Rent bidding apps will make renting more unaffordable

Cross-posted from The Conversation:

Renters are already the weak party at the negotiating table because they cannot ignore their need for a place to live. But a new series of apps that pit renter against renter will only further tip the balance of power in favour of landlords, making it even harder to get a house.

The fierce competition in the rental market often results in renters paying more than is necessary. Over 150,000 tenants pay more than 50% of their incomes for housing.

These apps may seem like they give renters more power – they are marketed using words like “fairness” and “transparency”, but they also note that landlords are missing out on “millions and millions”.

Renting is a zero-sum game. Every dollar that a landlord gains is a dollar out of the tenant’s pocket. And in a market already tilted in favour of landlords, these apps could further push up rents.

To address the problem of renting affordability we need technologies that promote more cooperation between renters, rather than competition.

The apps

There are several different rent bidding apps, and they all work in different ways.

Live Offer asks prospective tenants to fill out forms and these are then ranked for the landlord to choose. The prospective tenants can see where they are in the rankings, in real time.

Rentberry is more of a real-time auction site. Prospective tenants submit bids, can see what the current highest bid is and how many bids there have been.

With Rentwolf, prospective tenants set up extensive profiles, as they would with AirBnB, and then apply for properties through the marketplace.

What is the right price?

Real estate is worth what people are prepared to pay for it. But tenants will always be the weak party at the negotiating table.

At least as far back as David Ricardo in 1817, economists have theorised that landlords take what is left over once other costs are deducted from the tenant’s income. In other words, rent is as much as tenants are able to pay.

Even before that, Adam Smith recognised that all real estate is a monopoly for landowners. This is because the supply of land is strictly limited, giving excessive negotiating power to whoever owns it.

But these apps overwhelmingly rely on auctions, which can itself be a problem due to what is called the “winner’s curse”.

Studies have shown that so long as there are at least two motivated bidders, the winning bid tends to either equal the value, or be one bid above it. In other words, the winning bidder in an auction will often overpay and will “suffer” for having won.

In the case of renters, this means paying excessive rents throughout the lease. Even worse, as more people bid similarly, the ruinous rents become accepted as normal. They become the market rent.

This same phenomenon has been shown in everything from jars of coins to oil-drilling rights and, yes, real estate.

Some research has further shown that in an auction the second-highest bid could be the “rational price”.

My own controlled experiments have shown that people are easily encouraged by necessity to bid excessively in auctions. This is despite full knowledge of the ruinous consequences.

This is because people have only a limited capacity to vary their needs. We all need to live somewhere, and our culture limits the options. If the option is sharing with relatives or accepting a lower standard of living due to high rents, then our sense of independence will often prompt our willingness to tighten our belts.

These rental apps will play into these stresses and uncertainties, making it more likely people will overbid in the auctions. This is why these rental apps are likely to result in higher rents.

How technology can reduce rents

Some time ago researchers suggested that renters might be able to reduce rents by banding together.

Working together, renters would be able to create the equivalent of there being only one buyer in the market – a monopsony. A monopsony works like a monopoly, but for buyers rather than sellers. For real estate rents, if land owners enjoy a natural monopoly-like advantage, then tenants have to behave like a monopsony to negate the power imbalance.

The current crop of rental apps do not address this imbalance. They only inform bidders as to what other, similarly stressed people, are bidding. It stresses them to bid higher.

Already, we are seeing the power of Facebook to build communities around renting. There are groups that help people find flatmates, for example. If the internet is to tackle the problem of renting affordability, then we need to extend this community, for renters to act in unison on rent.

Without a service that seeks to unite renters, rather than have them compete, housing affordability will only get worse. Rent bidding apps will increase landlord revenues and do so at the expense of tenants.

Article by Garrick Small, Associate Professor, CQUniversity Australia

Comments

  1. reusachtigeMEMBER

    Every investor I know are forcing the use of rent bidder aps so as to maximise our profits. It’s the bright fruit of capitalism and should be encouraged in our free society.

  2. With 1 in 3 Australians renting and no sign of wages growth any additional dollar in landlords’ pockets is going to come from retailers. If there’s any noticeable rise in rents for any reason, including these apps, at this stage it stands a good chance of being the straw that breaks the economy’s back.

    • Yes – if the government targets a residential tenancy vacancy rate of 4-5% that should allow for plenty of downward pressure on rents and prices.

      Immigration rates could be made conditional on residential tenancy vacancy rates of at least 4%. If the rate drops below 4% the rate of immigration is cut or stopped completely.

