Tuesday, May 18, 2010

I was wrong on renters

Several people have emailed me over the post I did yesterday, on who will pay for National's tax cuts, which suggested that the poor would pay twice, as tax increases on landlords would be passed on as higher rents. I was wrong about this. As Icehawk points out quite convincingly on The Standard's original post, renters are not the captive market landlords like to pretend they are - they can change household size, flat with other people or move back in with their parents if prices are too high. This makes the demand for rental property a lot more elastic than the supply. The upshot is that landlords end up competing with each other for tenants, meaning that prices are limited by the market.

Alternatively, we can think of it another way: while all my landlords have been nice, they are in general greedy scum, with an interest in maximising the return on their investment. If the market could bear higher rents, we would already be paying them. We're not, so it can't, Q.E.D. (though this is awfully like the economists argument that you never find money on the footpath, because someone would already have picked it up).

So, those tax changes - which are in general a good idea - are unlikely to end up being dumped on renters. Instead, we will see highly leveraged landlords, the people who drove the property boom and cut first-home buyers out of the market, go to the wall and be forced to sell. Which is not something anyone should shed any tears over.