Rent controls: popular but wrong
5 January 2017
SUGGESTED
Economic Theory
Economic Theory
6 January 2017
Government and Institutions
Most readers of this column either already know this from first-hand experience, or they soon will: renting a flat is outrageously expensive in the UK. UK rents are the highest in Europe, both in absolute terms and relative to income levels. On average, British tenants pay between 40-50 per cent more than their counterparts in France, Germany, Belgium and the Netherlands. It is only if you count Monaco as a country that the UK gets pushed into second place, and even then, a number of Inner London boroughs have actually overtaken some Monaco boroughs.
So it is not surprising that rent controls are back on the political agenda. The re-introduction of rent controls is now official Labour Party and Green Party policy, and presumably, other parties will follow in due course. It is easy to see why: rent controls are extremely popular with the general public, and especially with younger voters. Among those aged 18 to 35, only 4.4 per cent oppose rent controls.
The case for rent controls is intuitively clear. Rents are too high, so the state should cap them – problem solved. Plenty of organisations have long been banging the drum for rent controls, and the latest organisation to jump on this crowded bandwagon is the Communication Workers Union (CWU), with a paper written by Alex Hilton.
In describing the problem, this paper is spot on. Britain’s exorbitant rents are a huge social and economic problem. They undermine the living standards of renters, and at the lower end of the income distribution, they have become the main cause of poverty and hardship. They cost taxpayers billions, because they make millions of people dependent on Housing Benefit. They undermine labour mobility, because the problem is most pronounced in those parts of the country which have the best jobs and earnings prospects, thus locking people out of these areas. They inflate consumer prices across the board, because the same factors which raise private rents also raise commercial rents in sectors like retail, and this then gets passed on to consumers. The list goes on.
So yes, the problems identified by the CWU are very real indeed. But rent controls are not the solution. Like most prices, rents are really messengers of scarcity. A high price is a messenger who tells consumers: “There is very little of this good, and lots of people want it, so use it as sparingly as you possibly can”. This messenger also tells (current and potential) suppliers: “There is very little of this good, and lots of people want it, so if you can possibly spare some of it, do it.”
A price control, then, is a form of shooting the messenger – except, it is worse than that. It means forcing the messenger to tell a lie. A controlled price is a messenger who, at gunpoint, is made to tell consumers: “Everything is fine! This good is available in great abundance. So don’t hold back, don’t be shy, please help yourself to some more.” His message to (current and potential) suppliers is: “This good is available in great abundance, so even if you can spare some of it, don’t bother too much.”
Rents are not an exception. The reason why rents, or rather, housing in general, is extremely expensive in the UK is simply that there is not enough of it. Relative to population size, the UK has the smallest housing stock in Western Europe. So of course housing is more expensive here than in places that have more of it.
Rent controls could not change that underlying reality. They would not add a single flat to the country’s housing stock. On the contrary: they would entice the ‘marginal landlord’ – the person for whom the decision to be a landlord is a borderline decision – to leave the market. Think of somebody who partitions off a part of their property, and converts it into a self-contained flat, but who would actually quite like to use that living space for themselves and/or their family – that person would no longer have the same incentives to do so. On the demand side, rent controls would also entice the ‘marginal tenant’ to either enter the market if they are not already participating, or to demand more of the product than they currently do. To cut a long story short, with rent controls, more people would chase fewer flats.
This is exactly what has happened wherever rent controls have been tried. One of the most consistent findings in economic research is that rent controls cause more problems than they solve. It is a similarly consistent finding that housing supply is mainly driven by the severity of land use restrictions. The UK has been building fewer new homes than other countries for decades, because the UK imposes exceptionally severe restrictions on housebuilding. For example, it is virtually impossible to build anything near London, Oxford, Cambridge, Bristol or Bath, because these cities are surrounded by greenbelts, where development is only permitted in exceptional circumstances (though it should be noted that ‘Greenbelt’ is a misnomer because a lot of greenbelt land is not remotely green). Add to that height restrictions and obstacles to densifying urban areas, and it is no wonder that levels of housebuilding are so low in the UK. This is the reason why the UK has such high housing costs, and easing those restrictions is the only way the problem can be solved. Silencing the messenger, or rather, forcing them to say that the problem does not exist, is not a solution.
The CWU paper is a missed opportunity. As far as the description of the problem is concerned, this paper is entirely correct, timely and relevant. The problem with the paper is that it plays to the gallery of trendy anti-capitalism. The author does not deny that there is a supply side problem, and he does not defend the British planning system. But he does not take this part of his argument any further, because he is too eager to signal his anti-market credentials. He wants to portray the problems in the UK rental markets as problems of ‘neo-liberal’ free market economics, yet if he went further in acknowledging the effect of planning constraints, he would not be able to sustain that favoured narrative. Government interventionism has caused Britain’s housing shortage in the first place, yet Hilton wants to make a case for yet more government interventionism. This leads him to disregard solutions that would work, and that have demonstrably worked in other places, in order to advocate a non-solution that is destined to fail, and that has demonstrably failed elsewhere.