      Even with 330+ cranes operating in Sydney the vacancy rate remains below 2% – A clear indicator the rate of immigration to Sydney must be cut dramatically until a more healthy vacancy rate is achieved.

  3. LabrynthMEMBER

    I doubt these will become mainstream. If you are using this app to find the ‘right’ tenant then why use an agent?

    This could see a new low price property management service appear but the existing property agencies will avoid these apps as it will make themselves irrelevant.

    • StomperMEMBER

      Mass fake bidding war by potential tenants such as Mr Chodley Wontok should bring their unethical app to its knees!!!!!

      • Good point. Renters should get on there and bid the price up to ridiculous rates and then just … pull out. Owner gets really excited … expectations through the roof … and then deflated. Continue to do that a couple of times and owners will close down their accounts (and users get blacklisted). Either way … credibility of the apps will be challenged.

        I like your thinking …

  4. GeordieMEMBER

    We need one that works the other way. Everyone lists their “value” of the property in question, then it averages the values and applies a discount based on the vacancy rate and price trends in the area. Then it responds with the agreed value that everyone then puts on their application forms.

    • Why isn’t there an app which shows past rental values, rates the landlord, rates the real estate agent, rates the house and location and shows rental rate trends in the area. If the landlord tries to take a massive increase in rates above the trend, and has a really crappy profile, then renters can steer clear, ultimately forcing the landlord to reduce their rate to an acceptable level.

  5. Jake GittesMEMBER

    The Conversation has a quality problem and while the theoretical basis of the argument is sound, in this market, at this time, it doesn’t look like a major issue.

  6. Jeremy Bentham

    Ally you need to do is create a register of tenants website. Good tenants, good jobs good rental history can then be bid for buy prospective land lords.

    Wouldn’t work ? People want money and not good tenants ?

    Guess again – I literally do not KNOW a landlord who would not use this service. Bad tenants are a nightmare – whats even better is you can guarantee your land lords that the tenants wont screw things over. (Everyone one pays insurance to use the system).

    Even more powerful is the idea that land lords who do not want to use the system and operate outside of it are considered rogue. So tenants can quickly and easily check to see if a land lord is reputable or not.

    Oh dear – shouldn’t have opened my mouth.

      • Yeah reading some of the reviews in my area, puts me off buying property. You can have some many issues with properties.. and it looks like every landlord in this country is determined to not fix anything and just skim off the tenant. It’s equally shit as a tenant because the quality of places to rent is so low.

  7. arescarti42MEMBER

    I don’t buy this argument, it’s got a lot of flaws.

    The “winner’s curse” comparison only really works if the value of rental property to each bidder is the same, which is obviously not the case.

    The assertion that landlords have a monopoly on land is pretty dumb as well. Yes, the absolute quantity of land is fixed, but the stock of rental dwellings sure isn’t. In fact given the dominance of the Australian rental market by millions of small time investors (compared to other industries like retail for example, where there might be only two or three places you can buy groceries from), individual landlords have basically no market (monopoly) power at all.

    It’s not clear to me how auctioning rentals disadvantages renters any more than the current system does.

    • billygoatMEMBER

      @ arescarti42 Especially if the first 100 – 1000 prospective tenants bid 40% off every asking rent instead of trying to top eachother out in a false bidding war.
      Also the whole notion of ‘bad tenant’ is overworked in the media. In my experience a really good tenant will pay over the odds to put a roof over their head and quietly suck up shot condition/ poor value if most rental properties on the market.

    • “The assertion that landlords have a monopoly on land is pretty dumb as well. Yes, the absolute quantity of land is fixed, but the stock of rental dwellings sure isn’t.”

      This argument is something of a red herring. The fact that an asset or resource can be allocated to different uses does not change the fundamental reality that its value is largely sustained due to supply being relatively fixed by nature, and it being difficult to create more of it.

      The value of gold is largely sustained by its relative scarcity in nature. The fact that gold can be allocated to different uses (coins, jewellery, gold bars, stored in vaults etc.) does not change this reality. You could say, ‘well, the supply of gold jewellery is not fixed’ and you would be right in a narrow sense. Yet the value of gold jewellery is still largely maintained by the overall scarcity of gold in nature.

      The only difference is that it is easier to forego gold jewellery than the need for a place to live.

  8. “more cooperation between renters”

    This is collusion, which would be of interest to the ACCC, no doubt.

