Why does the market economy allow exorbitant rents, Economist?

#12 – Present photography meets future economics

P: Yesterday, economist, a friend told me a story that will interest you.

E: I'm all ears, photographer.

P: The friend's sister was looking for an apartment in Berlin for herself and her children. Because the rental market is so tight she accepted the following offer: apartment in the backyard, 90 square meters, a rent per month of 3.000 euro, signing the contract without prior inspection of the apartment, premature termination of the fixed-term rental contract excluded. I ask you, economist, is this the market economy you keep telling me about?

E: Looks like.

P: Don't you want to defend yourself at all?

E: What or who to defend? A landlord who offers a contract that is presumably illegal?

P: It's your market economy where this happens!

E: In my market economy, more precisely, the market economy I advocate for, there is competition. If demand increases, for example for apartments, the price first increases, so housing becomes more expensive, then the supply of flats increases because more is being built, because it pays off building more housing units. Then the prices fall again.

P: What do you want to tell me, economist?

E: In a market economy, moral requirements are not directed at the people; morality is in the system, so to speak. The state ensures that competition works so immoral behaviour cannot pay off; it simply has no counterpart.

P: Isn't that economic thinking in the ivory tower? I suspect immoral rent contracts are common in Berlin and many other cities. Your beautiful market economy doesn't seem to work out here that well.

E: You're right. There is often a gap between theory and reality, especially in the housing market. Two reasons for that. On the one hand, immigration into cities often changes faster than the construction industry can build new apartments. Secondly, living space in cities is just not infinite.

P: What to do?

E: Create living space as much and as quickly as possible. And at the same time, prevent abuse through good laws and enforce that law.

P: If that had worked, the story I heard wouldn't have happened.

E: And the woman would probably not have gotten the apartment either. I guess she was one of the few willing to enter into these immoral contract terms. If the contract had been more moral, there would probably have been many more applicants, and her chances of getting the apartment would have been lower. The fundamental problem here is the shortage of supply. There are many ways to circumvent the law if both parties to the contract want it. 

< silence > 

P: Do you also live in a rented apartment, economist?

E: I do. 

P: I thought economists could afford to own their homes.

E: Obviously not every economist. Did you know, photographer, that ownership vs renting is not a question of wealth but rather a feature of functioning markets? The proportion of people who live in rented accommodation tends to be highest there, where the rule of law works, where contracts can be concluded and enforced. Do you know which country has the highest rental housing rate?

P: I don't. 

E: Guess.

P Tell me.

E: Guess.

P: If you don't tell me, I'll google it.

E: It's Switzerland. Almost 60 per cent of people rent their homes there.

P: Interesting. I thought they all lived in self-built mountain huts.

E: Sometimes you're not very funny, photographer.

P: But sometimes I am, right?

E: Rarely.