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Following a general election in which the only credible alternative government was pledging a form of rent control, and compulsory long-term tenancies, it would appear the rent control band wagon rolls on. The siren calls have not gone away.

Judging by a plethora of recent articles, and campaigning groups lobbying for government action, you would think that capping rents by government decree is the panacea to all tenant’s woes; control rents so that those greedy landlords stop lining their pockets and half the country’s housing problems would be solved overnight.

According to an article published in The Mirror newspaper this week, rent controls “would make tenants £1,546 richer a year”

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The article, which went on to tell tenants “how to tackle your landlord’s rent rise threats”, argues that landlords are taking advantage of the demand for private rented housing to hike rents.

Quoting tenants’ campaigning group Generation Rent, the article states that “The Consumer Prices Index, which measures how UK prices change on average, rose 38% between 1998-9 and today. If rents had risen at the same pace, the typical tenant would pay £98.28 a week in rent. But landlords have hiked rents more than twice as fast. So instead, the typical tenant pays £128 a week – £29.72 more.”

Well there is no doubt that rents have risen to high levels in some parts of the country, driven by high tenant demand and a shortage of suitable housing, and the latter needs to be rectified and fast, but that’s far from the case in much of the rest of the country.

Besides, it’s not landlords that hike rents, it’s market forces. Landlords generally charge what the market dictates, no more and more often than not, a lot less.

In fact many landlords, some of them struggling to make a profit from letting, even in an improving economy, would be more than happy to see rents held to the level of inflation. If that were so, over the last few years their rents would be higher than they are today. But could their tenants afford it?

Markets set rents to balance out supply and demand, and that’s a reality that can’t be ignored or manipulated. Eventually, if the market is left to correct itself, supply will increase to satisfy demand, albeit rather slowly, given the speed that new housing can be built. Cap rents and you prevent this happening.

Generation Rent’s argument is that controlling rents will “put more money into the economy and give people a better work-life balance.”

Well, forgive my ignorance if that’s the case, but it sounds like voodoo economics to me: how can taking money off Peter and giving it to Paul put more money into the economy? The only way to put more money into an economy is by creating more wealth or printing more money, and I think we’ve seen enough of the latter for now.

To paraphrase Santayana, those who don’t learn from the past are condemned to repeat it, and it would seem that applies to rent control policy as much as anything else, lessons often fail to transfer across generations.

Do we really want to return to 60s and 70s Britain, with all the strife that that entailed? I really do feel for tenants in some locations, where rents have reached a level which saps too high a proportion of their income. But rent control is not the answer, its economic illiteracy in my view.

A recent study by the Institute of Economic Affairs (IEA) concluded:

“Rent controls are probably the best researched and understood form of price control in economics. Their consequences are widely regarded as being extremely damaging and UK experience confirms this. In Britain, the period of rent controls between 1915 and 1989 was associated with the private rental sector collapsing from close to nine-tenths of the housing stock at the start of the 20th century to close to one-tenth by the late 1980s and early 1990s.

“When rents are held below market rates, outcomes can be expected to deteriorate over time. There is a substantial literature outlining the negative effects on the quality of rentable property, as well as substantial economic efficiency costs arising due to misallocation and lower labour mobility.”

The respected economic journal, The Economist says:

“All across America, rent control is dying out… What began as an emergency measure, to address housing shortages during the Second World War, now looks mostly like a way to prevent landlords realising the proper value of their properties. In recent years, California’s legislators have diluted restrictions governing how much private landlords may legally charge tenants. Illinois, together with several other states, has banned local governments from imposing rent control. Even in New York, where rent control is sacred in certain parts of the city, lawmakers came close last year to ending the regulated rents of millions of tenants.”

Even Shelter, one of the main proponents says:

“Capping rents could force landlords out of the market and make life harder for tenants if it is done too bluntly.”

Despite the fact that they call for “second generation” rent controls, or “rent control light”, it’s still rent control, with the same effects, the same expensive bureaucracy needed to enforce it, and the same work-arounds that crafty operators will always discover.

With inward immigration, increased longevity and single living, it’s the appetite for rental properties eating up available housing stock that’s causing house price and rent inflation. The only sensible solution is: (1) a concerted drive to build more housing, and (2) encouraging more landlords to enter the market, not deter them, as rent control, ever increasing bureaucracy and a landlord witch-hunt will do.