This article will appear in the forthcoming edition of EA Magazine. For a more detailed response to the Communication Workers Union’s proposals and further references, see Niemietz, K (2016), The key to affordable housing. A critique of the Communication Workers Union’s rent control proposals. Current Controversies Paper No.53, London: Institute of Economic Affairs.
So it is not surprising that rent controls are back on the political agenda. The re-introduction of rent controls is now official Labour Party and Green Party policy, and presumably, other parties will follow in due course. It is easy to see why: rent controls are extremely popular with the general public, and especially with younger voters. Among those aged 18 to 35, only 4.4 per cent oppose rent controls.
The case for rent controls is intuitively clear. Rents are too high, so the state should cap them – problem solved. Plenty of organisations have long been banging the drum for rent controls, and the latest organisation to jump on this crowded bandwagon is the Communication Workers Union (CWU), with a paper written by Alex Hilton.
In describing the problem, this paper is spot on. Britain’s exorbitant rents are a huge social and economic problem. They undermine the living standards of renters, and at the lower end of the income distribution, they have become the main cause of poverty and hardship. They cost taxpayers billions, because they make millions of people dependent on Housing Benefit. They undermine labour mobility, because the problem is most pronounced in those parts of the country which have the best jobs and earnings prospects, thus locking people out of these areas. They inflate consumer prices across the board, because the same factors which raise private rents also raise commercial rents in sectors like retail, and this then gets passed on to consumers. The list goes on.
So yes, the problems identified by the CWU are very real indeed. But rent controls are not the solution. Like most prices, rents are really messengers of scarcity. A high price is a messenger who tells consumers: “There is very little of this good, and lots of people want it, so use it as sparingly as you possibly can”. This messenger also tells (current and potential) suppliers: “There is very little of this good, and lots of people want it, so if you can possibly spare some of it, do it.”
A price control, then, is a form of shooting the messenger – except, it is worse than that. It means forcing the messenger to tell a lie. A controlled price is a messenger who, at gunpoint, is made to tell consumers: “Everything is fine! This good is available in great abundance. So don’t hold back, don’t be shy, please help yourself to some more.” His message to (current and potential) suppliers is: “This good is available in great abundance, so even if you can spare some of it, don’t bother too much.”
Rents are not an exception. The reason why rents, or rather, housing in general, is extremely expensive in the UK is simply that there is not enough of it. Relative to population size, the UK has the smallest housing stock in Western Europe. So of course housing is more expensive here than in places that have more of it.
Rent controls could not change that underlying reality. They would not add a single flat to the country’s housing stock. On the contrary: they would entice the ‘marginal landlord’ – the person for whom the decision to be a landlord is a borderline decision – to leave the market. Think of somebody who partitions off a part of their property, and converts it into a self-contained flat, but who would actually quite like to use that living space for themselves and/or their family – that person would no longer have the same incentives to do so. On the demand side, rent controls would also entice the ‘marginal tenant’ to either enter the market if they are not already participating, or to demand more of the product than they currently do. To cut a long story short, with rent controls, more people would chase fewer flats.
This is exactly what has happened wherever rent controls have been tried. One of the most consistent findings in economic research is that rent controls cause more problems than they solve. It is a similarly consistent finding that housing supply is mainly driven by the severity of land use restrictions. The UK has been building fewer new homes than other countries for decades, because the UK imposes exceptionally severe restrictions on housebuilding. For example, it is virtually impossible to build anything near London, Oxford, Cambridge, Bristol or Bath, because these cities are surrounded by greenbelts, where development is only permitted in exceptional circumstances (though it should be noted that ‘Greenbelt’ is a misnomer because a lot of greenbelt land is not remotely green). Add to that height restrictions and obstacles to densifying urban areas, and it is no wonder that levels of housebuilding are so low in the UK. This is the reason why the UK has such high housing costs, and easing those restrictions is the only way the problem can be solved. Silencing the messenger, or rather, forcing them to say that the problem does not exist, is not a solution.
The CWU paper is a missed opportunity. As far as the description of the problem is concerned, this paper is entirely correct, timely and relevant. The problem with the paper is that it plays to the gallery of trendy anti-capitalism. The author does not deny that there is a supply side problem, and he does not defend the British planning system. But he does not take this part of his argument any further, because he is too eager to signal his anti-market credentials. He wants to portray the problems in the UK rental markets as problems of ‘neo-liberal’ free market economics, yet if he went further in acknowledging the effect of planning constraints, he would not be able to sustain that favoured narrative. Government interventionism has caused Britain’s housing shortage in the first place, yet Hilton wants to make a case for yet more government interventionism. This leads him to disregard solutions that would work, and that have demonstrably worked in other places, in order to advocate a non-solution that is destined to fail, and that has demonstrably failed elsewhere.
