When zoning rules make it very difficult to build new housing, existing landlords do not face much potential competition. If every landlord has dozens of tenants racing to submit applications as soon as a property becomes vacant, landlords will have a lot of power over their tenants. And rents will be high.
But if developers can build new apartments and townhouses to compete with existing landlords, everything changes.
When Auckland’s Unitary Plan allowed developers to build more homes, the surge in building meant rents eased relative to those in other cities.
Nothing in this world is perfect. But competition for tenants can do a far better job than any tenancy tribunal.
The principle is hardly limited to housing.
Later this week, Auckland University’s Business School is holding a panel discussion on “Rebalancing markets: Competition, power, and a fair economy.”
Our host, Senior Lecturer Dr Drew Franklin, argues that “when people feel that essential markets are stacked against them, trust in the whole economic system begins to weaken.”
Housing markets really were stacked in favour of those who had bought when building was easier and housing was cheap. And it seems obvious that the harms of that dysfunction spread to trust in the overall system.
But the Commerce Commission’s standard toolkit would have had a hard time identifying the problem.
Competition policy sometimes weighs market concentration: do a small number of suppliers cover a large fraction of a city’s tenancies? If the Commerce Commission counted the number of landlords and their concentration in any city, it seems unlikely that they would have found any problem at all. There are lots of people who own a small number of rental properties.
Sometimes competition policy looks at supplier margins as a measure of competition. But while rents are high, so are the prices landlords have to pay for houses. Rental income will often not be high relative to those costs.
Had we relied only on headline competition indicators, we might have missed the problem. Landlords are numerous, so concentration measures would not show much. And although rents are high, houses are expensive too, so rental yields may not look extraordinary. The missing variable was permission: zoning prevented new supply from competing away scarcity.
Competition should not be understood mainly as a target number of firms, a target profit margin, or a prescribed market structure. The better question is whether an incumbent always has to look over its shoulder because someone else can enter, expand, innovate, or take its customers.
When markets are open, underperformance by incumbents becomes an opportunity for entrants who can provide better value for consumers. When entry is blocked by law, regulation, planning, occupational licensing or government procurement processes, harms to consumers become entrenched in ways that the Commerce Act and Commerce Commission are not well placed to deal with.
The Commerce Commission’s latest report on the state of competition, released earlier this month, tallied whether entrants are getting in, growing, and disciplining incumbent firms.
While the Commission’s report recognised that sectors facing greater exposure to imports are generally associated with stronger competition, it did not assess competition more generally against an openness standard. That can be a problem if government restrictions are a potential source of the perceived market power that the government later condemns.
If a sector is not seeing entry, is it because the sector is already sufficiently competitive that a new entrant would have a hard time making a go of things? Or is it because New Zealand’s market of about five million people requires potential entrants to jump through hurdles that are not worth the hassle to them, despite the benefit to us?
The government is already progressing one openness reform.
Hon Chris Bishop has taken competitive urban land markets as a goal of urban planning reform. Put most simply, zoning restrictions should never be the cause of scarcity. If someone wants to build an apartment tower, factory, supermarket, shopping centre or housing subdivision, there should be plenty of places with suitable zoning.
But openness should progress in other areas too.
Occupational licensing rules can give professional bodies the right to restrict entry. Regulatory impact reviews of licensing legislation should routinely ask whether the rules do more to protect consumers, or to protect incumbents from competition.
The Commerce Commission can use market studies to identify whether regulatory barriers hinder openness. A study into medical services could test whether restrictions substantially hinder competition. The Ministry for Regulation could then ask whether those restrictions still make sense.
Before government tries to rebalance markets, it should first check whether its own rules have stacked them. A fair economy cannot guarantee that every entrant wins. But it can guarantee something more basic: permission to try.
Dr Eric Crampton is Chief Economist at the New Zealand Initiative. This article was first published HERE
When Auckland’s Unitary Plan allowed developers to build more homes, the surge in building meant rents eased relative to those in other cities.
Nothing in this world is perfect. But competition for tenants can do a far better job than any tenancy tribunal.
The principle is hardly limited to housing.
Later this week, Auckland University’s Business School is holding a panel discussion on “Rebalancing markets: Competition, power, and a fair economy.”
Our host, Senior Lecturer Dr Drew Franklin, argues that “when people feel that essential markets are stacked against them, trust in the whole economic system begins to weaken.”
Housing markets really were stacked in favour of those who had bought when building was easier and housing was cheap. And it seems obvious that the harms of that dysfunction spread to trust in the overall system.
But the Commerce Commission’s standard toolkit would have had a hard time identifying the problem.
Competition policy sometimes weighs market concentration: do a small number of suppliers cover a large fraction of a city’s tenancies? If the Commerce Commission counted the number of landlords and their concentration in any city, it seems unlikely that they would have found any problem at all. There are lots of people who own a small number of rental properties.
Sometimes competition policy looks at supplier margins as a measure of competition. But while rents are high, so are the prices landlords have to pay for houses. Rental income will often not be high relative to those costs.
Had we relied only on headline competition indicators, we might have missed the problem. Landlords are numerous, so concentration measures would not show much. And although rents are high, houses are expensive too, so rental yields may not look extraordinary. The missing variable was permission: zoning prevented new supply from competing away scarcity.
Competition should not be understood mainly as a target number of firms, a target profit margin, or a prescribed market structure. The better question is whether an incumbent always has to look over its shoulder because someone else can enter, expand, innovate, or take its customers.
When markets are open, underperformance by incumbents becomes an opportunity for entrants who can provide better value for consumers. When entry is blocked by law, regulation, planning, occupational licensing or government procurement processes, harms to consumers become entrenched in ways that the Commerce Act and Commerce Commission are not well placed to deal with.
The Commerce Commission’s latest report on the state of competition, released earlier this month, tallied whether entrants are getting in, growing, and disciplining incumbent firms.
While the Commission’s report recognised that sectors facing greater exposure to imports are generally associated with stronger competition, it did not assess competition more generally against an openness standard. That can be a problem if government restrictions are a potential source of the perceived market power that the government later condemns.
If a sector is not seeing entry, is it because the sector is already sufficiently competitive that a new entrant would have a hard time making a go of things? Or is it because New Zealand’s market of about five million people requires potential entrants to jump through hurdles that are not worth the hassle to them, despite the benefit to us?
The government is already progressing one openness reform.
Hon Chris Bishop has taken competitive urban land markets as a goal of urban planning reform. Put most simply, zoning restrictions should never be the cause of scarcity. If someone wants to build an apartment tower, factory, supermarket, shopping centre or housing subdivision, there should be plenty of places with suitable zoning.
But openness should progress in other areas too.
Occupational licensing rules can give professional bodies the right to restrict entry. Regulatory impact reviews of licensing legislation should routinely ask whether the rules do more to protect consumers, or to protect incumbents from competition.
The Commerce Commission can use market studies to identify whether regulatory barriers hinder openness. A study into medical services could test whether restrictions substantially hinder competition. The Ministry for Regulation could then ask whether those restrictions still make sense.
Before government tries to rebalance markets, it should first check whether its own rules have stacked them. A fair economy cannot guarantee that every entrant wins. But it can guarantee something more basic: permission to try.
Dr Eric Crampton is Chief Economist at the New Zealand Initiative. This article was first published HERE
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