  9. PrinceOfPersia

    This is definitely the renter’s market. With so many different types of dwellings available you must be a fool not to rent. Ironically, I like my tenants to stay, thus I hardly increase their rent. They are fantastic tenants which are hard to find, they look after my places as well as always pay on time even earlier at times. I have to admit though, owning the properties outright is fantastic, as there are no pressures and I am enjoying life too. Unlike so many fools, who are the so called investors that age rapidly and prematurely. Just love it.

  10. armchair economist

    The market will determine what its worth and who better to set the market rate than the very people seeking to rent…afterall….the landlord becomes a price taker depending on the bid? Its funny than when the market is tipped in favour of land lords there is all sorts of commotion about how unfair it is but when its tipped in favour of renters (like in perth) land lord’s rights to extracting rents are ignored!!!

  11. arty the spruikbot detective

    Just like AB&B made hotel rooms more expensive, ah? What a bunch of total spruiking croc!!!

  12. Why are there no decent apps/sites where you can rate a rental property and/or the landlord? This would at least incentivise shoddy accommodation providers to lift the quality of their premises.

    Some problems are difficult to detect via an inspection e.g. terrible landlord, repeated mould invasions (which can be cleaned up for an inspection but will soon come back) etc.

    There is an unfair information asymmetry between tenants and landlords.

    • billygoatMEMBER

      @Grall Yes and an app tonrate REA and property managers. Agree with mould & unexpected problems: windows, broken shower – landlady screams at me ‘ I telll you darling I fix nothing’ and she was true to her word. Took her cttt to recoup $328 and she played crazy lady & police suggested a restraining order. As for cttt – what a self serving process that is – staffed by ex lawyers adjudicating on behalf of landlords & REA. Had to go back 3 times prepared like a lawyer only to be issued an unenforceable order & advised to vacate ASAP. Never mind that vacating and moving on from rental properties costs a small fortune for Removalists. Time spent searching & going through the lease bulls$$t with agent where they outline and get you to sign off on pathetic conditions that essentially mean nothing to benefit of tenant.

      • Interesting! It needs more publicity though, not many reviews on there. Maybe the tenant advocacy groups should be encouraging people to use it. Could be a good negotiating tool: “if you don’t fix my hot water, I’ll put a review on the website”.

      • Pretty sure it was started by a Sydney renter who had, had a gut full of renting shit holes.

    • Stick it back APP!

      Bring it on!
      Crowdfunding to create an app (outsourced on Freelancer) to rate/ review properties/ agents/ landlords.
      It’s time to level the playing field.

  13. Whatever policy or app, etc. that makes life more miserable for the average Australian is a policy that I can get behind.

  14. They need to start legalising vagrancy.
    At least then, the young wont be slavishly hamstrung by exorbitant baby boomer (predominantly) rent.

  15. In Perth the worm has turned and tenants are playing off the landlords and loving it.
    They are so pissed after having been screwed for years they will give the agent/landlord the finger for $10pw

    • Yes, WA is the place to be … and I always get a seat on the bus and train during peak hour.

  16. It is about time, the pendulum swung in the favor of locally born Australian tenants, predominantly youth.
    For years now, the baby boomers have enjoyed shafting our youth at auctions, outbidding them to enjoy yet another IP, shafting them with exorbitant rents (because they can), while youth’s aspirations of home ownership get crushed, and all their underemployed income gets handed over to you-know-who. What a great legacy to leave. You too can sit on your fat arse if youre “fortunate” enough and ride off the back of others less fortunate without working a day.
    Aged care cannot come soon enough for this gluttonous cohort who have put the youth of Australia a distant last.

  17. One potentially good thing about these apps is that they could reduce the amount of work applicants have to do in terms of filling in forms and photocopying documents over and over and over.. only to miss out on a place with no real feedback on why. That was one of the most odious aspects of renting IMO.

    From a certain perspective renters already bid against each other, they just don’t know what the other bids were. So while there’s a danger for these apps to make renters overstretch, there’s a “market driven” element to it which I like.

    Be honest, if there was an app where landlords were all trying to underbid each other, you’d probably love it. :p

  18. I have often wondered if the search function on Domainfax for property rentals acts as revealing the price preferences of the searchers, i.e. what people ‘expect’ to pay in a given suburb, which is not necessarily the true market rate.
    Also it seems to return properties over the ‘Max’ search value amount.

  19. Our owner landlords for migrant guestworkers are years ahead of this.

    Example.
    Proxy owners for a private Chinese Australian property syndicate for a number of factory workers in Guangzhou China & then ‘lent’ thru a Chinese then local funder to evade FIRB & currency controls. They have PR so are not seen as Chinese..

