We are the 6.6%! Why everybody is wrong on rent controls
5 August 2016
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The Communication Workers Union (CWU) has recently published the paper ‘How to repair the housing market quickly – A crisis response’, which makes the case for a (re-)introduction of rent controls. It includes a Survation poll which shows that there is indeed overwhelming popular support for such a policy: Only 6.6% of the public are opposed to rent controls (p. 88).
While this is already a very low number, bear in mind that it is an idiosyncrasy of opinion surveys that any option that can be picked will be picked by some people, no matter how unpopular or absurd. The blogger Scott Alexander of Slate Star Codex calls this phenomenon the ‘Lizardman’s Constant’, which he puts in the vicinity of 4%. The basis for this is a US survey which asked people whether they believed that the world was run by intelligent lizards from outer space disguised as humans. 4% replied yes. Once we subtract the Lizardman’s Constant, there is virtually nobody left who opposes rent controls.
I am therefore glad that the author of the CWU paper, Alexander Hilton, has reserved 10 pages in his paper for a counterpoint written by myself, an anti-rent-control digression within a pro-rent-control paper. He did not have to do this: preaching to the converted is not such a bad strategy when almost everybody is a convert already. So this is rather as if a Church in a fiercely religious region reserved a ten-minute slot during mass for a Satanist to present their alternative case.
While Hilton and I are worlds apart in our policy recommendations, we agree on the diagnosis. Hilton does not exaggerate the scale of the problem. He is right, of course, that “renters are paying large proportions of their incomes on rents, undermining their quality of life and their ability to save.” To be precise, British tenants are paying the highest rents in Europe, both in absolute terms and as a proportion of their incomes. Average rents in the UK are between 40-50% higher than average rents in the Netherlands, Belgium, Germany and France. They also exceed those of Luxembourg and Switzerland, two countries that are vastly richer than Britain. In most of Europe, rent payments account for between a fifth and a third of tenants’ incomes; in the UK, they account for around 40%.
It is only when Monaco is included in the rent level rankings that the UK is pushed into second place, although parts of London are in Monaco’s league. South Kensington, Marylebone, Belgravia and Chelsea have overtaken some Monegasque boroughs; Mayfair is only marginally less expensive than Monaco’s famous Monte Carlo district, and Knightsbridge has actually overtaken Monte Carlo.
Add to this the fact that homeownership rates in the UK have recently fallen to their lowest level in thirty years, so that renting is no longer the stopgap solution it once was, but a permanent tenure for a large and growing proportion of the population. This makes the renewed interest in, and popularity of rent controls wholly unsurprising. But could they be a solution? Hilton claims that “there are commonly repeated myths – unfounded in evidence – that are used to attack rent control. These are principally that “Rent Control restricts housing supply”, “Rent Control disincentivises landlords from maintaining properties properly” and “Rent Control creates an opportunity for corruption in tenancy”.
Let’s have a look at how ‘unfounded in evidence’ these arguments are. Perhaps the most comprehensive review of the economic evidence on the subject is the paper ‘Rent Control: Do Economists Agree?’ by Blair Jenkins, which discusses over sixty different studies on various forms of rent control. She concludes:
“[E]conomic research quite consistently and predominantly frowns on rent control. My findings cover both theoretical and empirical research on many dimensions of the issue, including housing availability, maintenance and housing quality, rental rates, political and administrative costs, and redistribution […] “[T]he economics profession has reached a rare consensus: Rent control creates many more problems than it solves”.
This puts Hilton’s following statement into context: “Over the past couple of years I have spent time with several LSE economists who are studying the housing market and the PRS [private rental sector] in particular, and despite the plentiful availability of evidence, even they are ideologically incapable of diverging from an instinctive neoliberal stance on Rent Control. And I mean neoliberal in the sense that they seem at one with Friedman and Hayek on the matter.”
