Increased Gazumping!
The owner-occupied housing market has seen widespread coverage. With house prices falling throughout the recession and problems accessing mortgages for many people, it is this sector of housing that has received most attention. However, it is rental homes that we’ll be considering here and a new strategy being adopted by landlords. As access to mortgages dried up, people instead turned to renting. Demand for rental properties began to increase, such that competition between potential tenants increased significantly. Not only has there been a substantial increase in rents – up by some 35%, but it has also led to a new ‘sealed bid’ strategy.
A strategy that is often used for purchasing houses is where potential buyers submit sealed bids and it is this approach which is now spreading to the rental sector, as demand and competition for properties increases. Potential tenants are required to submit a sealed bid, containing the amount that they are willing to pay to rent out the property and all this must be done within a deadline. Whoever submits the highest bid ‘wins’ the property and hence tenants are encouraged to submit a bid at or close to the maximum they are willing to pay. Landlords insist that they are not trying to force tenants to pay more, but that it is simply the most effective way of letting properties that are short in supply, but face significant demand. As the BBC News article states:
‘It seems that with the current state of the housing market, sealed bids will be here to stay – as long as many would-be renters are chasing a dwindling supply of good rental homes.’
Rental ‘gazumping on the up as demand rises Metro, Tariq Tahir (8/11/10)
’Bidding war’ for homes to rent BBC News, Nigel Cassidy (20/11/10)
Rental market’s now so hot tenants are having to make sealed bids Mail Online, Sebastien O Kelly (8/11/10)
Is the buy-to-let market on its way back? Seek4Media (20/11/10)
Gazumping on the rise as London rental soars Gulf Times, London Evening Standard (8/11/10)
Questions
- Using a supply and demand diagram, explain the trend we have seen in the rental market, thinking about the impact on demand, supply and hence on price. How does this explain why sealed bids have been used to combat the increased competition?
- Which factors have affected (a) the demand for rental properties and (b) the supply of rental properties? How is the elasticity of demand and supply relevant here in terms of the impact on price?
- To what extent is a sealed bid format fair on potential tenants? Who does such a strategy favour?
- How could this sealed bid strategy be an example of price discrimination?
- What is likely to happen to your consumer surplus if you have to submit a sealed bid?