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Archived Articles
Simeon Mitropolitski is a Canadian analyst, of Bulgarian origin, and a former syndicated columnist with the Bulgarian News Agency (BTA). He is the author of several hundred articles dealing with hot political and economic topics, both national and international.
He was part of the first group of Bulgarian intellectuals and students that began the opposition movement that finally put an end to the communist regime in this country in 1989, and in 1996-1997 participated in international observation teams during the elections in several Balkan countries - Romania, Albania and Bulgaria.
In 2002 Simeon and his family moved from Bulgaria to Canada where they live now in Montreal, province of Quebec. Simeon is a Master of Political Science from McGill University and a B.A. of Political Science and History.
Global Real Estate Project
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Rent seeking and how it affects real estate?We introduce here another fancy term, taken from economics, rent seeking. This term exists since early 1970s, in fact some studies trace it back to late 1960s; so far it hasn't been used extensively to real estate market. There is a need to change this situation. This phenomenon seems to affect in several ways real estate, and it can change significantly demand-supply ratio. Hereafter we first present popular definition of the term and then point out at its possible implications to the world of real estate.
DefinitionMore than 200 years ago economists looked at the incomes as a function of three main sources: profit, wage, and rent. We all know something about rent; it's when we have something that makes us richer just by possessing it. 200 years ago the rent came mainly from possessing land. Today we rent our homes to those who prefer not to buy residence. Rent seeking arises out of normal rent. In additional, however, it implies governmental interference with the normal market relations; so some people and organizations make other people and organizations pay higher rents because certain goods and services are artificially been made scarce.Look around you and you'll soon see at least couple of examples of rent seeking. Some people cannot exercise certain professions even if they are highly competent UNLESS they belong to a particular professional association. Companies cannot provide goods and services UNLESS they are registered within a particular jurisdiction where they may offer these goods and services. These are not normal regulations applicable to anyone; rent seeking is precisely an interference with the market that divides people on small group enjoying privileges and everybody else who is left outside this circle of privilege.
Citizenship as rent seekingHow rent seeking affects real estate market? It does so in several ways and they all have big impact on supply-demand ratio. Let's look at something we all take for granted since our birth, citizenship of one or another country. Well, some countries just don't allow BUT their own citizens to buy some types of real estate. Sounds very familiar, so much that we don't even ask for the reason why is so? A brief research will tell us that there is no economic reason whatsoever for this restriction other than rent seeking by particular group of citizens enjoying full rights to buy.Restricting buying real estate has two main goals. First, citizens will buy cheaper. This reason is usually put forward. The land and houses are scarce, so government should care about its own citizens first. In countries with scarce population and huge empty spaces however such explanation looks really funny. Second, non-citizens pay higher rents to residential and commercial properties. Yes, if these non-citizens cannot buy, they must rent, and if they don't buy not because they don't want, but because they cannot buy, then the rental market will be artificially higher. So citizenship as rent seeking makes buying cheaper and renting more expensive. Some people make money just because they are citizens.
Agency as rent seekingReal estate professionals as virtual rent seeking corporation use the same instruments for making money out of nothing as any other professional organization that has monopoly on particular activity on particular territory. Real estate business in fact facilitates such rent seeking activity because of the nature of the product; we unfortunately cannot take the land in our suitcase, neither we can order it delivered by mail. Many jurisdictions require licenses for real estate professionals; they say they do it in order to increase the quality of services provided to public. The funny thing here is that these professional organizations are always on the front stage when it comes to increasing the costs for newcomers of becoming their members; in turn this always decreases the competition on the market and thus the quality of services provided to the public. Above certain minimal regulation all additional requirements for exercising this profession seem unnecessary at best. They always restrict the competition, and therefore push real estate prices up.
Financing as rent seekingBuying nowadays is almost unthinkable without using bank financial support. Interest rates therefore are critical in whether buying real estate will be a deal or a heavy financial burden. There is enormous difference in countries regarding access to financing. Even in those countries that offer large variety of mortgage providers, the conditions differ slightly. This 'slight' difference at the end may lead to 5-digit difference in total mortgage amortization. Capital globalization is a fact in many countries generally speaking, but it seems full harmonization is still a matter of future. At any given moment most countries' financial systems offer less than best rates to their final customers. Remember about more than a decade of deflation in Japan? Well, most banks there offered mortgages at ultra-low rates for many years, but they couldn't access foreign markets. Local banks keep for themselves their customers, real and potential. I cannot go looking for the best possible rate outside my country. The banks here know this; they therefore have no incentive to match these best rates.
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