Many university towns have problems with affordable student accommodation. In Graz things are not too bad, I think, but I guess things could also be better. Let me make the following policy proposal and let’s discuss whether we think this is a good idea. I suggest a law that states that students who rent an apartment or a room are not allowed to be charged more than €2 per square meter. At the moment gross rent prices in Graz are probably around €10 per square meter (if not more). Do you think this policy would have the desired effect?
Before we discuss this question, let me first explain how (almost all of) economic theory or economic thinking is developed. In fact it is a simple recipe, but then again one can easily get any of the ingredients wrong. In the end, we can test this recipe on the student accommodation problem.
Good economic theory, at least in my opinion, starts with a question, such as the one I posed here. Then we need three ingredients. First, who are the relevant people involved in the problem as posed by the question? Second, what are their primary goals (recall the first lecture on people pursuing goals) as they relate to the problem as posed by the question? Third and finally, what can these people do in terms of pursuing their goals as they relate to the problem as posed by the question? Once we have all this, all we need to do is think it all through. The last thing, by the way, is often done with the help of math (see my post on this) to make sure we do this at least logically correctly.
Note that it is very easy to get this all wrong. We can be mistaken in our choice as to who the relevant people are. We can be mistaken about our choice as to what these people’s primary goals are. We can be mistaken about our choice of what these people’s possible choices are. All these are ultimately empirical questions. Note, however, that when we build what is called a “model” in this way our goal is not to provide a model that is a perfect depiction of the real world. This would also not be helpful. We already have a perfect depiction of the real world, the real world itself. And it is not helpful to us. When we build a model we try to simplify by stripping away what we hope to be less relevant things and by focusing on what we hope to be the key aspects for our problem, the aspects of first order importance if you like. Again, this is of course so easy to get wrong. Ultimately we check our models in terms of two things. First, we check it in terms of empirically grounded common sense. Does the whole story that we build with this model make sense? Second, if we can, we check it in terms of proper empirical tests of our so developed theory. For this you will have to collect data (carefully) or run experiments (ok also carefully) and do appropriate statistical work (now that I started it, of course, also carefully), which you learn to do in your statistics and econometrics courses.
Let me now use this recipe on our particular question at hand. So who are the relevant people involved in this problem? I guess there are two groups of people of interest: first, the students who are seeking accommodation and second, the landlords who are renting out their apartments or rooms to students.
What are these people’s goals? Let me start with the students. Well, I guess the primary goal for a student would be to find a nice apartment or room at reasonable prices, the lower the price the better, I guess. Recall we have already met the hypothesis, if we want to call it that, that people, ceteris paribus (all else fixed) tend to prefer more money over less in our second lecture. What about the landlords? Well, I guess, they would like to have reasonably well behaved tenants and would like to charge a high-ish rent, ideally, the higher the rent the better. Here we are again: the more money the better (ceteris paribus).
A quick aside: when you develop economic theory or economic thinking you are well-advised, I think, not to be (morally) judgmental at the model building stage. It is not helpful, I believe, at this stage to wag your finger in the air and cry out that these landlords should really not be so greedy and that it is morally wrong to charge ever higher rent. Nobody will hear you. The landlords will do what they do and you better take it into account if you want to understand the problem. I like to think that an economist analyzing such a problem should have cognitive empathy (an ability to put themselves into other people’s shoes) without at the model building stage necessarily needing affective empathy (you do not need to cry with the people in your model while you build your model). Once you understand the mechanics of the problem, then you should apply your moral judgment. Then you can think about ways of improving the world, now with a proper understanding (if we built our model well) of the problem. This is the time when you cry with the people in your model and think about how you could improve their lives.
Now back to our problem. One thing is still missing. What can these supposedly relevant people do? In this case what students can do, I guess, is to search and compare and either accept or not accept certain price offers from the landlords or possibly also make their own offers of what they would be willing to pay. The landlords, I guess, can do more or less the same, they can search and compare and either accept or not accept certain price offers from the students or possibly also make their own offers of what they would be willing to accept.
Ok, with all this in place, let us now think about the question I posed in the beginning. Will this policy, of not allowing landlords to charge more than €2 per square meter, have the desired effect that students will find affordable accommodation? Let us first think about the students. Students, at such prices, will happily accept to rent even fairly large apartments, perhaps now even 100 square meter sized ones, after all they are really quite cheap. Many students who, at higher rental prices, would otherwise still live with their parents would now consider renting a place for themselves. Economists like to say that, at such prices, there will be a high “demand” for student accommodation. But what about the “supply”? How many landlords will be willing to rent out their apartment(s) to students at such prices? Suppose you are a landlord. Wouldn’t you try as much as possible to find a tenant who is not a student and whom you would be allowed to charge a much higher rent? Or even if you do not have any alternatives than to rent out to students, perhaps you might reconsider renting out your extra 20 square meter room and rather use it for yourself, after all it would only bring in an extra €40 a month (and not the extra €200-300 you would get in a world without this law). One would guess that the supply of apartments for rent to students would be rather low. Thus, we would have a situation in which many many more students are looking for apartments when almost no apartments are available. We will have an incredible “shortage” of student apartments. There will be some lucky few who get one, but most people will have to resort to alternative plans: either stay with their family, or rent an apartment in their uncle’s name somewhat illegally (at possible higher prices than before), or even go study somewhere else.
You can now switch on your moral judgement again and you might well find this an even worse situation for students than the original somewhat higher rental price situation, in which students were at least able to find accommodation.
Now, what if you really wanted to bring down the rent for student accommodation? There are possibilities, but none of them are cheap, as far as I can see it. For instance, the city of Graz (which really means the citizens of Graz) or someone else could subsidize student rent. They could pay some part of the students’ rent. Perhaps they should, however, do this only up to a certain size limit. In any case, even such an expensive measure will have its effect on rents. What do you think?