1. Governance
May 1, 2015

Are rent controls actually a good idea – or will they just make everything worse?

By Jonn Elledge

British? Then there’s a fairly good chance you quite fancy a spot of rent control.

Earlier this year, campaign group Generation Rent published a survey of over 1,000 people, showing that more than half (59 per cent) backed the idea; just 7 per cent were opposed. As one might expect, support was even higher (64 per cent) in London; as one probably wouldn’t, even a slim majority of homeowners were in favour.

Now the Labour Party has decided that this whole thing might have some votes in it. Its manifesto promises three-year contracts for tenants, during which landlords will be prevented from raising rents by more than the local market average. This is what is known as “second generation rent control” (which caps increase), rather than the full blooded version (which caps all rents), but it’s pandering to the same instinct, nonetheless.

Not everyone thinks much of the idea that there should be limits on rents, however. Those who don’t include the good people of the IEA, a think tank in favour of free market everything. Rent controls, the IEA has argued, would mean that “tenants face higher rents and restricted choice”. 

Which, let’s be honest, doesn’t sound great. 

The IEA is on the right though – was a major provider of intellectual support for the Thatcher government – so you’d expect that. Let’s hear from the other side.

In a New York Times article written in 2000, the left’s favourite economist Paul Krugman explained at great length how rent controls were the best way to offer tenants, er, higher rents and restricted choice. Capping rents, he wrote, would lead to “the absence of new apartment construction”, “bitter relations between tenants and landlords”, and “ever-more ingenious strategies to force tenants out”.

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So, everyone loves rent control except economists, who all hate it. Now there are often very good reasons to ignore economists, who are singlehandedly responsible for at least 84 per cent of the world’s problems – but nonetheless. 

It’s easy to fall down a rabbit hole of theory and counter theory, here, but let’s try to boil the argument down to its simplest form. So – why do people want rent controls, and why do economists hate them? (We’re talking about the full version of rent controls here – we’ll come onto Labour’s version later.)

Rent controls are great!

The case in favour of rent control is simple, powerful, and emotional: tenants are getting utterly screwed. Rents have risen faster than incomes, except in London, where they’ve risen much faster than incomes. As a result, by 2013, housing charity Shelter found that renting a home could swallow up 59 per cent of the average London family’s income. Good luck saving for a deposit on that.

Rents are rising for the same reason that house prices are rising – we’re trying to squeeze more and more households into basically the same number of homes. In that kind of market, all the power is with the landlord. If they want to hike rents by 30 per cent, and feel confident that they can get it on the open market, it means existing tenants have a choice of abandoning their home in the hope of somewhere cheaper or sucking it up.

In other words, the only thing that protects tenants from exploitation is the goodwill of their landlord.

There’s another element to this: the profile of people renting is changing. The private rental sector increasingly houses families too (1.5m, and growing), and while moving every six months when you’re 22 is a pain, doing it when you’ve got kids in school is potentially life-ruining.

So. Some form of rent control to give tenants a degree of stability is firmly back on the agenda.

Except maybe it shouldn’t be.

Rent controls are awful

Economists, as noted, are pretty much universal in their condemnation of rent control, damning it as a demand-led solution to a supply-led problem. The argument is that there simply isn’t enough housing in the places that we need it: by capping rents, all you do is make owning housing less profitable. That makes building housing less profitable, which, er, reduces building rates. 

Which would be bad. 

Rent control brings other problems too. It reduces the incentives to renovate or maintain a property (why bother if you can’t raise rents to pay for it?), so over time means property will start crumbling too. And, by reducing the amount of rental property coming onto the market, it splits renters into lucky insiders, who have rent controlled homes and cling to them at all costs, and beleaguered outsiders, who struggle to find a home and may end up paying a fortune to live in the unregulated sector. This, Krugman argued in that NYT piece from the year 2000, leads to a level of back stabbing and treachery among potential tenants on a positively Claudian scale.

Labour’s plan, of course, isn’t for rent controls in the strictest sense: instead, it’s to block landlords from pushing rents up by more than the market average. That might not have some of these downsides – might, in fact, not have much impact at all. As the IEA’s Kristian Niemietz notes 

If you live in an area where rents climb steeply, and if your reference rent is defined as the average rent of that area, then your rent will go up fast too

So – if average rents continue to soar, then “capped” rents will continue to soar too. And landlords might set higher rents in the first place to compensate for the fact their increases are capped. Which they can do, because – we may have mentioned this – all the bargaining power is with the landlord.

And yet…

That said, Labour’s plans would probably prevent some of the most Rachman-esque abuses that currently abound in the system, by preventing landlords from jacking prices up at will, and kicking tenants out if they complain.

And it’s worth remembering that Britain had rent control of some sort for decades – from 1915, all the way up to 1988. It’s hard to avoid noticing that, for large chunks of that period, Britain’s housing market worked just fine. Since we scrapped them, by contrast, it’s gone nuts, and we now have a national crisis on our hands. This is the exact opposite of what the theory says is supposed to happen. So it’s only natural to find yourself thinking, well, bring it on.

And yet, those economists. Economists agree on nothing, yet they are basically unanimous in their argument that rent control will make things worse. What worse would look like right now may be hard to imagine, but all the same: when Paul Krugman is on the same page as the IEA, you wonder if maybe it’s time to listen.

Those economists, I suspect, would argue that their belief that rent control led to shoddy housing had held true (think of the Rising Damp style bedsits of the 1970s). The reason it didn’t lead to a housing supply crisis is the same reason it’s never led to one in Germany – that, between 1915 and 1988, Britain was building a lot of homes. 

Which suggests that, ultimately, rent controls might be a bit of a sideshow. They might make things better for some; they might make things worse for others. But they won’t fix the housing crisis. 

The only thing that’ll do that is if the state takes action to ensure Britain is building a lot more homes. And if it does that – well, suddenly landlords won’t be able to put up rents by 30 per cent without finding that nobody wants their dingy flat any more. Maybe then, rent controls would look a tiny bit irrelevant. 

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