What Owen Jones gets wrong (part 1 of 2: Landlords and rent controls)
12 September 2014
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Energy and Environment
11 September 2014
Regulation
Labour Market
Concern about ‘low pay’ and the ‘cost of living’ are two sides of the same coin. Pay is deemed ‘low’ when the prices of things we need to buy are rising substantially relative to our incomes. That’s what the ‘cost of living’ debate is all about. It’s a recognition that the cost of essentials like housing, energy, childcare and food in the UK are too high and that pay growth is subdued. In simple terms, finding a solution to this crisis requires at least one of two things to happen: wages to increase in a sustainable way or prices of essentials to fall.
In his new book, The Establishment: And How They Get Away With It, Owen Jones concerns himself at various points with this theme (see my colleague Chris Snowdon’s extensive review). Indeed, it is a popular theme among many on the political left and underpins the well-known ‘Living Wage’ campaign. The idea that somebody who works full time should have the resources to live a comfortable life and not be reliant on substantial state hand-outs is a powerful one, and in truth an aspiration which people across the political spectrum would share. Jones rightly identifies that at the moment the taxpayer, in the form of tax credits and housing benefit, is stepping in and having to top up people’s incomes and hence living standards. He’s angry about it too. Indeed, at times he could be mistaken for a true fiscal conservative.
But if one is really serious about durable solutions to this problem, if one wants to think through policies that can improve the living standards of the working poor whilst reducing government welfare spending, then it is crucial that your analysis of what has caused low wages and high prices in the first place is correct. Otherwise your policy ideas tend to be misguided. It’s in this regard that Jones’ thoughts go astray.
For Jones the story is simple. Unscrupulous landlords and stingy employers are the cause of high government spending on housing benefit and tax credits. Landlords put up rents, safe in the knowledge that the state will step in to subsidise tenancies through increased housing benefit payments. Employers meanwhile are able to offer lower pay settlements because they know that their employees’ earnings will be topped up by the state.
If the problem is the behaviour of landlords or employers, as Jones believes, then it is obvious to him that any solutions should seek to curb their behaviour. Landlords and Scrooge-like employers are sucking off the public teat, so the state should make sure that taxpayers are not being exploited. The government can do this by imposing rent controls and forcing firms to pay a ‘Living Wage’ to avoid us being taken for a ride.
His train of thought can therefore be distilled into two premises: first, that the cause of high welfare spending is exploitative rents and poverty pay; second, that price and wage controls can be implemented painlessly to deal with these problems and improve living standards.
Let’s take landlords and rent first. Is Jones right? Is housing benefit spending high because of greedy landlords? And can rent controls be the solution to the problem of high rents?
The answer to both of these questions is ‘not really’. Rent levels are very high, and housing benefit no doubt helps to stoke demand to a certain extent, in turn raising market rents further. But the high housing benefit bill and high rent levels are themselves both a function of ever-rising house prices. Over the past forty years, the UK’s house price index has increased by over 4000 per cent. The overwhelming evidence suggests that high house prices have been caused primarily by an inelastic supply response, a failure for new homes to be built in the face of rising demand. And the overwhelming reason for this, outlined in extensive academic literature, is the UK’s planning laws, particularly green-belt restrictions around economically prosperous cities such as London, Oxford and Cambridge.
Whilst it’s true that landlords do charge high rents, these high rents occur because of policies which ration land in areas where people want to live. To claim otherwise, and to suggest that landlords are ‘greedy’ would require one to show that landlords continuously increase rents more quickly than economic fundamentals would allow.
There is no evidence for this assertion. Over the past six years the Office for National Statistics’ rental index has increased by just under 10 per cent, less than both its house price index and CPI inflation (see Figure 1 from Chu 2014). The ONS’s index covers all tenancies, rather than just new ones, which means it is not as helpful in analysing dynamics in the market. But what it does show is that landlords, on average, have not been quick to hike rents even though house prices have been increasing significantly.
Figure 1: House prices and ONS rental index – January 2012 = 100.
