Rent control poses a real threat to the UK’s buy to let landlords.
The London Assembly’s housing and regeneration committee, a left-leaning sub-group, has recently called on Mayor Boris Johnson to adopt a London based pilot scheme for rent control.
This is not the first time and will no doubt not be the last time this is called for: Ken Livingstone and Jeremy Corbyn (MP for Islington North) have both been advocating the move for some time.
If rents keep on rising, pressure on politicians will increase as struggling tenants get more public support for the idea. There are far more voting tenants than there are investor landlords.
The move is very unlikely under the current administration, and perhaps in the next, but a Labour government in two years time could conceivably be a different matter. Ed Miliband has already been calling on local authorities to reduce the rents they pay to private landlords to emergency house social tenants, and there’s some that believe it could become Labour party policy if Ed Miliband were to become prime minister in 2015.
For those who have not experienced rent control in their lifetimes, most people, those not old enough to remember life in England under the Rent Act, or know about the experience of this in other countries, rent control may appear to be logical step towards a fair way of solving the housing problems in London.
After all, isn’t it about time those greedy buy-to-let landlords got their comeuppance?
That’s certainly not what those in the know, those old enough to remember our Rent Acts, those who live in several rent controlled cities in the US and Sweden, and most economists, would say.
Allister Heath, editor of City AM, writing recently in the Daily Telegraph, said:
“while something drastic needs to be done to tackle Britain’s housing crisis, rent controls would be complete madness: they are one of the stupidest economic policies known to man.”
Likewise, left leaning Swedish economist Assar Lindbeck has asserted,
“In many cases rent control appears to be the most efficient technique presently known to destroy a city—except for bombing.”
Chairman of the Residential Landlords Association, Alan Ward, thinks rent control will do “untold harm” to the rental market and asks if we have learned anything from history, referring to the days under the Rent Acts when security of tenure for life and rent control pervaded and virtually destroyed the rental housing market in Britain.
There is without doubt a need to do something about housing in London.
The success of the capital relative to the rest of the UK (London’s share of Britain’s economic output is put at 22% by the ONS), and the attractiveness of
London property as a safe haven for foreign investors’ money, are putting increasing pressure on housing for the middle and working classes in the capital.
London property prices are starting to rise again, despite the fact that prices have fallen or are still falling elsewhere. The cost of renting has risen to over half the average wage in two thirds of London boroughs, putting many workers under intolerable pressure.
The so called “Generation Rent”, the majority of 20 and 30 somethings, professionals working in London, and around 16pc of all households, is being spiked by a two pronged attack: the average wage this year has risen by around 0.8%, whilst rents in London have risen by something like 8% and the average in England and Wales by around 3.9pc.
Little wonder then that these politicians and others are making noises about rent control. What is clear is that those making noises either have little or no concept of the basic principles of economics, especially in relation to the housing market – it’s an issue of basic supply and demand – or else they have a political agenda.
There is only one sure way to tackle the London housing problem: either demand must be reduced or supply increased, or a combination of the two. All that rent control would achieve is the exact opposite of this.
As Allister Heath says in his Telegraph article:
“The policy has failed with horrifying consequences everywhere it has been tried, including in New York, and is the perfect embodiment of the adage that no problem exists that cannot be made worse through government intervention.”
Once investors get wind of the fact that rent control is a possibility, and even now with these very musings about the London market, landlords will begin to think twice about investing their hard earned cash. Some will already be adjusting their future plans! So, just by the very fact of Livingstone, Corbyn and
Miliband intimating that a rent control policy, or as some have phrased it “rent stabilisation”, is possible, potential supply may be being reduced as you read this.
Introduce the full blown policy and landlords will begin to take fright, if not downright flight.
Wherever rent control is introduced a fresh army of bureaucrats will start to enforce a rent ceiling on a large section of the property market, leaving the expensive end properties uncontrolled. The immediate effect is rents start to increase in the uncontrolled sector as landlords dispose of properties on the margin, fearing they may also come under control.
Landlords with lower to middle end properties, no longer able to charge a market rent, will start to feel the pinch: there’s no longer much surplus from letting, or any incentive to invest further, so what surplus there is will no longer be spent on maintaining the properties. Over time properties begin to fall into really bad states of repair, some to deliberately force out tenants, but all resulting in only the worst properties being offered for rent.
The protected tenant is sitting pretty, by dint of being in the right place at the right time, or through their “political connections”, the protected tenant gets a real bargain under rent control, and therefore never wants to move out.
But over time this bargain can turn into a nightmare as the areas under control start to deteriorate, because of the poorly maintained properties. The enjoyment the tenant derives from her dwelling space is ultimately reduced to a level which is commensurate with the rent being paid – in other words, a doss-house on an uneconomic rent.
This process can take years. But in the short-term the lucky ones are benefitting from the reduced rent, whilst their opposite numbers in the uncontrolled sector are paying through the nose. As someone once said to me, to live in Manhattan you have to be either extremely rich or extremely poor – there’s no in-between.
There’s no incentive for those living in the controlled sector to move out when their family moves away, and the space becomes too big for them, as they would if they were paying a market rent.
Rooms lie empty while other people remain homeless on the streets. Furthermore, employment mobility is stifled when those no longer contributing to the working economy stay put, whilst others who are productive have far longer commutes.
Surprisingly, homelessness increases under rent control, and the housing shortage gets worse, not better.
The argument that rent control is a temporary or short term measure to be brought in because the housing market is not in the economists’ terms “elastic”, because a shortage cannot be made up quickly – just does not wash.
Once Government gets involved with controlling rents, they become a political issue at elections and the longer rent control remains in place, the more difficult it is to remove it: inflation ensures that controlled rents fall further and further behind an economic level, until it becomes politically
impossible to remove the controls without a public outcry.
All these negatives will still have little or no impact on the advocates of rent control: as Allister Heath again says, “… you are met with a mixture of economic illiteracy, an antiquated, quasi-Victorian class hatred of landlords, generational strife and downright incomprehension.”
For those interested in an economist’s technical explanation of the non utility of rent control, I recommend you watch this excellent Khan Academy video: http://goo.gl/ZTcW2
Pressure from those who advocate rent control comes from people who see only its imagined benefits to one group of people in society. They fail to see, or simply don’t want to see for political ends, the devastating long-term consequences it brings for everyone, including the tenants who it is intended to benefit.
Blaming the buy-to-let landlords who risk their own capital to provide a valuable public service will not solve anything. It goes far beyond that. The housing shortage which is pushing up prices and rents is caused by restrictions on building and antiquated planning rules, among other things.
The politicians should be focussing their efforts on getting the housing market moving; encouraging more investment, both public and private, by providing incentives and relaxing planning restrictions where it is appropriate and sensible to do so. One attempt to rationalise the issues is the London Mayor’s recently published London Plan: http://www.london.gov.uk/priorities/planning/london-plan
Some moves in what would appear to be the right direction have already started, including the conversion of office space into residential without the need for planning consent is some locations. In the light of the decline of many high streets, this could perhaps be extended to retail shop conversions in secondary locations as well?
Building more council housing is not necessarily the answer: people want to be living in reasonably priced private housing, either to buy, or to rent.
Building more of these quickly should start to have the desired effect on prices.
The solution to the problem, as has been proved in practice, time and time again, is not one of political control and central planning; it all boils down to basic economic principles of supply and demand.
By Tom Entwistle
Editor of LandlordZONE®
This article by Tom Entwistle, editor of LandlordZONE first appeared in the August 2013 issue of Property Investor News www.property-investor-news.com
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