Rent controls

The economic and social case for rent and landlord regulation

The fundamental aim of controlling rents for a sizeable part of the rented property market is to improve affordability of rental apartments especially for vulnerable groups on lower incomes including large working families on low wages and the elderly who rely on pensions and state welfare assistance. Maximum prices are often justified on grounds of equity and fairness.

Just recently the left-wing Labour MP Jeremy Corbyn was campaigning for maximum rents in his constituency of Coventry arguing that the rapid rise of private sector rents and cuts in housing benefits were causing misery and huge inconvenience for many of his constituents. Lower rents in the city ought - in theory at least - to allow more people to live closer to work or to their extended families, and give them more flexibility about where they can live and find a job. Rent controls are often accompanied by laws offering tenants security of tenure, something that are important when people are trying to settle into a new area and build some roots. 

Regulations are also need to protect tenants against landlords who are very reluctant to repair or improve the properties and who in some cases allow their properties to worsen into a dangerous, life-threatening state.

The next set of analysis slides takes us through what can happen when maximum rents are introduced.

Now go and look at the slides....

Critical Evaluation: 
Here are some of the key criticisms of rent controls as an intervention policy:

1. Rent regulations can create larger shortages on rented property in the longer term
2. Landlords get a smaller return from upgrading and maintaining their houses - they spend less on their properties
3. There are negative externalities (external costs) from the deterioration in the quality of the rented housing stock
4. Rent caps increase the incentive to build luxury apartments only - developers can build luxury housing that doesn’t come under rent control
5. Caps encourages people the live alone which increases the shortage of properties
6. People spend more time searching for the dwindling supply of properties available - an opportunity cost of lost time
7. People in capped apartments have an incentive to stay - limiting supply for people moving into the city
8. Caps are often ineffective - in New York City, lots of people living in rent-regulated apartments have a second home in the suburbs
9.    The maximum rent does not address the fundamental problem which is a lack of good quality supply of rented apartments

The general consensus would seem to be that rent controls / maximum rents generate problems of

(i) Allocative inefficiency

(ii) Equity issues especially when there are rich families in New York living for decades in rent-capped apartments

(iii) Unintended consequences - for example the possible stifling of new building for rent

The result is government failure all of which can make the shortage of affordable apartments worse in the long term. For example, the share of free-market rented properties in New York has grown over the years and must be set to continue.

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Rent control

But two words are conspicuously absent from the long list of recommendations: rent control.

Conservatives reel in horror at the idea of rent control, which they blame for the dilapidation and collapse of the rental market in the 1960s. Landlords, unable to put up the rent, simply let their properties (and tenants) rot. A return to rent control will strangle supply, returning us to the bad old days, they warn. Yet the same people used the same economic theory to oppose minimum wage legislation – and were wrong then, too.

Let's examine this "strangling supply" argument. The rise of landlord buyers has not provoked a fabulous new supply of property. Instead, with so little new building going on, landlords compete head-on with first-time buyers for existing properties and, as they enjoy easier access to loans and better tax breaks, outbid young adults and families time and again. The only "strangling" is of first-time buyers.

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Rent controls....

Most readers of this column either already know this from first-hand experience, or they soon will: renting a flat is outrageously expensive in the UK. UK rents are the highest in Europe, both in absolute terms and relative to income levels. On average, British tenants pay between 40-50 per cent more than their counterparts in France, Germany, Belgium and the Netherlands. It is only if you count Monaco as a country that the UK gets pushed into second place, and even then, a number of Inner London boroughs have actually overtaken some Monaco boroughs.

So it is not surprising that rent controls are back on the political agenda. The re-introduction of rent controls is now official Labour Party and Green Party policy, and presumably, other parties will follow in due course. It is easy to see why: rent controls are extremely popular with the general public, and especially with younger voters. Among those aged 18 to 35, only 4.4 per cent oppose rent controls.

The case for rent controls is intuitively clear. Rents are too high, so the state should cap them – problem solved. Plenty of organisations have long been banging the drum for rent controls, and the latest organisation to jump on this crowded bandwagon is the Communication Workers Union (CWU), with a paper written by Alex Hilton.

In describing the problem, this paper is spot on. Britain’s exorbitant rents are a huge social and economic problem. They undermine the living standards of renters, and at the lower end of the income distribution, they have become the main cause of poverty and hardship. They cost taxpayers billions, because they make millions of people dependent on Housing Benefit. They undermine labour mobility, because the problem is most pronounced in those parts of the country which have the best jobs and earnings prospects, thus locking people out of these areas. They inflate consumer prices across the board, because the same factors which raise private rents also raise commercial rents in sectors like retail, and this then gets passed on to consumers. The list goes on.