This article will appear in the forthcoming edition of EA Magazine. For a more detailed response to the Communication Workers Union’s proposals and further references, see Niemietz, K (2016), The key to affordable housing. A critique of the Communication Workers Union’s rent control proposals. Current Controversies Paper No.53, London: Institute of Economic Affairs.
3 thoughts on “Rent controls: popular but wrong”
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While the “price signal” argument here is correct analysis, there is one issue that is overlooked here. In response to the financial crisis, we re-introduced caps on mortgages, which put a restriction on borrowing for those who wanted to be owner-occupiers, but did not also re-introduce rent controls, hence we now have the situation that someone who would choose to buy is deemed to not be able to afford it, but they are deemed to be able to afford the rent.
The issue that needs sorting out relates to fair access to land for housing, which we each should have as our birthright (otherwise we are arguably born into “rent slavery” if we are unfortunate enough not to be born into wealth).
There are two factors that I would say need addressing. First is the unearned incomes (economic rent) that accrue to the already wealthy because they own desirable land in an area of economic success created not by them, but by society at large (people, businesses and governments). This should be taxed as is recognised by many, in the form of a Land Value Tax (or as I prefer to call it, a Location Value Tax).
The other is fair access to land on which development is permitted. The housing supply market is a stitch-up. We need to change how land is released for development so that there is fair access allowing an improved response to the market signal of high rents/location values.
While a transition to a meaningful LVT and the Citizen’s Dividend that should go with it, there are things we could do now.
We could, for example, eliminate the planning gain windfall and developer stitch-up by taking democratic control of land purchase and master-planning at the local authority level. Use compulsory purchase at a little above agricultural rates when there is a change of use, and then either: auction off the land to a developer, or do the master planning, and then sell off plots to both developers and those wanting to build their own homes.
Economists are quite rightly against rent controls because they act as an implicit subsidy to tenants, leading to misallocation and over consumption of immovable property.
However, most economists then fail to apply that logic to freeholders, who unlike tenants pay no rent(as tax) for their right to exclude others from valuable locations. Thus, they are in receipt of an implicit State subsidy worth a market distorting £200bn per year.
Which not only causes vacancy, under occupation and a widening North/South divide, but is then capitalised into rental incomes, which in turn raise selling prices by over 200%.
Without a 100% LVT, markets cannot be fair and efficient, and cannot therefore match supply with demand. Until we do have such markets, no one can possibly say whether or not the UK has a shortage of housing. Its just bad, dishonest economics to say we have.
It’s also bad economics to mix up selling prices/rents with costs. As location values makes up the majority of rents/selling prices, it is pure transfer payment, not a cost in terms of labour/capital expenditure. Therefore building more homes in order to reduce selling prices will actually increase costs rather than reduce them, even if the aim of reducing transfer payments is a noble one.
By dealing with the transfer payment at source, a 100% LVT would not only be far more effective in lowering selling prices and increasing the discretionary incomes of typical UK households, but by rationalising our existing housing stock it would lower costs rather than increasing them.
Affordability issues in the UK are due to the concentrated nature of locations values in London/SE, relative to the distribution of income and capital throughout the UK as a whole and how they are taxed. It has nothing to do with lack of supply, planning, immigration or any other such nonsense.
Price floors and ceilings are one the basic first things one learns in economics lessons. On my degree economics only took up a few modules but even then it was enough time to cover the consequences of these interventions.
I would have more respect for rent control supporters if they came out and said we support the policy however, there are consequences such as shortages. Likewise, if they said raising minimum wage creates more unemployment and hurts small businesses but it may benefit those who keep their minimum wage jobs. But we are not dealing with people like this, nor are any of the major media outlets going to explain these fairly digestable economic processes – the pros and cons, so that people can weigh these consequences and make an informed decision.
No, the people we are dealing with will flat out deny any problems are caused. Their supporters will buy that line while others may be swayed due the paucity of coverage on offer. The BBC preferred to dedicate more time to the ‘can Corbyn inspire more people’ narrative and had a floundering economic illiterate pay lip service to the problems created by rent control.
Your article was very good but for the most part you are preaching to the converted and sadly, will not win others over this way. I understand that it is easier to market pie in the sky guff on emotion, but it also worries me that organisations like the IEA (amongst others) who are so in favour of the concepts of free markets, enterprise, innovation etc. are so bad at marketing them.
IEA are by no means the worst, by the way. The Adam Smith Institute refer themselves as neo-liberals – marketing suicide!