“Magarpatta City” lies in the south-east outskirts of the city of Pune in Maharashtra, my home state. Searching for place to live in led me to Magarpatta City yesterday. Since moving out of my Mumbai apartment in mid-February, I have been a homeless person leading a rootless life living out of a suitcase. February saw me in New Delhi, Nagpur (my home town), and Bangalore; March was spent in New York City, Long Island NY, Boston MA, and Newark DE; April I was in Berkeley CA, Saratoga CA, Seattle WA, and Tampa FL. Upon my return to India on May 3rd, I spent a few days in Mumbai and then came here to Pune with the idea of storing my suitcase for a bit and have a home for a couple of years.
Searching for a place to call home is not an easy task. You cannot refer to a directory of places available for rent because there is no such central depository of information. What information exists is fragmented and incomplete. There are listings in local newspapers but you would have to consult many sources published over an extended period. Given space limitations in newspaper classifieds, the information for any specific place is incomplete. You would have to call and/or visit to see for yourself what is on offer. Search costs add up and makes the market for rental housing needlessly inefficient. Where there are information imperfections of this kind, specialized services emerge. Rental property brokers step into the picture as specialized agents bridging information gaps manually.
Brokers have specific areas of the city that they operate in and have inside information on available places. To increase my chances of finding a suitable place, I had to engage through various sources, a set of brokers. Each has about a dozen properties to show. The process is time-consuming and frustrating because of a number of reasons. First, there are numerous levels of indirection. The broker is one link in a network of relationships. Broker A, for example, will call up an intermediate B who will in turn call up C who has the key to the apartment. When you go to see the property, a confluence of events have to occur such as the presence of B and C for you to actually look inside. At places, I have spent over an hour just waiting, while the actual seeing of the place took only about two minutes.
The second reason for the frustration is cultural, the inability to say no. I have a set of very specific criteria about the place I wish to rent. Somehow I get taken to see properties that don’t come anywhere close to what I have clearly stated I want. Why do they do that? Don’t they waste their time as well as mine? There has to be a rational explanation. I conjecture it has to do with conveying an impression that they have earned the commission they charge.
Brokers charge about two months’ rent as commission. If they were to show only those properties that meet the specifications, they would perhaps be able to show only one or two places. If that means you rent a place through a broker after he (or she) shows you only a couple of places, the impression could be that the commission is disproportionate to the work done.
The third reason for the frustration is structural. The market is fragmented. Information which could have been aggregated and made searchable is only present as knowledge in heads of various agents. The asymmetric information—renters don’t have information on the complete set of available properties—gives rise to ‘rent-seeking’ opportunities, the commission charged for the deal. Dis-intermediating in this situation would involve aggregating the information (which is currently held as private knowledge) and making it searchable but would result in a loss of income for those agents.
Imagine, for a moment, a more efficient system. Let’s say there is “Craigs List” type platform where landlords list their properties in detail including pictures of the insides and of the surroundings. The technology exists for making this list accessible and searchable to prospective renters from anywhere in the world at very lost costs. In a few minutes of searching, one identifies a set of properties and invests in going over to check out the places. If such were the case, I would have only seen three properties and spent about half a day. Instead, I have spent four days and seen about a dozen properties only two of which I would even remotely consider renting.
Is there a point in this renting story? Yes, a general point. The availability of technology is only a small part of the story of development. It is a necessary part but very small and far from sufficient. The technology has to be adopted. There are barriers to adoption of technology which go beyond affordability and appropriateness: adopting technology could hurt the entrenched interests of the existing system.
Using a web-based system to remove information asymmetries in most markets would eliminate rents that information brokers (and property rental brokers are information brokers) currently enjoy and therefore they can be relied upon to resist such an efficiency enhancing change. But then you may ask, how does any efficiency enhancing change come about at all when in practically all cases the vested interests would prevent the change? The answer: If the vested interests can find alternate and better roles in the new system, the change can occur. That is, if they can move up the value chain. Even after the implementation of an efficient web-based system, people would be required to help with the creation and maintenance of the list, of vetting prospective renters, etc.
Efficiency implies that less labor would be required, however. So instead of a dozen agents, I would need only one agent. In short, if the market does not expand, then there will be mass unemployment among property agents. But the market may indeed expand, both due to lower transaction costs and due to increasing population of tenants and landlords. Then again, in an expanding economy, there will be other opportunities for those who used to be property brokers. It is an old story repeatedly told: fewer secretaries when printers and word-processors became the norm but more programmers. What you lose on the swings, you gain on the slides.
So what about “Magarpatta City”, you may ask. I was coming to that. Tomorrow, shall we say?