It is not ‘despite the plentiful availability of evidence’, but precisely because of it, that these economists oppose rent controls. And while it is correct that Friedman and Hayek were opposed to rent controls (which, for Hilton, seems to be enough of a proof that rent controls must be A Good Thing), they were not exactly alone in this. Let’s hear it from that arch-Hayekian, Paul Krugman:
“The analysis of rent control is among the best-understood issues in all of economics, and – among economists, anyway — one of the least controversial. In 1992 a poll of the American Economic Association found 93 percent of its members agreeing that ”a ceiling on rents reduces the quality and quantity of housing.” […] Bitter relations between tenants and landlords, with an arms race between ever-more ingenious strategies to force tenants out – what yesterday’s article oddly described as ”free-market horror stories” – and constantly proliferating regulations designed to block those strategies? Predictable. […] [T]he pathologies of San Francisco’s housing market are right out of the textbook, that they are exactly what supply-and-demand analysis predicts. But people literally don’t want to know. A few months ago, when a San Francisco official proposed a study of the city’s housing crisis, there was a firestorm of opposition from tenant-advocacy groups. They argued that even to study the situation was a step on the road to ending rent control – and they may well have been right, because studying the issue might lead to a recognition of the obvious.”
The basic problem is that rents, like other prices, are messengers. A high price of X tells us that X is in short supply (relative to demand), and a low price of X tells us that there is plenty of X. A price ceiling is, however, worse than just shooting the messenger. It means forcing the messenger to tell a lie. A capped rent is a messenger, who, at gunpoint, informs us that everything is fine, and that rental properties are available in great abundance. But while we can force the messenger to say anything we want to hear, the trouble is that that does not make it any truer. The shortage is still there. It will just manifest itself in other ways.
Hilton mentions Assar Lindbeck’s famous dictum (“next to bombing, rent control seems in many cases to be the most efficient technique so far known for destroying cities”), but dismisses it, claiming that “Germans, who have experienced both intensive bombing and rent control, are universally more favourable towards rent control.”
That is not true. I happen to be German, and I actually prefer bombing, for the simple reason that bombing raids end eventually – they do not create a political constituency that has an interest in sustaining them forever. A system of rent controls, in contrast, becomes politically self-perpetuating once it is in place, because no matter how catastrophic its overall effects, there is always somebody who benefits. You cannot ‘experiment a little’ with rent controls. You adopt them, or you don’t. And we shouldn’t.
We should instead view the private rental sector as a downstream market. Whatever nasty things it may wash up, these originate much further upstream, namely in the land and housing markets. Sorting out the upstream market will solve the problems in the private rental sector that Hilton correctly describes, and as an added bonus, it will also sort out the problem in the owner-occupier market, the social rental sector and the market for commercial property. That is the way to go. Burning your Econ 101 textbook is not.
Dr Kristian Niemietz is the IEA’s Head of Health and Welfare. His full response to Alexander Hilton’s proposal can be read here on pp. 45-54.
His IEA briefing on the UK’s housing crisis can be read here.
While this is already a very low number, bear in mind that it is an idiosyncrasy of opinion surveys that any option that can be picked will be picked by some people, no matter how unpopular or absurd. The blogger Scott Alexander of Slate Star Codex calls this phenomenon the ‘Lizardman’s Constant’, which he puts in the vicinity of 4%. The basis for this is a US survey which asked people whether they believed that the world was run by intelligent lizards from outer space disguised as humans. 4% replied yes. Once we subtract the Lizardman’s Constant, there is virtually nobody left who opposes rent controls.
I am therefore glad that the author of the CWU paper, Alexander Hilton, has reserved 10 pages in his paper for a counterpoint written by myself, an anti-rent-control digression within a pro-rent-control paper. He did not have to do this: preaching to the converted is not such a bad strategy when almost everybody is a convert already. So this is rather as if a Church in a fiercely religious region reserved a ten-minute slot during mass for a Satanist to present their alternative case.
While Hilton and I are worlds apart in our policy recommendations, we agree on the diagnosis. Hilton does not exaggerate the scale of the problem. He is right, of course, that “renters are paying large proportions of their incomes on rents, undermining their quality of life and their ability to save.” To be precise, British tenants are paying the highest rents in Europe, both in absolute terms and as a proportion of their incomes. Average rents in the UK are between 40-50% higher than average rents in the Netherlands, Belgium, Germany and France. They also exceed those of Luxembourg and Switzerland, two countries that are vastly richer than Britain. In most of Europe, rent payments account for between a fifth and a third of tenants’ incomes; in the UK, they account for around 40%.
