This paper examines the impacts of new policies aimed at reducing the cost of renting by regulating the actions of intermediaries in the rental market. We highlight how information frictions between buyers and intermediaries can give rise to rents in the thick two-sided market. The distribution of these rents between intermediaries and sellers, as well as the impact of price regulation, depends on the shape of the respective demand curves. The study focuses on the introduction of the Tenant Fee Act in the UK in 2019, which regulated letting agents’ prices. We combine a conceptual framework of the interconnected markets for rental properties and letting agent services with a novel dataset containing detailed micro data on prices and choices from all bilateral relationships, as well as market entry and exit. Empirically agencies passed 20-30% of the shock to landlords, whose reaction implies an elasticity of demand of -1.8 and a second order elasticity of 8, indicating a strong deviation from perfect competition, and locally concave demand. Landlords are unable to pass through the shock to tenants suggesting a high local sensitivity to rental prices. Conversely, tenants are not sensitive to tenant fees suggesting the presence of information frictions. The study also reveals no evidence of market exit for agencies or landlords, assuaging concerns of adverse effects on the supply of rental properties. Overall, the policy successfully reduced the cost of renting without any adverse general equilibrium effects. This success hinges on the presence of information frictions and market structure.
(joint work with Nikhil Datta)
Jan David Bakker, Bocconi University
Topics: Consumers , Markets , Real estate and housing