So yes, the problems identified by the CWU are very real indeed. But rent controls are not the solution. Like most prices, rents are really messengers of scarcity. A high price is a messenger who tells consumers: “There is very little of this good, and lots of people want it, so use it as sparingly as you possibly can”. This messenger also tells (current and potential) suppliers: “There is very little of this good, and lots of people want it, so if you can possibly spare some of it, do it.”

A price control, then, is a form of shooting the messenger – except, it is worse than that. It means forcing the messenger to tell a lie. A controlled price is a messenger who, at gunpoint, is made to tell consumers: “Everything is fine! This good is available in great abundance. So don’t hold back, don’t be shy, please help yourself to some more.” His message to (current and potential) suppliers is: “This good is available in great abundance, so even if you can spare some of it, don’t bother too much.”

Rents are not an exception. The reason why rents, or rather, housing in general, is extremely expensive in the UK is simply that there is not enough of it. Relative to population size, the UK has the smallest housing stock in Western Europe. So of course housing is more expensive here than in places that have more of it.

Rent controls could not change that underlying reality. They would not add a single flat to the country’s housing stock. On the contrary: they would entice the ‘marginal landlord’ – the person for whom the decision to be a landlord is a borderline decision – to leave the market. Think of somebody who partitions off a part of their property, and converts it into a self-contained flat, but who would actually quite like to use that living space for themselves and/or their family – that person would no longer have the same incentives to do so. On the demand side, rent controls would also entice the ‘marginal tenant’ to either enter the market if they are not already participating, or to demand more of the product than they currently do. To cut a long story short, with rent controls, more people would chase fewer flats.

This is exactly what has happened wherever rent controls have been tried. One of the most consistent findings in economic research is that rent controls cause more problems than they solve. It is a similarly consistent finding that housing supply is mainly driven by the severity of land use restrictions. The UK has been building fewer new homes than other countries for decades, because the UK imposes exceptionally severe restrictions on housebuilding. For example, it is virtually impossible to build anything near London, Oxford, Cambridge, Bristol or Bath, because these cities are surrounded by greenbelts, where development is only permitted in exceptional circumstances (though it should be noted that ‘Greenbelt’ is a misnomer because a lot of greenbelt land is not remotely green). Add to that height restrictions and obstacles to densifying urban areas, and it is no wonder that levels of housebuilding are so low in the UK. This is the reason why the UK has such high housing costs, and easing those restrictions is the only way the problem can be solved. Silencing the messenger, or rather, forcing them to say that the problem does not exist, is not a solution.

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Rent controls - The economist explains

Rent regulation can take various forms, including rent control (the placing of a cap on the rent that can be charged) and rent stabilisation (setting limits on how much rent can be raised over time). Supporters argue that introducing controls helps ensure that households on low and middle incomes are not squeezed out of cities in which housing costs are soaring. In many booming cities, growth has pushed up rents, and over time the composition of many neighbourhoods has changed in favour of those who can afford higher prices. Supporters of rent control often point to Germany, where it is illegal to charge rent more than 20% above the level charged for a comparable property. (Around 50% of people rent their housing in Germany; almost 90% of all Berliners do, many in pleasingly spacious, well-looked-after apartments.) In the ten years to 2014, the proportion of British households headed by someone aged between 25 and 34 which rented privately rose from 22% to 44%. In Seattle, rents for one-bedroom apartments increased by nearly 11% between 2010 and 2013. A case could be made that rent controls provide long-term security for renters, and tilt the balance of power away from landlords towards tenants. That, some reckon, makes for a fairer housing market, in which households with lower incomes cannot easily be pushed aside by landlords keen to "gentrify" the neighbourhood.

But economists, on both the left and the right, tend to disagree. As Paul Krugman wrote in the New York Times in 2000, rent control is “among the best-understood issues in all of economics, and—among economists, anyway—one of the least controversial”. Economists reckon a restrictive price ceiling reduces the supply of property to the market. When prices are capped, people have less incentive to fix up and rent out their basement flat, or to build rental property. Slower supply growth exacerbates the price crunch. And those landlords who do rent out their properties might not bother to maintain them, because when supply and turnover in the market are limited by rent caps, landlords have little incentive to compete to attract tenants. Rent controls also mean that landlords may also become choosier, and tenants may stay in properties longer than makes sense. And some evidence shows that those living in rent-controlled flats in New York tend to have higher median incomes than those who rent market-rate apartments. That may be because wealthier households may be in a better position to track down and secure rent-stabilised properties. The example of Germany is also an imperfect one: many cities there have seen declining populations and low (or falling) house prices over the past two decades, although the latter is now changing in several cities.