Even rents in new tenancies, which show stronger rent inflation (see Figure 2 from Chu 2014 – a 6.4 per cent increase in June 2014 compared with 2013, and the 11.2 per cent increase in London over the same period), are not out of kilter with house price movements being experienced in both London and the country more broadly. They certainly could not be considered evidence of ‘greed’ given the fundamentals of the market.
Figure 2: HomeLet Index, CPI and ONS rental index. January 2008 = 100.
The idea then that there are swathes of greedy landlords exploiting tenants and the state with huge unjustified hikes in rent levels is therefore just not true. What’s more, Jones’ proposed solution of rent controls, far from being benign, could have profoundly deleterious consequences for tenants.
Traditional rent controls, which would hold rents below market rents, have been a disaster wherever they have been tried. My assessment of the literature in The Flaws in Rent Ceilings shows that they are associated with a collapsing availability of accommodation, deteriorating quality, misallocation of property and deteriorating landlord-tenant relations. Whilst some claim that landlords are all to a certain extent monopolists given heterogeneous preferences and non-substitutability of properties in different areas – in reality a wealth of empirical evidence has shown that this sector behaves more like a competitive market, making lowering rents below market levels disastrous.
That’s why barely anyone advocates these controls today. Instead people suggest ‘tenancy rent controls’, such as those advocated by the Labour Party. But these cannot do anything to actually improve affordability. They may in fact increase rents given that measures to bolster tenants’ security push more risk onto landlords, who are likely to raise rents to compensate.
In short then, Jones is right that rents are extortionately high. But he is wrong about ‘greedy landlords’ being the cause. Furthermore, his solution of ‘rent controls’ would either be economically destructive (if traditional rent controls) or do nothing to address the affordability problem (if tenancy rent controls). He has correctly identified a problem, but misdiagnosed why it has occurred and advocated price controls which would not work to solve it. As we’ll see in the next blog post, similar mistakes are made in his analysis of low pay, tax credit spending and the push for a ‘living wage’.
In his new book, The Establishment: And How They Get Away With It, Owen Jones concerns himself at various points with this theme (see my colleague Chris Snowdon’s extensive review). Indeed, it is a popular theme among many on the political left and underpins the well-known ‘Living Wage’ campaign. The idea that somebody who works full time should have the resources to live a comfortable life and not be reliant on substantial state hand-outs is a powerful one, and in truth an aspiration which people across the political spectrum would share. Jones rightly identifies that at the moment the taxpayer, in the form of tax credits and housing benefit, is stepping in and having to top up people’s incomes and hence living standards. He’s angry about it too. Indeed, at times he could be mistaken for a true fiscal conservative.
But if one is really serious about durable solutions to this problem, if one wants to think through policies that can improve the living standards of the working poor whilst reducing government welfare spending, then it is crucial that your analysis of what has caused low wages and high prices in the first place is correct. Otherwise your policy ideas tend to be misguided. It’s in this regard that Jones’ thoughts go astray.
For Jones the story is simple. Unscrupulous landlords and stingy employers are the cause of high government spending on housing benefit and tax credits. Landlords put up rents, safe in the knowledge that the state will step in to subsidise tenancies through increased housing benefit payments. Employers meanwhile are able to offer lower pay settlements because they know that their employees’ earnings will be topped up by the state.
If the problem is the behaviour of landlords or employers, as Jones believes, then it is obvious to him that any solutions should seek to curb their behaviour. Landlords and Scrooge-like employers are sucking off the public teat, so the state should make sure that taxpayers are not being exploited. The government can do this by imposing rent controls and forcing firms to pay a ‘Living Wage’ to avoid us being taken for a ride.
His train of thought can therefore be distilled into two premises: first, that the cause of high welfare spending is exploitative rents and poverty pay; second, that price and wage controls can be implemented painlessly to deal with these problems and improve living standards.
Let’s take landlords and rent first. Is Jones right? Is housing benefit spending high because of greedy landlords? And can rent controls be the solution to the problem of high rents?
