 20th century wars. These had the effect of containing nominal rental prices despite inflationary pressures from the wartime economic build up. In terms of the primary objective of lowering the ‘rental canopy’, they worked very successfully.
In modern times the main approach to pruning the rental canopy is to enact tenancy laws that restrict the pricing power of landlords for existing tenants. Indeed, almost every wealthy country has laws that improve the bargaining position of tenants, with government agencies tasked with ensuring there is full cooperation amongst tenants, and that landlords cannot sidestep these protective laws. They do this, because it works. It reduces rental prices. Even economists know this.
“It is possible to design a set of rent regulations that results in an improvement in efficiency over the unrestricted market equilibrium”