In places where demand for urban housing is rising (as in London, New York and Seattle), a more effective policy is simply to build more housing. The number of houses being built each year in Britain peaked in 1968 at 352,540 dwellings. Since 2008 there has been a particularly bad slump, while a restrictive “green belt” around the edges of London restricts growth. Meanwhile many developers sit on the land, watching its value grow. According to McKinsey, some 45% of land which is due to be developed in London remains idle. House-building rates are even lower in Germany, says Kath Scanlon of the London School of Economics. Restrictive zoning laws in places such as San Francisco (which also has rent control) could also be loosened, though locals might not like it. But in order to keep housing affordable, politicians will have to take on the NIMBYs, not just the landlords

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Rent controls are not the answer

The country is experiencing the turmoil of high rent and low salaries and have voted to leave this at the hands of the Conservative party.

Prior to the election, the Labour and Conservative parties had many heated debates over rent control and its potential to help struggling citizens keep their homes. ThisIsMoney reported that rent in England has risen above inflation at about 4.2% in the past five years and while rent control is widely supported by tenants who want a quick-fix solution, the practice has proven time and time again to be counterproductive to the long-term health of the housing market.

The root of the issue in the UK is a low housing supply and placing a cap on rents will only slow down growth by discouraging investments. This refers not only to investment of new property but also in the upkeep of current property. By suppressing landlords’ means, we will inherently affect their financial ability to routinely refurbish their property and this will lead to poor living conditions – particularly among the poor.

Rent control began in London during the First World War and continued until the Housing Act of 1988 which deregulated the rental market for all leases after January 15, 1989. Like London, New York City used rent control in order to protect citizens returning home after World War II and continued through the 1970s. 

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Is there a case for rent controls?

House prices that are soaring out of the reach of ordinary people. Rapacious landlords squeezing every last penny out of hard-up tenants. Irresponsible buy-to-let lenders throwing money at speculative investors that may trigger another crash. It is hard to think of any other sector of the economy that gets more flak that the private rental industry. Against that tidal wave of negative publicity, it is hardy surprising that the call for some form of rent controls is rising all the time.

The respected think tank Civitas has just released a big report calling for tighter regulation of the sector, including limits on what landlords can charge. A separate poll last week found almost 60pc of people support rent controls, and more and more politicians are jumping on that bandwagon.

But hold on. On closer inspection, the case for rent controls turns out to be about as solid as the dividing wall on a hastily converted block of flats in East London. In reality, within a property market that is already horribly distorted by political meddling, rentals may well be one of the few sectors that actually works relatively well. All the evidence suggests that rents are coming down in real terms, not rising, while the increasing numbers of tenants can mostly be explained by mass immigration and the explosion in higher education. There is no problem – and, even if there were, rent controls would be the worst possible solution.

That does not seem to stop people trying. The campaign group Generation Rent, which lobbies on behalf of tenants, has just released a poll showing that 59pc of people support rent controls, with less than 7pc opposing them, and the rest undecided. Among private sector tenants, the support was even higher, with 77pc backing controls. Civitas weighed in with a well researched and thoughtfully argued paper, which, while the full report was balanced, came up with the headline solution that there should be limits to rent rises, and more protection for longer tenancies.

Not surprisingly, politicians are starting to tap into that. Ed Miliband has already called for caps on rent increases and may well extend that to full-blown rent controls. The Hackey MP, and potential candidate for London Mayor, Diane Abbott has called for far more extensive regulation, with rents being determined by local authorities based on council tax bands – it is disingenuously billed a voluntary scheme, but landlords would face a punitive charge for not joining. Not very surprisingly the Green Party has come out in favour of controls, as have the Welsh Nationalists. With growing public support, don’t be surprised if more politicians come out for them. There are clearly votes in attacking landlords.

There are two problems with rent controls, however, and they are both pretty big ones.

Firstly, there is no problem to fix. Secondly, controls are a terrible solution. In reality, there is very little evidence that aspirant home owners are being squeezed out of the market, or that rents are unaffordable.

It is certainly true that the UK has seen a big increase in the private rental market in the past decade. If you go back to 1999, there were 2m privately rented homes, out of a total of 20m households, according to a recent analysis by the parliamentary select committee for communities and local government. Now there are 3.8m, out of 22m homes. The total has almost doubled in 15 years.

The assumption of the rent control lobby is that everyone who is renting would rather buy, but has been “squeezed out” of the market by greedy landlords. And yet there are some very good reasons why the demand for rentals may well have grown.

Firstly, we have large scale immigration, regularly running to hundreds of thousands a year. While many immigrants are planning to stay, many, and especially the Eastern Europeans, are here for a few years to make some money. A Polish scaffolder might well prefer to save for a house in Krakow rather than buy one in Luton, and is happy to rent while he is here.