It is only when Monaco is included in the rent level rankings that the UK is pushed into second place, although parts of London are in Monaco’s league. South Kensington, Marylebone, Belgravia and Chelsea have overtaken some Monegasque boroughs; Mayfair is only marginally less expensive than Monaco’s famous Monte Carlo district, and Knightsbridge has actually overtaken Monte Carlo.
Add to this the fact that homeownership rates in the UK have recently fallen to their lowest level in thirty years, so that renting is no longer the stopgap solution it once was, but a permanent tenure for a large and growing proportion of the population. This makes the renewed interest in, and popularity of rent controls wholly unsurprising. But could they be a solution? Hilton claims that “there are commonly repeated myths – unfounded in evidence – that are used to attack rent control. These are principally that “Rent Control restricts housing supply”, “Rent Control disincentivises landlords from maintaining properties properly” and “Rent Control creates an opportunity for corruption in tenancy”.
Let’s have a look at how ‘unfounded in evidence’ these arguments are. Perhaps the most comprehensive review of the economic evidence on the subject is the paper ‘Rent Control: Do Economists Agree?’ by Blair Jenkins, which discusses over sixty different studies on various forms of rent control. She concludes:
“[E]conomic research quite consistently and predominantly frowns on rent control. My findings cover both theoretical and empirical research on many dimensions of the issue, including housing availability, maintenance and housing quality, rental rates, political and administrative costs, and redistribution […] “[T]he economics profession has reached a rare consensus: Rent control creates many more problems than it solves”.
This puts Hilton’s following statement into context: “Over the past couple of years I have spent time with several LSE economists who are studying the housing market and the PRS [private rental sector] in particular, and despite the plentiful availability of evidence, even they are ideologically incapable of diverging from an instinctive neoliberal stance on Rent Control. And I mean neoliberal in the sense that they seem at one with Friedman and Hayek on the matter.”
It is not ‘despite the plentiful availability of evidence’, but precisely because of it, that these economists oppose rent controls. And while it is correct that Friedman and Hayek were opposed to rent controls (which, for Hilton, seems to be enough of a proof that rent controls must be A Good Thing), they were not exactly alone in this. Let’s hear it from that arch-Hayekian, Paul Krugman:
“The analysis of rent control is among the best-understood issues in all of economics, and – among economists, anyway — one of the least controversial. In 1992 a poll of the American Economic Association found 93 percent of its members agreeing that ”a ceiling on rents reduces the quality and quantity of housing.” […] Bitter relations between tenants and landlords, with an arms race between ever-more ingenious strategies to force tenants out – what yesterday’s article oddly described as ”free-market horror stories” – and constantly proliferating regulations designed to block those strategies? Predictable. […] [T]he pathologies of San Francisco’s housing market are right out of the textbook, that they are exactly what supply-and-demand analysis predicts. But people literally don’t want to know. A few months ago, when a San Francisco official proposed a study of the city’s housing crisis, there was a firestorm of opposition from tenant-advocacy groups. They argued that even to study the situation was a step on the road to ending rent control – and they may well have been right, because studying the issue might lead to a recognition of the obvious.”
The basic problem is that rents, like other prices, are messengers. A high price of X tells us that X is in short supply (relative to demand), and a low price of X tells us that there is plenty of X. A price ceiling is, however, worse than just shooting the messenger. It means forcing the messenger to tell a lie. A capped rent is a messenger, who, at gunpoint, informs us that everything is fine, and that rental properties are available in great abundance. But while we can force the messenger to say anything we want to hear, the trouble is that that does not make it any truer. The shortage is still there. It will just manifest itself in other ways.
Hilton mentions Assar Lindbeck’s famous dictum (“next to bombing, rent control seems in many cases to be the most efficient technique so far known for destroying cities”), but dismisses it, claiming that “Germans, who have experienced both intensive bombing and rent control, are universally more favourable towards rent control.”
That is not true. I happen to be German, and I actually prefer bombing, for the simple reason that bombing raids end eventually – they do not create a political constituency that has an interest in sustaining them forever. A system of rent controls, in contrast, becomes politically self-perpetuating once it is in place, because no matter how catastrophic its overall effects, there is always somebody who benefits. You cannot ‘experiment a little’ with rent controls. You adopt them, or you don’t. And we shouldn’t.
