Looking beyond the populist message of rent control
Last week, London’s mayor, Sadiq Khan, renewed his calls for rent controls to be implemented in the capital. Currently, that’s not something under mayoral control, but Khan wants the Government to make it possible that he, or indeed his successors, can impose rent controls. As rents seem to be steadying or even declining in some parts of London right now, on the face of it, the calls appear political. They sound like an idea that would be immediately popular with tenants, and if the so-called ‘profiteering’ landlords lose out, well, that will serve them right for being ‘greedy’.
It’s simple enough to propose a populist idea, but housing is anything but simple. Despite the relatively high levels of rents in the city, many of those who have studied the issue of rent controls remain opposed to their use. Their effects are often detrimental to both the supply of housing and its quality. They can in fact end up hurting most those whose interests they are supposed to protect. That’s why whenever rent controls are proposed, those who truly understand how the market works – tenants, landlords, housing policy specialists and economists alike – argue against them.
Rent controls do not protect the vulnerable. They reduce the supply of housing because those who invest in rental properties have alternatives. They can invest in stocks, shares, unit trusts, land, artworks or wine. Meanwhile, those who need somewhere to live, still need somewhere to live. The last time the UK had rent controls, the supply of private sector rented properties fell massively.
Imposing rent controls distorts the market. It removes the critical link between the value of an asset and its earnings potential which in turn makes alternative investments more attractive. Those who stay in property rental will be willing to rent only to the most secure and financially stable tenants. This forces those with poorer credit ratings or lower incomes to depend upon the more expensive unregulated sector – or worse, to be faced with renting from unregistered landlords with substandard properties.
Rent controls reduce the ability and incentive for landlords to maintain high standards. It’s been shown in San Francisco, for example, that landlords operating under a rent control policy which protects existing tenants, neglect repairs in the hope that the tenant will choose to move on. And where rent controls limit the amounts that rents can rise when tenancies are renewed, initial rental values can be hiked up as ‘insurance’, reducing the affordability of housing.
Rent controls can also reduce desirable tenant mobility. For example, if controls were in place in the capital, but not beyond it, those living in a rent-controlled property would be more likely to stay put in a property that didn’t meet their needs than they would if the market was operating without restriction.
If Sadiq Khan gets his way and rent controls are imposed there will be a substantial shift in the buy-to-let market. Many properties will be sold to new owner occupiers, and although that could be seen as good news for those able to buy, many who rent do so because they can’t afford to buy or because renting suits their lifestyle better. Reducing the supply of rental properties isn’t good news for tenants in either of those situations.
I’ll go back to what I said earlier, housing isn’t simple. Rent controls won’t increase the housing supply and they won’t protect the interests of tenants. They sound like a no-brainer, but their consequences are often the opposite of what’s intended. This country has a housing crisis, I understand that, but the solution is more supply. It’s not rent control.