Renters are already the disadvantaged party at the negotiating table because they cannot ignore their need for a place to live. And a new series of apps that pit renter against renter will only further tip the balance of power in favour of landlords, making it harder for renters to secure affordable housing, said Garrick Small, associate professor at CQUniversity Australia.
The fierce competition in the rental market often results in renters paying more than is necessary. As a result, many renters experience “rental stress,” which occurs when a person has to set aside more than a third of their income on rent.
According to Rent.com.au’s Rental Affordability Survey, 53% of tenants reported spending one-third to a half of their weekly income on rent. Up to 30% of tenants experience extreme rental stress, which occurs when they have to set aside more than half of their weekly income on rent.
While rent-bidding apps appear to give renters more power (they are marketed using words like “fairness” and “transparency”), these apps also suggest that landlords are missing out on untold profits by failing to squeeze extra income from their tenants, Small said.
“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,” Small said in an opinion piece for The Conversation. “To address the problem of renting affordability we need technologies that promote more cooperation between renters, rather than competition.”
There are three main rent-bidding apps, and they all work differently:
- Live Offer – Asks prospective tenants to fill out forms. These are then ranked for the landlord to choose. The prospective tenants can see where they stand in the rankings, in real time.
- Rentberry – This app functions more like a real-time auction site. Prospective tenants can submit bids, see what the current highest bid is, and find out how many bids were made in the past.
- Rentwolf – Prospective tenants are allowed to set up detailed profiles, and then apply for properties that are available for rent.
Rent bidding and the “winner’s curse”
Real estate is worth what people are prepared to pay for it; however, tenants will always be the weak party at the negotiating table, Small said.
Apps that overwhelmingly rely on auctions can create problems due to what is known as 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,” said Small. “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.”
Small’s own research has shown that in an auction, the second-highest bid could be the “rational price.”
Based on his controlled experiments, Small said people are easily encouraged by necessity to bid excessively in auctions. This is despite full knowledge of its 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,” said Small.
The latest slew of rent-bidding apps will play into these stresses and uncertainties, making it more likely that people will overbid during auctions, which in turn is likely to drive up the prices of rentals.
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