4 ms·

There's no incentive for that profit to be passed on as reduced rates for the tenants.

by Gracana 10y ago

ikeboy 10y ago
Competition.
- pavel_lishin 10y ago
  Only a factor if there is a significant number of vacant properties that need to be filled with people, which is not the case in places like SF and NYC.
  - ikeboy 10y ago
    Then why don't landlords raise the price until there are? Seems inefficient.
    - jbooth 10y ago
      1) They already are 2) If you're going Econ 101 on this, ever heard of elasticity or switching costs?
      - ikeboy 10y ago
        1. Then why isn't there competition yet? This points towards a more complex model being needed. 2. I mentioned stickiness in https://news.ycombinator.com/item?id=11989391 https://news.ycombinator.com/item?id=11989391. But it makes the analysis more complicated, and the comments I was responding to were not at that level. Remember, I started by responding to a comment saying "There's no incentive for that profit to be passed on as reduced rates for the tenants.", which is a simplistic model.
        jbooth 10y ago
        https://en.wikipedia.org/wiki/Spherical_cow https://en.wikipedia.org/wiki/Spherical_cow
        ikeboy 10y ago
        I'm not saying the simple model is correct, I'm saying that you need a model which accounts for the things the simple model has. You can account for more things, and I did, but without doing that you aren't justified in complaining.
  - gist 10y ago
    Well if that is the case then the price they could charge would be infinite and they would simply keep raising it. Even in a competitive market, specifically the ones you have mentioned, the rent charged is based on supply and demand and the competition. If not what prevents them from doubling the rent?
    - ikeboy 10y ago
      To be fair to the original point, one could argue that sticker price of rent is more sticky than the imputed cost, and so this is a sneaky way of raising rent that doesn't reduce demand as much. But that's a more complicated case to make than "kickbacks therefore bad".
      - gist 10y ago
        > so this is a sneaky way of raising rent that doesn't reduce demand as much. You could say a similar thing about laundry room charges where there isn't any competition. And also no specific disclosure as well (unless you ask) therefore is that sneaky? What I am saying is non disclosure does not mean "sneaky". But another point is this: If enough buildings are doing this, such that an article like the parent post is being written, it then becomes something that a careful apartment shopper should or would consider when pricing apartments "total cost of rental". You know if you buy an expensive luxury car they don't specifically point out that you will have to pay fees to keep your warranty current (Porsche, Mercedes as two examples). So is that sneaky? After all BMW (as a high end competitor) includes all maintenance.
    - TeMPOraL 10y ago
      > Even in a competitive market, specifically the ones you have mentioned, the rent charged is based on supply and demand and the competition. If not what prevents them from doubling the rent? Because doubling the rent would be enough to get the people to desperately search for someone else. But getting them move in and then slowly raising the rent is a common practice. Sure there is competition in this market, but given that a) demand is much bigger than supply, b) switching costs for tenants are extremely high, and c) it's not a competition in which a landlord can actually get out of business (even if they cut their rates by half, it would still be profitable to rent out the apartments), the competitiveness matters very little, and landlords are in no hurry to fight against each other - they're more likely to cooperate instead. The prices aren't set on the level competition demands - they're limited to what people can afford at all.
- makomk 10y ago
  Competition is based mostly on the headline rental rate, excluding tricks like this.
  - ikeboy 10y ago
    That's not enough to change anything. If everyone can get $X from kickbacks, then one person can afford to reduce their headline rate by $Y<$X, thus outperforming others until they reduce their price to the same equilibrium except $X of costs are now implicit. You need some more complex notion of stickiness differing between imputed and sticker costs as I mentioned downthread for this to be harmful.
- mrep 10y ago
  I almost entirely agree with you, but you have to tailor your writing to the people you're talking too. The HN audience mainly understands technology, not economics. The real problem is that the landlords are exploiting the cost of information. It's costly for new tenants to educate themselves and factor in the costs of potential ISP/TV in addition to rent. Landlords are exploiting that cost to profit for themselves. Is it nearly as big as a problem as everyone here is making it out to be? No. It's like 50-100$ a month compare to 1000-4000$ a month rent for most people. That's 1/80 to 1/10 the cost of the rent.

