Banning rent bidding: what do the new protections do?

Update 20/12: edited to include specifics from the regulation as published.

You have likely heard the NSW Government this week signed off on changes to introduce new protections against rent bidding. These will come into effect for any new listings from this Saturday, 17 December.

What is rent bidding?

This generally refers to a situation where applicants under pressure to compete against each other for a property in a tight market are encouraged - often by agents or landlords - to make an offer to pay rent above the advertised price in order to secure a listed property. Or an agent or landlord might similarly attempt to initiate a rent auction or bidding process by advertising a rental property without a clear fixed price. Instead they'll provide a range of rents or list as rent price available 'on application' or 'by negotiation'.

(For a more in-depth overview have a read of our previous explainer).

What are the new protections against rent bidding?

The protections introduced bring NSW almost in line with other jurisdictions, such as Queensland, Victoria and Tasmania while the ACT is currently also considering legislation in their parliament. Key elements of the protections include the following prohibitions:

• A rented premises must be advertised or listed for rent at a fixed amount.
• An agent must not solicit or otherwise invite an offer of an amount of rent that is higher than the advertised amount of rent for the rented premises

These terms become part of the Rules of Conduct that agents are legally required to comply with. An agent who fails to comply with the Rules of Conduct may face penalties, with fines of up to $5,500 for an individual and $11,000 for a company.

There are some restrictions to note - the rules apply only to advertisements that were first published on or after 17th December, and do not apply to physical signs on or near the premises.

What does it look like to “solicit” or “invite” an offer?

A real estate agent or assistant cannot solicit or invite an offer of rent that is higher than the advertised price for a rental property. The prohibited conduct of “soliciting” or “inviting” an offer could also arise at any time in the application process, and could include a broad range of agent conduct that asks for an offer, tries to elicit an offer from you or suggests that you should be offering an amount above the advertised price in order to secure a listed property. It could also mean an agent or landlord pointing to perceived shortcomings in your application that could be fixed by you offering to pay more rent.

The spectrum of prohibited conduct could include for example the following statements by an agent:

“someone else has made an offer, would you like to match it?”

“there are lots of people interested in this property, you can secure it if you offer more rent”

“you have not been working full time for very long, you might want to strengthen your application by offering more rent.”

In the current tight and competitive rental market, you might feel pressured or encouraged by agents or landlords, at the point of application, to offer to pay rent above the advertised price to get a scarce or sought after listed property. These new laws are intended to prevent such practices by real estate agents. If you think that an agent is not complying with NSW’s new rent bidding laws you can contact NSW Fair Trading or your Local Tenants’ Advice and Advocacy Service.

Tenants are currently able to offer higher rents for a property if they do so voluntarily and freely, however the prohibition on agent’s conduct to not solicit or invite a higher offer of rent may also impact how real estate agents respond to questions from prospective tenants. We recommend NSW Fair Trading's page on rent bidding for some examples of how real estate agents should ensure they do not breach these rules.

Sample scenario from NSW Fair Trading:

A prospective tenant asks if anyone else has offered more than the advertised price of $650 per week.

The agent states, "Under NSW real estate laws, agents are not permitted to solicit or invite a person to offer more than the advertised rent. I encourage you to make your own decision about the value of the property and the rent you wish to pay for it."

The agent's response is clear and specific and complies with the new rent bidding laws. By not providing a specific answer to whether there have been higher bids, the agent has not suggested that the prospective tenant should offer more than the advertised amount.

Read more scenarios from Fair Trading

Will the new protections be effective?

There are a few drawbacks and gaps in the new protections. In order for protections to be introduced immediately (without having to wait for Parliament to sit), they have been implemented through the Property and Stock Agents Regulation (Rules of conduct). This means the changes apply to licensed real estate agents, but do not apply to landlords. This seems to be something that all sides of politics are willing to look at addressing through legislation in parliament and so as an interim measure, acting through regulation is a sensible move  - so long as the legislation doesn't take too long into the next parliamentary cycle!

More significantly though the reforms fail to restrict landlords or agents from accepting formally unsolicited offers. 

There are two forms of rent bidding - the first is where a landlord or their agent encourages bidding either via advertisement or explicit solicitation, the second where a renter makes an offer above the advertised rent without being formally required or told to do so. Reforms to protect against rent bidding need to look at and restrict both or rent bidding will continue to be a problem.

"It is important to stop the formal soliciting of bids over the advertised price, and the impact will be negligible unless landlords are banned from accepting so-called unsolicited higher offers. If we only address the soliciting, the experience from other states and territories tells us we have not effectively addressed rental bidding and it will continue. We’d really like to see a restriction on accepting a rent over the advertised price so you can negotiate down if you’ve pitched too high but you can’t bid up.”

Other jurisdictions have had protections against rent bidding in place for a while now and their experience demonstrates protections are not effective if you still allow landlords or their agents to accept unsolicited. All report ongoing problems with rent bidding when the market is tight. Applicants are in a situation of disadvantage and may feel pressured to make an offer. This is not a situation in which renters are exercising genuinely free choice, so much as making offers in the context of being desperate for a home. And without a very clear restriction in place, agents and/or landlords are able to work around the existing protections and - without formally breaching the restrictions - still in practice encourage or facilitate renters' offers.

Some commentators have raised a concern that restrictions against unsolicited offers may lead to inflationary outcomes or that this would interfere with the free market.

On the first point, there is greater pressure placed on prices currently through artificially created competition by presenting the property as available for a lower rent than it is ultimately priced for. Reducing the competition by having more accurate and transparent pricing will put more incentive on agents and landlords to accurately price the property, by introducing a jeopardy for them getting it wrong and overreaching. Tenants do not have access to the same information about the property, or the amount of demand, and so are at information asymmetry. Where an agent overprices the premises it is a fairer process to negotiate the price down.

On the second point, there is no restriction proposed on the level of rent a landlord can seek for the property and therefore no restriction on their participation. Whether there ought to be is a separate discussion to this proposal.

"The guiding principle here should be that 'what you see is what you get'. This will not be delivered if renters can continue to be coerced into offering over the advertised price."

A ban on 'secret' rent bidding?

There are currently some suggesting stronger protections should include a requirement for landlords and their agents to advise other applicants when a renter makes an offer at higher than the advertised rent. This would mean if you had put in an application on a property, you would receive written notification that another applicant had applied and offered a higher rent. This is supposed to help ensure more transparency and accountability during the application process, and that renters can't be 'secretly' outbid. 

Given that agents are not permitted to use a prior bid to solicit further bids, we're concerned it would simply formalise and potentially entrench 'rent auctions' as part of the application process. There are no other essential services where the pricing is run as an auction by the end user consumer because people are at real disadvantage when it comes to securing a service that is so fundamental like health, energy, water or food.

New protections a start, more needed

It's good to see the NSW government act to introduce strong prohibitions against 'rent bidding' practices. It's a source of deep frustration for people that the advertised rent doesn't always reflect what the landlord or agent is realistically expecting for the property and so whether they can actually afford the property. It wastes a lot of time and energy for both renters and property managers. Prospective renters can find themselves continuously unsuccessful after being outbid for a property. Many, caught up in this process, find themselves pushed beyond their means to secure a property.  

Unfortunately we don't think in their current form the reforms commencing Saturday will achieve what is needed. We're hoping this is the first step in a longer process of bringing in protections to ban rent bidding. And of course, in terms of addressing the root of the problem - the lack of supply of genuinely affordable homes that are available for people who need them - the Government has a lot more to do.