One eye-catching policy currently being proposed by the Labour party is a ban on “bidding wars” in the private rented sector. In many high-pressure housing markets bidding by competing prospective tenants, instigated by the landlord or letting agent, results in tenants agreeing to pay a considerably higher rent than originally advertised.

Labour proposes to require rents to be stated in all advertising and to make it unlawful for landlords or letting agents to initiate a bidding process to increase rent further. A similar policy was introduced by Jacinda Ardern’s government in New Zealand in 2021.

The policy is intended to give tenants greater clarity and certainty over their potential housing costs. And, when the growth of private rents is seemingly unrelenting and a substantial proportion of households carries a heavy rent burden, the policy is intended to restrain one channel through which upward pressure is exerted on rents.

There are concerns about how effective this policy will be. What sorts of incentives does it present to landlords and tenants and how might they respond? The answers will depend, in part, on the policy details and, as yet, we have few to work with. So, let’s consider possibilities.

In principle, prices in a market allocate resources to those consumers that value the goods most highly. They are a rationing device. In housing markets where many people are pursuing the same property, bidding wars are one way of deciding who gets what.

Unlike in areas where consumption is discretionary, in housing markets “valuing the goods most highly” can be less about choice than desperation. People will forego other goods or services – including necessities such as food or fuel – to secure somewhere to live.

We can envisage several potential scenarios with this policy, depending on its precise design.

First, if regulation successfully stops prices from fulfilling the rationing function, then another rationing mechanism is required. Other mechanisms include queuing or lotteries. But in the private rented sector the risk is that the mechanism adopted is discrimination.

If a property attracts several prospective tenants then the landlord may select the household they perceive to be lowest risk, in terms of paying the rent or caring for the property. Certain types of households, including those reliant on benefits, people in precarious employment, or those with children, could find it even harder to secure accommodation.

Alternatively, if we look back at the experience of rent control we see that where regulation tries to constrain rents below the market level a range of side payments – most notable so-called “key money”, an additional upfront payment to get access to the key to the property – arise to restore the landlord’s income.

Labour is also proposing to limit the size of the upfront deposit that landlords can request, in terms of a maximum multiple of the monthly rent, partly to try to forestall such tactics. But the appearance of other “under the table” payments that aren’t designated as rent or deposit can’t be ruled out.

Equally importantly, Labour is suggesting that while landlords will be prohibited from instigating bidding wars, tenants will not be prevented from volunteering to pay more than the advertised rent.

The question is how voluntary such payments will be. There are indirect means of communicating that landlords expect more than is advertised. It is possible that local norms and expectations will arise through which it becomes known that unless you are willing to offer at least a certain amount over the advertised price you will have limited chance of securing the property. Critics might argue, therefore, that by allowing this flexibility the whole policy would in effect be neutralised.

Another possibility is that a ban on bidding wars results in a one-off upward adjustment in rents. Rather than advertise a property at £1,500 a month and use the bidding process to ratchet that up to £2,000, simply jump straight to advertising at £2,000 from the outset. That might bring greater clarity, but it won’t restrain rental growth.

Alternatively, one could envisage a scenario in which private rental pricing starts to operate more like the home ownership sector. A property might be offered at a rent of £2,000 a month “or nearest offer”, and see what tenants are willing to pay.

Compliance and enforcement

Whatever its detailed design, a key determinant of the impact of this policy will be compliance and enforcement.

Knowledge of rights and obligations – on the part of landlords and tenants – in parts of the private rented sector is low. And even when tenants know their rights, some can be reluctant to enforce those rights if it means they risk losing a place to live.

In addition, as a result of budget cuts, whichever branch of government Labour is thinking should be responsible for enforcement is almost certainly already struggling under the burden of existing responsibilities.

So, effective implementation of the policy could be a challenge.

Finally, while housing activists have been concerned about bidding wars for some time and have welcomed moves to address them, they have been quick to note that this is a relatively marginal change. This is a plausible assessment.

Tackling bidding wars is very much treating symptoms rather than causes. In New Zealand rents continued to increase strongly after the 2021 ban on bidding.

The policy risks being an example of what systems thinkers call a “fix that fails”. By addressing symptoms but not causes, it could trigger a chain of unanticipated outcomes that are not helpful to the tenants it seeks to assist. It could conceivably end up making the problem worse.

Bidding wars arise where there are too many people chasing too few properties, which hands power to suppliers. It is only when that fundamental imbalance is adequately addressed that upward pressure on rents will be eased. But that entails a much more far-reaching reform agenda.