We should instead view the private rental sector as a downstream market. Whatever nasty things it may wash up, these originate much further upstream, namely in the land and housing markets. Sorting out the upstream market will solve the problems in the private rental sector that Hilton correctly describes, and as an added bonus, it will also sort out the problem in the owner-occupier market, the social rental sector and the market for commercial property. That is the way to go. Burning your Econ 101 textbook is not.
Dr Kristian Niemietz is the IEA’s Head of Health and Welfare. His full response to Alexander Hilton’s proposal can be read here on pp. 45-54.
His IEA briefing on the UK’s housing crisis can be read here.
11 thoughts on “We are the 6.6%! Why everybody is wrong on rent controls”
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Kris – As you are German (although I rather suspect that you are gradually becoming as – or more – British as you are German!) perhaps you could tell us a little more about the German rental market. My understanding is that newly available tenancy prices are not controlled in Germany but once you have taken out a tenancy the landlord is only at liberty to raise the rent at the same rate as new tenancy prices are rising – thus protecting tenants from arbitrary rent increases but allowing landlords till to charge market rates. Is this correct?
Kristian Niemietz,
Alex Hilton and other Generation Rent proponents are simply wrong. All of the things that they claim are “are commonly repeated myths – unfounded in evidence – that are used to attack rent control.” are visible in Sweden, Denmark and The Netherlands if you register for their housing queue systems, log in and search for actual advertisements, you will see major issues.
Sweden has a goverment centred housing system. Rents are controlled and any gap or shortfall that results in rental housing production is expected to be picked up and filled in by The State. There are over 300 public housing companies run by local councils in Sweden and public housing is non-targeted universal and open to all regardless of income level. All rent increases are controlled through negotiations each year between landlord and tenant unions (so its not a price freeze) and are linked to the features of the apartment such as size, number of rooms, presence of lifts and balcony and so forth.
What are the results of decades of this policy?
85% of municipalities report a rental housing shortage, and people register for housing queues. One can expect to wait around 10 or more years in the largest cities before getting a rental apartment contract. A vacant apartment can have hundreds or thousands of people vying for it.
If you want the evidence, it is right here:
Rent Control in Stockholm
by Alex Tabarrok
http://marginalrevolution.com/marginalrevolution/2015/07/rent-control.html
Boverket, the Swedish Government’s national housing agency estimates that around 700 000 new homes need to be built in the next decade. At say $400 000 per dwelling (construction costs in Sweden are insane), that works out to be 280 BILLION DOLLARS or 48% of the entire country’s annual GDP.
You can see what the problem is already!
Newer rent control proposals are more sophisticated, proposing a free price on rent but then major taxation if rents exceed a certain level. But that completely misses an important point – when you tax something you get less of it because investment money can go elsewhere and get higher return. Building and selling owner-occupied places or AirBnB, for example. People will simply sell to the tenant, taking the apartment out of the rental pool, and new investors who are not compelled to invest in rental housing will take their money elsewhere.
Not to mention that “tax over X” schemes aren’t really a control – price will go up anyway under that proposal, so the central aim – to keep rents low – will be lost, and if land development rules are still in place, then attempts to build new dwellings by The State will also be stymied.
If people want to solve housing, this is what they can do:
1. Land Value Tax, super efficient and loved by economists everywhere
2. Allow smaller apartments to be built
3. Targeted subsidies for apartments that are too small for banks to be interested in financing (funded by land tax)
4. Do something about land development regulations – more density, more height, allowed in more places.
Housing is not a new issue, at the turn of last century industrial progress brought huge number of people to the city. The approach then was massive expansion of the city, for example, the massive 1855 expansion of Barcelona and its Grid Plan. It needs to be the same now.
HJ: That was the situation until very recently. They have since brought in hard rent controls, but they have thus far been non-binding in practice:
http://www.iea.org.uk/blog/qtwtain-havent-rent-controls-worked-in-germany
Rent Controls: Thanks for the info, will check.
