Who’s Afraid of Rent Controls?

rent controlRenting is London is out of control. This is well known to most people – especially those who are unfortunate enough to be tenants themselves.There are a range of issues, short contracts, expensive estate agent charges, poor maintenance etc. But the biggest issue is simply price, the extortionate cost of renting in London that makes it impossible for many to remain in the city especially as the government and the mayor require housing associations which want to build any new sub-market housing to increase rents on both the new and existing properties towards a laughingly titled ‘affordable rent’ of 80% of market value. As a result London is becoming less of a mixed city, and increasingly a playground for the wealthy, which threatens to destroy everything about London which makes it great. So what can be done?

The most obvious solution, one that would be supported by the vast majority of the renting population is rent capping. By this I mean not only a cap on the rate of increase the landlords can charge to existing tenants (although that would be a start) but a legal maximum that landlords could charge for their properties. The rate would probably differ across the city – it would be set by councils who would categorise properties along similar lines to council tax bands. Such a policy is in operation in many countries across the world such as Holland, Sweden, Czech Republic, Denmark as well as in some American cities such as New York and Washington D.C. Introducing such a policy in London (one of the least regulated rental markets in the developed world) could be transformative, making life easier for renters and their dependents, ensuring London remains a mixed city.

The problem is that a very large number of ‘experts’ will line up to tell you that such a policy would be the worst thing imaginable and that it would destroy London as we know it. Chief amongst these nay-sayers are mainstream economists who think all markets self regulate and depict rent control policies as a classic failure to heed the laws of supply and demand.  The chief argument is that any attempt to limit the price of a commodity will result in a shortage, as producers have less incentive to produce and sell. This is correct in a genuine market situation – if cakes are being sold for around £2 but I rule that henceforth they can only be sold for 50p, many cake makers may decide to quit and do something more profitable instead. Thus there are less cakes available and they will probably be of lower quality as the remaining makers have no incentive to improve their recipe. This, say classical economists is what happens with rent control. There is no incentive for developers to build new rental properties, as they will not be able to make much return on them (or at least, not as much return as they would in an open market situation). And existing landlords will find private renting insufficiently profitable so will sell their properties instead. So the overall rental housing supply will decrease. Also, landlords will have no incentive to maintain their properties, so they will fall into disrepair. Finally, it will be harder for new people to move to the city, as existing tenants will be reluctant to leave their cushy, rent-controlled pads. The only way to bring down rents is to build more houses. Eventually (after the city has become significantly denser and many communal/public spaces demolished to make way for more housing) prices will fall.

This analysis seems to have scared off many politicians from advocating and implementing rent controls. But the arguments outlined above are seriously questionable. Housing does not work like many others marketable goods – there are serious limitations on it. Housebuilding requires land – which is a scarce commodity in London.

There is a large amount of land which is designated as green belt and thus cannot be built on. There are also many sites that are not available for building because they are currently used in ways that are protected, as park, schools, libraries, hospitals. The planning system carefully controls the use of land, limiting the amount of new housing that can be built. So even under the current system of uncontrolled rents there is a limited amount of housebuilding – and at present it seems to be insufficient to bring down rent levels, as they are continuing to rise every year. Houses are thus less like a regular marketable commodity subject to normal laws of supply and demand and more like a scare resource (e.g. a rare material or certain foodstuffs in wartime) which can either be rationed so everyone has a chance at purchasing a small amount of them or put on the open market where they will be bought by a wealthy minority.Its also worth pointing out that housing developments attract a good deal of subsidy, either to make sure that it contain some ‘affordable’ homes (defined as 80% of market rent) or to give some negligible benefit to the ‘wider community’. So housebuilding is not purely dependent on developers making a profit – it also requires subsidies – and in a rent control situation those subsidies could be put to much better use.

So what of the predicted dire effects of rent controls?

 1) Many Private landlords would sell their properties rather than continue to rent them at a lower rate

This is almost certainly true. It’s not clear why this would be a bad thing. Right now, Buy to Let is insanely profitable and consequently lots of properties which might otherwise be bought by first time buyers are instead bought as buy-to-let investments, leading to increased house prices. Fewer Buy to Let buyers would mean less demand, which would mean lower prices, which would allow more people to buy their own property rather than rent. So the size of the overall housing stock is not decreased, but the owner-occupier share of it increases, returning to the situation before the property boom of the late 90s.

