More affordable rents in the short term are key to solving the housing crisis and NEF recently released a report calling for rent control policies in London. Since 2010, average private rents in London have risen more than three times as fast as average earnings. Currently, London has 2.4 million private renters, spending, on average, 43% of their household income on rent.

Most Londoners are now in favour of rent control but the debate around these policies is still highly polarised. Rent control will inevitably create winners and losers; many landlords for example would have their profits reduced by a policy like this and can therefore be expected to oppose such a move. This opposition could present both political and policy risks so we’re addressing some of the key concerns, busting some common myths about rent control policy, and suggesting options for managing and mitigating risks.

Do economists hate rent control?

In general, mainstream economists are sceptical about price controls — anything that sets a minimum or maximum price that can be charged for a good or service — as they distort prices away from what the free market would set. This can cause mismatches between supply and demand. But sometimes price controls are the best option: for example, the minimum wage is a form of price control that we accept in order to provide a minimum standard of living for workers and protect employees from exploitation. Evidence around rent controls is mixed which is largely because, when implemented badly, they can cause more problems than they fix. But that is also true of most policies. We need to take a clear look at the empirical evidence and consider rent control as part of the policy mix for making rents more affordable.

Will rent control actually reduce rents?

Rent controls have been shown time and again to reduce rents for tenants. In San Francisco, researchers found people in rent-controlled properties paid about £2.3 billion less (at aggregate) in rent than those not in rent-controlled properties between 1994 and 2016. Reduced rents in controlled properties have also been found in New York and Cambridge, Massachusetts, in the US as a result.

However, rent control has also been blamed with driving rents up in properties that are not subject to rent control, San Francisco is an example of where this has happened. The argument is that rent controls will lead to a reduced supply of rental housing (because of the opportunity for lower profits), which in turn will increase prices. Where there are many exemptions to rent control, it is possible that a two tier system forms:a regulated, low price sector alongside a rapidly escalating private market. NEF recommends minimising exemptions to avoid this type of two tier system and ensure that as many tenants as possible benefit from rent control.

What about the impact on landlords?

Rent controls will obviously reduce the profits landlords can make. Understandably, many landlords are not keen on any policy that decreases their profits, and the landlord lobby is not shy to speak up. However, landlords are likely to remain in the sector as long as London property investment is more attractive than alternative investments. This depends on each landlord’s business model. About a third (39%) of landlords have no debt on any of the properties they manage and therefore profit margins are sufficiently large to allow for rent reductions. Other landlords will be willing to accept a reduction in rental profit, as long as the capital asset (the home) will still be appreciating in value. Of course, not all landlords will be able to continue making a profit — particularly highly leveraged buy to let landlords (ie. landlords with large mortgages compared to the value of the property). But if such business models rely on charging excessive prices for a fundamental human right, we should not be propping them up. In the long run, there will have to be a shift towards landlords with larger property portfolios that are better able to absorb lower profit margins.

xxx

Will landlords just sell off their properties?

Rent controls do carry a risk of shrinking the amount of homes available for rent, reducing the overall supply in the renting sector (although landlords are likely to remain as long as London property investment is more attractive than alternative investments, see above). Part of the solution is to shrink demand for the PRS (private rented sector) by rapidly building more social housing so lower income tenants no longer need to rely on the PRS. There are also other policies which could be implemented to respond to a shrinking renting sector, and ameliorate any negative effects for tenants. This could involve the Government stepping in to buy the homes as landlords sell up, and converting them to social housing. Shelter has identified a need for over 3 million social homes, and buying private rented sector stock could turn unaffordable and insecure tenancies into affordable and secure homes. 

Wouldn’t it make more sense to just leave rent controls and focus on increasing the housing supply instead?

While building more homes will help in the long run to reduce house prices and rents, this is not a solution to the housing crisis in anything like the timescale the crisis demands. Houses are not traditional assets, and not subject to simplistic supply/​demand (number of new homes vs. prospective occupants with the cash to buy) dynamics. In the case of London, this can be seen in two ways:

  1. As London’s homes have become increasingly attractive as financial assets, the demand in the market has become increasingly unhealthy. For every prospective homeowner looking to buy a home in London, there are investors seeking homes as income yielding assets. Competition for homes — and house prices — is increased by this unhealthy demand, and renters and prospective homeowners suffer the consequences in terms of unaffordable house prices and rents. On the supply side, the market stands to profit more by responding to the unhealthy speculative’ type of demand, soluxury style homes are built at the expense of affordable ones. This is why, as London’s Deputy Mayor for housing often says, 80% of the new homes built in London are only affordable to 8% of the city’s population. A large portion of demand for homes to buy in London doesn’t primarily come from where housing demand should come from in a healthy system: people who want a home to live and thrive in. So simply building more homes, as opposed to homes which people can afford (e.g. social housing) — which has been the centre point of government policy for decades, while the housing crisis has worsened — doesn’t, at least in the short term, reduce house prices, because the supply of new homes is primarily responding to the level of unhealthy demand in the system.

  2. As NEF has shown, the deregulation of the mortgage sector, and the expansion of bank credit available to buy homes, has increased the amount of money which can be used to buy houses. Alongside a relatively fixed supply of housing, the expansion of new flows of credit for property has pushed up house prices dramatically since the 1980s. The drastic increase in house prices we have seen in recent decades is not determined primarily by simply supply demand dynamics, but in part by the financialisation of London’s housing market.

It is a false dichotomy to suggest that we must do one or the other: either build new affordable homes or control rents. Rent controls are not a panacea. In order to contribute to solving the housing crisis they will need to be accompanied by a large scale increase in social house building, as well as an expansion of the benefits system to ensure low income households can afford homes where they need to live. But controls are part of the solution, and by reducing rents they can — if implemented in a sustainable way — remove some of the unhealthy investor-led demand for London’s homes

What about housing quality?

Rent controls are often attributed with reducing incentives for landlords to maintain or improve their properties. But this can be ameliorated by designing controls in a way that means quality is taken into account (like the points system in the Netherlands).

Regardless of rent control design, landlords should be legally mandated to maintain properties to a minimum standard; progress has been made with regards to tenant safety recently, with the passage of the Homes fit for Human Habitation Act. But further policies to strengthen and enforce legal obligations can and should be introduced.

What will this all mean for house prices?

If more landlords sell off their properties as a result of rent control, this may have a dampening effect on house prices. Although dampening house prices would not be a bad thing for those that want to get on the housing ladder, it could be a concern if house prices deflate too quickly as it could increase overall indebtedness, reduce economy-wide spending and in extreme cases drive people into negative equity (i.e. this is when the value of a house is less than the remaining mortgage debt on it). This could be a particular issue in the short term for anyone looking to sell or remortgage their property, but depending on the scale and severity, a fall in house prices could also have more long term impacts on the wider economy. But rent controls have been brought in in many different countries and have not led to the complete collapse of the housing market.

And if rent controls are brought in gradually, indicators regarding house price and supply can be closely monitored and rent controls can be adjusted if adverse effects are being seen. This is why our proposal suggests that rent controls bring prices down gradually using stepped decreases (or at least prevent them from increasing further). As outlined above, as long as it is done sustainably, removing unhealthy demand from the system in terms of investors, controls are a step towards resolving London’s housing affordability crisis.

Given all this, we have assessed different types of rent control policies and made the case for an approach that puts economic and social justice at the heart of rent reform, while taking seriously the risks involved. The scale of the housing affordability crisis in London means that, despite these risks, carefully designed rent controls are becoming increasingly necessary to create a capital with a fairer, more affordable PRS.

Banner image: Pixabay