Movem logo
Peter Ramsey
Published by Peter Ramsey
May 10th 2017

Why the property-rental market is like shopping for peaches and lemons

How can you know, before you buy something, whether or not it’s any good? This isn’t a trivial question. When economists think of what makes markets work well or badly, one of the key things they think about is information: do buyers and sellers have enough of it to make sensible decisions?

Why the property-rental market is like shopping for peaches and lemons

Let’s say you want to buy a frozen burger. To make a perfectly well-informed decision, you need to know how much benefit, in terms of taste and nutritiousness, you’d get from each of the various brands of burger. And you’d have to be aware of the various shops selling them, and the prices they’re charging. Which would be doable, but time-consuming.

Now picture the car market, before the robot-production-line era. Let’s say that, even within a particular make and model, individual cars would have particular quirks. Some would turn out to be ‘peaches’, and some would be ‘lemons’. But you wouldn’t know – and couldn’t know – which you’d bought until you had driven it, say, a few hundred miles. 

The situation with the second-hand car market during that period would be even worse, because the seller, having driven it, knows whether they’ve got a peach or a lemon. They might tell you it’s a peach, but you’ve got no way of checking.

This is an ‘information asymmetry’, and it’s important. The 2001 Nobel Prize for economics went to three American academics for their work on markets with this problem.

One of the trio, George Akerlof, had published a famous paper in 1970, which discussed the used-car issue. He argued that, in a simplified theoretical situation, ‘good cars and bad cars must still sell at the same price – since it is impossible for a buyer to tell the difference between a good car and a bad car.’ 

In this situation, Akerlof suggested, why would you sell a peach? You wouldn’t get what it was worth. The presence of unidentified lemons in the market would drive down the price for everyone. The only people who might benefit from this information asymmetry are people with lemons to sell.

How to fix it? In certain markets, the problem may be insoluble. But in other cases, it can be done. Now, let me get to the point and move onto the property-rental market.

Let’s say that the flat you’re viewing is prone to rising damp, and has noisy neighbours, and the appliances don’t work, and the landlord is a fix-nothing, and a deposit-confiscator. How are you supposed to figure all that out in a 15-minute viewing?

Of course, the landlord’s not going to tell you. However – and this is an important however – there are usually some other people who have that information, and have no reason not to disclose it. His previous tenants.

I can’t pretend that I was inspired to create Movem by Akerlof’s article. It was simply that I’d had a bad rental experience myself. But it’s nice to think that a problem which may have once seemed insurmountable to economists now has, at least in this market, a neat and simple solution.

Movem allows tenants to know if they're looking at a peach or a lemon, and therefore, if it's worth moving into.

What's new with 3.0?

Peter Ramsey
May 3rd 2017

What’s new in v3.0.3?

Peter Ramsey
May 25th 2017