2) Developers would cease to build new properties

Most of the current building is focussed on the most expensive end of the market, not really help the goal of making London a more affordable city. But let’s say that this objection is true. So what? The main reason usually given for the need for more rental development is to increase supply and thus bring down prices. But prices will already have come down due to our rent controls.

3) But there is huge demand to live in London – how will you increase supply?

Firstly, supply could be increased by changes in regulation. We could heavily tax empty properties and sites, to disincentivise hoarding. Even better, we could expand the supply of called council housing. If the law was changed to once again allow councils to borrow in order to build new council houses then supply could be increased in a way that didn’t rely on guaranteeing profits to development companies.

Secondly, and more importantly, not all demand has to be met. As the unbalanced British economy currently stands there is probably enough demand to replace every park, library and school playground in London with tower blocks – but no-one is seriously suggesting this – everyone agrees that a certain level of housing density (or green belt building) would be unacceptable, they just disagree over where to draw the line.  London is dense enough as it is, and when sites become available they should be used to improve the quality of life of residents, e.g. more parks. Usually, one of the main arguments for more housing is to bring down house prices, but a rent cap would do that anyway, directly in terms of rents and indirectly in terms of sales.

Thirdly, rent controls would probably have the effect of reducing demand in London. Given that a substantial number of properties in London (particularly at the top end of the market) are bought as investment opportunities, on the assumption that prices are going to keep rising, a fall in house prices would decrease such investments and thus lead to less demand. So it would become cheaper to buy properties as well as cheaper to rent.

 4) It would become almost impossible to move to the city – as existing tenants would not want to leave their rent controlled flats.

Firstly, many tenants would eventually move out, either leaving the city, or buying their own house. Secondly, it’s already impossible to move to the city for many who can’t afford rents, and who are not prepared to endure 5 to a room squalor. Yes, the freedom of a wealthy few would be limited but this is easily outweighed by the increase in freedom for those who are currently tenants, for whom living in the city would become affordable, especially for those that would otherwise be forced to move to other parts of the country. Finally any housing shortage in London could act as an incentive to boost growth in other regions of the country especially ones where there is surplus housing.

5) Landlords would leave their properties in poor condition

Frankly this is already true in many cases. Demand is so high, that landlords can simply drop the price a bit if they don’t want to renovate, and can easily find new tenants if the current ones get fed up at the poor maintenance. Even if things did get a bit worse, I think most tenants would be willing to do a bit more themselves ( i.e painting) if they were paying less rent and their contract allowed them to do this.

6) You’ve conceded above that rent controls would probably lead to a fall in house prices. Wouldn’t that be catastrophic?

It’s only bad if you’re a current house owner. The millions of people who cannot yet get on the housing ladder would benefit. In wider economic terms, we’ve been led to believe that house price increases are necessary for economic growth, but in fact they don’t represent real growth at all, simply increases in the value of land. Real, sustainable growth would come from increased productivity, technological innovations and building a more skilled workforce. Britain lacks any kind of industrial policy that would seek this kind of growth – it instead relies on financial services and house price inflation in the south-east. This model only really benefits one region of the country and within that, is mostly to the benefit of existing homeowners and their descendants who inherit their property. A fall in house prices could lead a more equitable and sustainable economic model.

Rent controls have so far been seen as politically impossible – mostly because a significant group of wealthy, influential people would lose out – notably property owners in London and the South East. Tony Blair would never have touched this, and David Cameron is hardly likely to either. Boris Johnson has brushed off demands even for secondary controls saying that this would lead to a great housing shortage. However, with Ed Miliband as Labour leader, some of the unthinkable is starting to become thinkable amongst the centre left. I would suggest that property prices have become so high in London that even cautious social democrats will have to start thinking about policies like these. The crucial thing is to convince the Labour mayoral candidates to adopt this as part of their platform – given that the next mayor is likely to be Labour this would make rent capping in London a reality. The campaign starts now.

The idea for this piece, along with several of the concrete policy suggestion came from Gillian Peskett of Ground Plane Architecture. Thanks also to Nick Rendle  for his feedback on an earlier draft of this piece

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