Keeping the market honest

At least two people died last August due to New Zealand’s disgraceful lack of rental housing standards. And not in privately-owned rental accommodation either – these were both state houses. There is a Bill before Parliament to introduce “warrants of fitness” for houses like we already have for cars; I believe National have already voted it down once.

Here’s a comment from Facebook, representative of the National point of view:

Look at it from the other side: they voted against rising rents.

Maybe. But funnily enough, people seemed to manage in 18th-century England when – against exactly the same objection – a law was brought in mandating at least one toilet in every residence. Whatever extra the poor residents might have had to pay in rent, they gained back in not dying of cholera. Asthma is less often fatal than cholera, but the principle is the same.

I can hear the response now – “So what you’re saying is, people will willingly pay the higher rent if their family’s health is that important to them? Leave it to the market.” There are two problems with this. One is that these are state houses. They’re owned by Housing NZ, which dates back to the days when New Zealand’s government had a philosophy of actually doing something about things like homelessness. They’re not some middle-aged couple’s retirement fund. Housing NZ is not obliged to pass on refurbishment costs to its tenants. We wouldn’t even have to take more money off rich people whose houses aren’t giving their children asthma; we seem to have $27 million sitting around to change the national flag, for instance. I’m not enamoured of New Zealand’s current flag but children with asthma are more important.

The second problem is that the free-market model in economics assumes that both buyers and sellers have perfect market information. This assumption is behind a lot of the mismatches between economic theory and reality. In this particular case, imagine that landlords have the option of renting out both houses that meet the standard and houses that don’t. Now presumably it costs a certain amount of money to keep the houses patched up to standard, so those houses will have higher rents. But the tenant doesn’t know how much money it costs, so the landlord can whack the rent up by a good deal more than that and make a neat little profit on houses specifically advertised as “up to standard”. Tenants who can’t afford the higher price will have to be content with houses that are still substandard. If the standard is compulsory, on the other hand, then price-jacking like that will do nothing but lose you tenants. Regulations, in fact, fix the imperfect-information problem – and thereby keep the market honest.