Secondly, we have seen a huge increase in student numbers, and they also prefer to rent. Total student numbers have risen from 2m in 2000 to 2.5m now, and the number of foreign students is rising all the time. Does a Chinese undergraduate really want to buy a house in Warwick for a three-year course, or would she rather rent? Set against those two trends, a 1.8m rise in the number of rental properties seems quite modest. Keep in mind that the number of owner-occupiers has also risen over that period, from 14m to 14.3m, which also seems about right for a country with a modestly growing native population. It is hard to see that anyone is getting “squeezed out”.

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Are rent caps the answer?

Renters are understandably angry about the unaffordable cost of renting. In the capital, average rent for a two bedroom flat is now a whopping £1,495 a month. Other parts of the country are also experiencing record highs.

Shelter is deeply concerned by how unstable and unaffordable private renting has become.  The record high costs of private renting have led to renewed calls for some form of rent control.  But we’re not convinced that comprehensive rent caps are the best answer.

Is rent capping the answer?

There are two different ways of using the law to control private rent levels:

1)      The old-style rent cap involved setting overall maximum rent levels, giving tenants indefinite contracts, and limiting the rent increases that could be charged to tenants once they were in a contract. It was originally introduced in the UK in 1915 as an emergency wartime measure to deal with housing shortages caused by the absence of any building workforce. However, few comparable countries have such an intensive set of controls today.

2)      Germany, France and Spain use what is sometimes called second generation rent control to calm rents without directly setting prices: rents are determined by the market at the outset; renters have longer term contracts and, as long as renters are in these contracts, their rent can only be increased by an inflationary index, such as RPI or CPI.

We think that the second option would dramatically improve private renting in England- and we’ll explain why later on. Although we wouldn’t call it rent control as this often adds to the confusion.

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Rent caps (again)?

The only UK political party that openly supports the introduction of rent controls in the private rented sector is the Green party, but recent polling suggests Westminster is out of step with the general public. According to a recent survey fewer than 10% of Britons oppose rent control, while almost 60% support the policy.

Critics warn that capping rents would drive professional landlords out of the rental market and push down standards. Meanwhile politicians are frightened to get on the wrong side of private landlords, who now control the vast swathes of the nation’s housing. Despite this, the government badly misread landlords over direct payment of housing benefit, so trying to cosy up to them now at the expense of the wishes of the electorate may prove costly at the ballot box.

Young people in their 20s have no collective memory of the risks associated with rent controls; they just want to see something done to address their generation’s housing crisis.

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Solving the housing crisis?

At the weekend London’s new mayor, Sadiq Khan, outlined his plans for the capital, saying: “The key thing for me is to tackle the housing crisis.” This was welcomed by those of us who have been campaigning on this issue. Less so what followed, with Khan adding: “I am bringing together an alliance of people from local authorities, housing associations, developers.” He can do much better than that. There have been enough summits and meetings. It is time for action and (if needs be) the shaming of the government by the mayor of London about the crisis that the government has itself contributed to.

The housing situation in the UK is so bleak that the key reason increasing numbers of people are becoming homeless is that they are unable to pay extortionate private sector rents. In February 2016, the Financial Times described the help-to-buy scheme as “help to cry”, naming it “one of the most perversely named government policies ever”. Squatting is on the rise again despite being outlawed in 2012: when people’s only choice is criminalised, the legitimacy of the law itself is discredited.

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Rent caps?

Hayley Miller was initially shocked when she received a letter to say the rent on her London flat was to increase by £1,000 a month. But this soon turned to resignation when she accepted that the unaffordable hike would mean she had to move to another flat – her eighth move in eight years.

“The contract was coming up for renewal and we were told the rent was increasing to £2,800 a month [from £1,800],” says the 34-year-old, who shares a two-bedroom flat in Camden with a couple. “It’s really sad as I loved it, and the landlord let us get two cats only a few months ago. I’ve only been there around a year, and the last rise was only about £70, so this was a total shock.”

There are pitfalls to hardline caps, according to commentators. “Rent caps are the most onerous of regulations,” says Bibby. “Concerns include landlords withdrawing from the market, and this could trigger evictions.” Property analyst Kate Faulkner says rent controls may actually penalise some tenants. “The biggest problem is they haven’t been proven to work anywhere,” she says. “It risks landlords selling up, and doesn’t tackle the main problem – a lack of stock.” She says landlords often have an interest in keeping good tenants and rents fixed. “Contractually, landlords may be more likely to put rents up in line with whatever the cap allows – penalising the very people they are designed to protect.”

Germany is often held up as the model of stabilisation, with many people living in the same property for life. Kath Scanlon, a researcher at the London School of Economics, authored a 2011 report entitled Towards a sustainable private rented sector, and said it would be difficult to replicate the system in the UK

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