The answer to both of these questions is ‘not really’. Rent levels are very high, and housing benefit no doubt helps to stoke demand to a certain extent, in turn raising market rents further. But the high housing benefit bill and high rent levels are themselves both a function of ever-rising house prices. Over the past forty years, the UK’s house price index has increased by over 4000 per cent. The overwhelming evidence suggests that high house prices have been caused primarily by an inelastic supply response, a failure for new homes to be built in the face of rising demand. And the overwhelming reason for this, outlined in extensive academic literature, is the UK’s planning laws, particularly green-belt restrictions around economically prosperous cities such as London, Oxford and Cambridge.
Whilst it’s true that landlords do charge high rents, these high rents occur because of policies which ration land in areas where people want to live. To claim otherwise, and to suggest that landlords are ‘greedy’ would require one to show that landlords continuously increase rents more quickly than economic fundamentals would allow.
There is no evidence for this assertion. Over the past six years the Office for National Statistics’ rental index has increased by just under 10 per cent, less than both its house price index and CPI inflation (see Figure 1 from Chu 2014). The ONS’s index covers all tenancies, rather than just new ones, which means it is not as helpful in analysing dynamics in the market. But what it does show is that landlords, on average, have not been quick to hike rents even though house prices have been increasing significantly.
Figure 1: House prices and ONS rental index – January 2012 = 100.
Source: Chu (2014).
Even rents in new tenancies, which show stronger rent inflation (see Figure 2 from Chu 2014 – a 6.4 per cent increase in June 2014 compared with 2013, and the 11.2 per cent increase in London over the same period), are not out of kilter with house price movements being experienced in both London and the country more broadly. They certainly could not be considered evidence of ‘greed’ given the fundamentals of the market.
Figure 2: HomeLet Index, CPI and ONS rental index. January 2008 = 100.
Source: Chu (2014)
The idea then that there are swathes of greedy landlords exploiting tenants and the state with huge unjustified hikes in rent levels is therefore just not true. What’s more, Jones’ proposed solution of rent controls, far from being benign, could have profoundly deleterious consequences for tenants.
Traditional rent controls, which would hold rents below market rents, have been a disaster wherever they have been tried. My assessment of the literature in The Flaws in Rent Ceilings shows that they are associated with a collapsing availability of accommodation, deteriorating quality, misallocation of property and deteriorating landlord-tenant relations. Whilst some claim that landlords are all to a certain extent monopolists given heterogeneous preferences and non-substitutability of properties in different areas – in reality a wealth of empirical evidence has shown that this sector behaves more like a competitive market, making lowering rents below market levels disastrous.
That’s why barely anyone advocates these controls today. Instead people suggest ‘tenancy rent controls’, such as those advocated by the Labour Party. But these cannot do anything to actually improve affordability. They may in fact increase rents given that measures to bolster tenants’ security push more risk onto landlords, who are likely to raise rents to compensate.
In short then, Jones is right that rents are extortionately high. But he is wrong about ‘greedy landlords’ being the cause. Furthermore, his solution of ‘rent controls’ would either be economically destructive (if traditional rent controls) or do nothing to address the affordability problem (if tenancy rent controls). He has correctly identified a problem, but misdiagnosed why it has occurred and advocated price controls which would not work to solve it. As we’ll see in the next blog post, similar mistakes are made in his analysis of low pay, tax credit spending and the push for a ‘living wage’.
6 thoughts on “What Owen Jones gets wrong (part 1 of 2: Landlords and rent controls)”
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If the stock of housing is causing the high rents then why has this not been a feature for many years?
Most likely the cause is Osborne pumping up mortgage lending by guaranteeing repayment to the banks and so pushing up prices.
That is a recent event and as recent as the surge in property prices.
Perhaps he no longer cares about the consequences of first holding prices high through stupidly low interest rates and QE and now sending them even higher. Well, this was a car crash waiting to happen and if it continues we will see the rates of tenant default rapidly increasing, landlords defaulting on debt repayments and should he try some other prank a few banks failing into the bargain.
We have “rent caps” for the Water Industry, for exactly the same reason as rent caps have been suggested for housing. While I agree that rent caps are not the best way of tackling monopoly profits, the simplistic “build more” is as ludicrous for housing as it is for water. The answer that reconciles affordability and efficiency in both cases is to tax monopoly profits down to zero.
Fake-Capitalists love monopoly profits. So this is the last thing they want to see happen.