There's no incentive for that profit to be passed on as reduced rates for the tenants.

by Gracana 10y ago

There's no incentive for that profit to be passed on as reduced rates for the tenants.

ikeboy 10y ago

Competition.

pavel_lishin 10y ago
Only a factor if there is a significant number of vacant properties that need to be filled with people, which is not the case in places like SF and NYC.
- ikeboy 10y ago
  Then why don't landlords raise the price until there are? Seems inefficient.
  - jbooth 10y ago
    1) They already are 2) If you're going Econ 101 on this, ever heard of elasticity or switching costs?
    - ikeboy 10y ago
      1. Then why isn't there competition yet? This points towards a more complex model being needed. 2. I mentioned stickiness in https://news.ycombinator.com/item?id=11989391 https://news.ycombinator.com/item?id=11989391. But it makes the analysis more complicated, and the comments I was responding to were not at that level. Remember, I started by responding to a comment saying "There's no incentive for that profit to be passed on as reduced rates for the tenants.", which is a simplistic model.
      - jbooth 10y ago
        https://en.wikipedia.org/wiki/Spherical_cow https://en.wikipedia.org/wiki/Spherical_cow
        ikeboy 10y ago
        I'm not saying the simple model is correct, I'm saying that you need a model which accounts for the things the simple model has. You can account for more things, and I did, but without doing that you aren't justified in complaining.
- gist 10y ago
  Well if that is the case then the price they could charge would be infinite and they would simply keep raising it. Even in a competitive market, specifically the ones you have mentioned, the rent charged is based on supply and demand and the competition. If not what prevents them from doubling the rent?
  - ikeboy 10y ago
    To be fair to the original point, one could argue that sticker price of rent is more sticky than the imputed cost, and so this is a sneaky way of raising rent that doesn't reduce demand as much. But that's a more complicated case to make than "kickbacks therefore bad".
    - gist 10y ago
      > so this is a sneaky way of raising rent that doesn't reduce demand as much. You could say a similar thing about laundry room charges where there isn't any competition. And also no specific disclosure as well (unless you ask) therefore is that sneaky? What I am saying is non disclosure does not mean "sneaky". But another point is this: If enough buildings are doing this, such that an article like the parent post is being written, it then becomes something that a careful apartment shopper should or would consider when pricing apartments "total cost of rental". You know if you buy an expensive luxury car they don't specifically point out that you will have to pay fees to keep your warranty current (Porsche, Mercedes as two examples). So is that sneaky? After all BMW (as a high end competitor) includes all maintenance.
  - TeMPOraL 10y ago
    > Even in a competitive market, specifically the ones you have mentioned, the rent charged is based on supply and demand and the competition. If not what prevents them from doubling the rent? Because doubling the rent would be enough to get the people to desperately search for someone else. But getting them move in and then slowly raising the rent is a common practice. Sure there is competition in this market, but given that a) demand is much bigger than supply, b) switching costs for tenants are extremely high, and c) it's not a competition in which a landlord can actually get out of business (even if they cut their rates by half, it would still be profitable to rent out the apartments), the competitiveness matters very little, and landlords are in no hurry to fight against each other - they're more likely to cooperate instead. The prices aren't set on the level competition demands - they're limited to what people can afford at all.
makomk 10y ago
Competition is based mostly on the headline rental rate, excluding tricks like this.
- ikeboy 10y ago
  That's not enough to change anything. If everyone can get $X from kickbacks, then one person can afford to reduce their headline rate by $Y<$X, thus outperforming others until they reduce their price to the same equilibrium except $X of costs are now implicit. You need some more complex notion of stickiness differing between imputed and sticker costs as I mentioned downthread for this to be harmful.
mrep 10y ago
I almost entirely agree with you, but you have to tailor your writing to the people you're talking too. The HN audience mainly understands technology, not economics. The real problem is that the landlords are exploiting the cost of information. It's costly for new tenants to educate themselves and factor in the costs of potential ISP/TV in addition to rent. Landlords are exploiting that cost to profit for themselves. Is it nearly as big as a problem as everyone here is making it out to be? No. It's like 50-100$ a month compare to 1000-4000$ a month rent for most people. That's 1/80 to 1/10 the cost of the rent.