And just recently, there is a proposal to tighten the German rent control because “According to the city state’s mayor, Michael Muller (SPD), rent control in its current form isn’t working as planned and therefore needs to be reformed.”
What a surprise.
Proposals to tighten Germany’s rent control laws (DE)
http://europe-re.com/p/62605
Here are news articles from Sweden about black contracts, in Swedish so perhaps this is why there isn’t so much notice by the international media, but it is all out there. Google Translate to read it.
Illegal rentals thrive in Stockholm flat crunch
“The black market for first-hand rental contracts in Stockholm is alive and well as Swedes desperate for a place to live won’t report illegal sales to the police, an investigation has revealed.”
http://www.thelocal.se/20130506/47742
Contemplating Black contract in search of accommodation
“They can not afford a condominium and miss opportunities to get a tenancy so now considering Karin Asp and his partner Anders buying a black leases to avoid removable carousel. – It is terrible that it has gone so far.”
http://www.svt.se/nyheter/inrikes/overvager-svartkontrakt-i-jakten-pa-boende
“Anything between 15,000 and 25,000 crowns for a black contract”
http://www.svt.se/nyheter/lokalt/sormland/sa-har-jobbar-formedlare-av-svarta-bostader
“The black market may be the only way to a home art straight for many. Esklistunabon Amjad Shammaa from Syria, who himself lives legally, talks about the hidden and yet so easily accessible black market.”
Indeed SVT has a whole section dedicated on their website to the rent control and development controls induced housing shortage in Sweden, which can be found here: http://www.svt.se/nyheter/inrikes/6468381 (in Swedish)
It is obvious that rent control proponents have either not done thorough enough research, or perhaps found out the negatives and simply ignored it.
In many ways, rents controls are even worse than you suggest because they encourage people who can get to the front of the queue to use more space and give them no incentive at all to economise on space thus exacerbating the problem. The cause a move down the demand curve in terms of q and a move up the supply curve thus exacerbating the shortage as a result of both demand and supply changes.
Instead of rent controls, which are obviously a second best solution, wouldn’t it be better if we simply leveled the playing field for all participants? That is renters, landlords and owner occupiers all paid land rent. In the case of landlords and owner occupiers in lieu of other taxes. Not only would this allow the market to allocate resources at optimal efficiency, but would reduce selling prices(by over half) and excessive inequality(increasing the disposable income for typical households by over £10K). Making housing much more affordable and negating the need to wastefully build any extra new housing. Sorted.
“To be precise, British tenants are paying the highest rents in Europe, both in absolute terms and as a proportion of their incomes. Average rents in the UK are between 40-50% higher than average rents in the Netherlands, Belgium, Germany and France. ”
“proportion of their incomes.” that’s not a very good measure. It needs to be as a ratio of discretionary incomes, after taxes and major expenses like health spending is taken into account.
Furthermore, London is by far the biggest city in Europe, that will attract more global demand, pay higher wages and have a greater proportion of people renting. Pushing up the “average”.
“average” rents tell us nothing useful about the relative levels of affordability between Countries. Median rents would be far better, although not perfect.
And, its very likely housing benefit in the UK artificially pushes up average rents.
How does levels of social housing/rent controls affect average rents?
In other words, simply comparing average rents is highly unlikely give any meaning conclusions.
Just one quick question. If rents are higher in the UK, then it must be true that household discretionary incomes must also be lower. We would therefore expect to have seen an exiguous of people migrating from the UK to work in places like France, Germany and indeed Poland. But the opposite is true isn’t?
“Average rents in the UK are between 40-50% higher than average rents in the Netherlands, Belgium, Germany and France.”
Perhaps not a valid comparison because I think all those places mentioned, bar the UK, have some form of Rent Control.
Interestingly, rent controls were a major factor in driving the private rental sector from 90% of the market to under 10% in a few decades. A very crude way of relegating a very poor value housing tenure to students and young people without children, for whom the insecurity and poor conditions are not as much of a problem as families, but nonetheless it worked. Rent controls abolished and we now have a much bigger proportion of people living in poor quality privately rented homes that the government pays part or all of the rent for 25%. The worst of both worlds. ‘You can get better, but you can’t pay more’ (except Monaco). Thank goodness my family escaped the PRS