A good example of the long-term effects of rent control is given by one of the commentators on this article below:

When rent controls were tried in Sweden, it plunged the entire country into a housing shortage. The idea was that everybody everywhere could have a cheap rent. Rent Control in Stockholm http://shar.es/1twHCZ Towns and cities all across Sweden are now experiencing dire housing shortages. Stockholm is the worst where waits for rental accommodation now exceed 10 to 20 years. A single apartment can attract hundreds or even thousands of applicants!

The government is getting twitchy about the amount of outstanding debt in buy-to-let loans and is passing measures to cool the market, but they need to be careful: discouraging landlords will only exacerbate the problem.

There’s private cash ready and waiting to be invested in rental housing, as people release money from their pensions, but making it more difficult and less profitable for small-scale landlords to operate will simply turn off this tap of potential new investment in housing.

The government have initiated several schemes and have tweaked the planning rules to encourage more house building, but all this takes time. These schemes appear to be working as there are many large-scale build-to-rent and build-to-buy schemes under way, but they still pale in comparison to the amount of housing stock provided by private landlords, large and small.

Private provision should be encouraged by government and economic policy at all costs if the housing shortage is to be solved, not discouraged by rent control and other threats.

Tom Entwistle, Editor

References:

Rent control in the private rented sector (England) (House of Commons Library) http://researchbriefings.parliament.uk/ResearchBriefing/Summary/SN06760#fullreport

The Flaws in Rent Ceilings (IEA) https://www.landlordzone.co.uk/wp-content/uploads/2015/08/DP_Rent20ceilings.pdf

Rent control – the morning after (The Economist) www.economist.com/node/161526

Please Note: This Article is 4 years old. This increases the likelihood that some or all of it's content is now outdated.
©LandlordZONE® – legal content applies primarily to England and is not a definitive statement of the law, always seek professional advice.

6 COMMENTS

  1. Sorry, this is just a whinge of special pleading. The same arguments about supply and demand have been made for the last 30 years but rents have increased above inflation inexorably. What is different now is the politics. The owner occupation population is now in decline, the tenant population rising. Eventually politicians will go where the votes are or get booted out.

    • I thought that was to point of the article anyway, rents have gone up because demand for renting is high. Perhaps if the local councils get there hands in there pocket an build some social housing the probelem would be solved.
      Most of the increased demand is from tenants that would have been in council housing in the past.
      As for the politicians was it not the case thqat the party that voted for rent control at the election got booted out before they got in anyway

  2. Thank you for this excellent analysis of the pitfalls of Rent Control measures – I hope the RLA will present this to the various politicians who are proposing/opposing this legislation. It is incomprehensible to me why residential property investors should be treated any differently to other businesses. I am currently a provider of affordable accommodation, but increasingly demanding tenants (whose dissatisfaction with perfectly decent properties is fuelled by anti-Landlord propaganda) combined with the imposition of ever more costly regulations, Local Authority licensing schemes and so on, are taking their toll on returns. Even without rent control, my portfolio yield has fallen to 5%. This has led me to consider taking my properties out of the private rental sector and into holiday lets instead. It goes against all my principles to do this, but if the Government wants to put the squeeze on the PRS and at the same time give tenants the right to sublet rooms via AirB&B or such like, then what choice do I have?

  3. Rent Controls are silly.

    When rent controls were tried in Sweden, it plunged the entire country into a housing shortage. The idea was that everybody everywhere could have a cheap rent.

    Rent Control in Stockholm http://shar.es/1twHCZ

    Towns and cities all across Sweden are now experiencing dire housing shortages. Stockholm is the worst where waits for rental accommodation now exceed 10 to 20 years. A single apartment can attract hundreds or even thousands of applicants!

    • Is it a coincdents that a Swedish economist Assar Lindbeck said – In many cases rent control appears to be the most efficent technique presently known to destroy a city—except for bombing.

  4. Missing the point somewhat. Housing is more than a speculative commodity, it is a human right and it is someones life.

    Rent Control is in place in hundreds of cities, none of which have been destroyed. New York still has at least partial rent regulation.

    Even Adam Smith agreed that tenants need to be protected from exploitative situations. A landlord can increase rent above market rate for sitting tenant, knowing that the expense and stress of moving home will often outweigh the rise in price. Not fair and must be regulated.

    Your analysis re robbing Peter to pay Paul is way wide of the mark. Rent controls will have a marginal increase in consumption because of the economy of scale. If many tenants are wealthier they will spend more in the economy. If a handful of landlords are kept wealthy they are more likely to invest again in housing which is entirely unproductive. The economy is served better if tenants have disposable income.

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