    They now own 15 x 2 bed units in the Regis & Summit and Luminere : Sydney CBD.

    Each unit is fitted out with bunk beds : 6 bunks in the master, and 4 bunks in the smaller room, plus 2 mattresses in the lounge cordoned off into seperate living areas with shower railing and dropped sheets.

    Foil on the windows for ‘privacy’, communal Wifi and 3 rice cookers using portable camp stoves in each living area.

    Each unit has a lead tenant / manager – a past Asian TR transient name & ID used via a Chinese real Estate Agent and paying a nominal $450 a week & they claim negative gearing of $350 a week in mortgage costs & travel expenses via negative gearing.

    Pass Keys or co-ordinated access are organised via this person (why the Asians huddle in groups in the lobby waiting to be let in).

    The Regis and Summit has mostly Thai international students working girls or fake ‘partner’ factory or Resturant workers all paying $250 a week each for the standard deal of bunk, rice, wifi & toilet rolls.

    The Luminere is more upmarket and has Korean international students or Chinese tourist visas vice or underground blackmarket workers paying much the same.

    The proxy owners pull $2,200 a week cash in hand from each unit via the subletting plus $50 from the lead tenant manager plus $350 from negative gearing so say shoot $2,500 a week for the syndicate.
    About $130,000 a year from each Unit no tax.

    X 15 units it’s about $2 million a year income.

    The money is washed onshore and then banked for the syndicate for future property purchases – as it’s easy to run this operation in established suburban housing as no building manager or other checks.

    They can get up to 15 or more migrant guestworkers in a small modest established house – as the rental market demand soars with the flood of migrant, temporary visa and tourist visa arrivals.

    Advertising is done via gumtree, word of mouth or organised via the immigration agents and fake colleges or education institutes, or via street pole posters in foreign languages and using fake ID untraceable phone numbers.

    Any issues – they just say it was the agent who then blames the (long gone) transient lead tenant for subletting illegally… ,
    wait a while then do it all over again.

    Now this beats AirBnB by a very wide margin in ease of management, dwelling occupancy ratios, rental yields and non taxed cash flow. No declaration via BnB, not building manager approvals, no one checking anything.
    And government tax payer assistance via negative gearing.

    Living the dream.
    330,000 such dwellings – mostly low end established residential dwellings are now owned & managed like this.

    Where and how do people think the 2.4 million Third world migrant guestworkers all here on temporary & tourist visas to work illegally – actually live ?

  20. Check out this sh1*…

    https://www.domain.com.au/news/experts-raise-concerns-about-efficacy-of-scott-morrisons-empty-property-tax-as-overseas-investors-offered-loophole-20170516-gw6c0o/

    “A website urging overseas investors to easily circumvent a proposed “ghost tax” by renting properties on Airbnb calls into question just how the government plans to police its proposed rules around vacant properties.”

    Thanks for subtly outlining the work-around for your property vulture minions, arses!

  21. There are a few interesting aspects to this.

    Firstly, what sort of obligations are placed on potential tenants who sign up to the service?

    Usually you sign an application but are under no obligation until you sign the lease. No sensible tenant will sign up to a site that obliges them to sign the lease if they “win” (or imposes some sort of penalty). So there’s nothing stopping people from putting fake bids in and then pulling out. Get a few people to syndicate together and do this will mean a few months no rent for the landlord. Let’s see how that works.

    On the other hand, there’s nothing to stop the website putting in dummy bids. If that happens and it gets out no one will trust the service.

    At the end of the day, the question is: do you believe automation can take over real estate agents? Forget atrificial intelligence, we’re talking about artificial arseholery.

  22. kiwikarynMEMBER

    If I were a landlord I would be more concerned about how well a tenant will look after the property than how much they are prepared to pay. What happens if a gang member wanting to start a meth lab is the highest bidder? Destroying your property just to get an extra $50 a week is not worth it. Also, what about bidders who overbid, move in, then struggle to pay the rent? It takes months to get an eviction order, and good luck getting the outstanding rent back. Its better to have a tenant who can afford to pay the rent, not one that goes broke trying to. Choosing tenants should be about more than just who is prepared to pay the highest price, otherwise you are asking for trouble. Tenants should be ranked on creditworthiness, quality of references, employment security, and whether they come with destructive things like kids or pets.

  23. Personal anecdote: I rent a 5 bedder 3 bathroom house in Coburg Vic 3058. We are 3 years 6 months in so far with ZERO rent increase on the $2520 pcm.