“While I agree that rent caps are not the best way of tackling monopoly profits, the simplistic “build more” is as ludicrous for housing as it is for water. ”
?? No one stops me using as much water as I like. I’m not even metered. And you don’t think “build more” might just help a little? And if “build more” is ludicrous, are you suggesting we build less? Why stop there? Why not demolish more?
@ Luke
Everywhere you look in the World, GDP per capita, and therefore house prices, are highest where populations are densest.
So, rather counter-intuitively, if you did start demolishing large portions of our housing stock, house prices would get lower. Degrading infrastructure in other words.
Conversely, if you build more homes where demand is highest, aggregate house prices rise. This is called the agglomeration effect. So every time a population doubles in size, you get 15% more GDP per capita, and 15% more amenity per capita. Which is why the “build more homes=lower prices” is simplistic. Observation alone should inform us of that.
The point about water, is that like location that is in the highest demand, the supply is inelastic, insofar as their is no competition to provide you with sewerage treatment or piped water. You could of course dig a well, install a cesspit, collect rainwater or buy it in bottles.
So, if caps were removed from water utilities they would put the price up by not what their costs are, but by how much your are prepared to pay. Just like housing.
The trouble with price caps, like water, is that it doesn’t put the true market cost onto the consumer. So, we tend not to value water correctly, thus over consume it. Taxing monopoly super profits would produce optimum results. Same with housing.
Jones assertion that “Landlords put up rents, safe in the knowledge that the state will step in to subsidise tenancies through increased housing benefit payments” is naive in the extreme since benefit payments are based on the 30th percentile of market rents measured by the VOA (Valuations Office Agency). Those in receipt of benefits have to find property to match closely the payments or pay the difference, which in hard-pressed areas outside London is not realistic. As a result rents have remained relatively static outside London. In the Capital there is a transmigration from expensive areas outwards and some evidence of rents reducing. ONS data show that rents in London increased by 1.4% to June 2014 and across England by 1%.
Letting agent data has a commercial bias and can only be extrapolated with caution.
What nobody is addressing in London is the impact of immigration and the tendency of immigrants to rent not buy.
Gross immigration figures to March were 1/2 million. Those arriving from countries which joined the EU since 2001 – are 15x more likely to rent. And EU citizens account for 40% of the influx.
The current British obsession with “property” popularised by so many get-rich-quick tv programmes has commoditised the market – renting is a long term hold, and this reflects the availability of low-cost money and paucity of decent alternative investments (aka pensions).
Watch this space when interest rates rise.
From my experience, the systems in place are geared toward landlords. There are some reasonable landlords, but there are exploitative ones too. Regardless of which you believe landlord’s are, I will explain by example why it can be argued on balance that landlords’ interests are protected and tenants’ interests aren’t
The thing I like about this article is that it doesnt just look at one factor, however it doesn’t go far enough and there are wider mechanisms that aren’t delved into which show further complexities that ought to be brought into context.
The concept of risk is an interesting one. Some are real and some are perceived risk and it is the perceived ones which allows opportunities to exploit tge market. If a perceived risk is present but not actually a risk, it gives justification for adding a price tag regardless of whether its genuine.
The risk that the article is referring to isn’t defined and a risk is a very individual topic that also has many factors from external influences. The market sides with caution and inflates the cost of real risk. Its this level of detail which is required to be able to distinguish real from bogus risk why its difficult to gauge greed.
Mortgage risk
The biggest risk a landlord may have is financial default. This is generally a low risk so long as tenants are present and therefore this aspect could help the tenant secure a lower rent as the landlord is dependent on them. In reality I doubt the tenant really has the bargaining power, and if the going rate for an area dictates the price and the tenant may have to live in the location for their livelyhood.
This perspective wouldnt take into account the landlord’s individual circumstances of when the property was purchased. If the landlord bought in the bubble, the risk of default and negative equity may be a problem at tge forefront of the landlords mind in which case may be inclined to have better relations with their tenant. but on the other end of the spectrum a landlord may own the property outright, either way both will ask the going rate, the former may accept a lower rent if they’re squeezed, the latter who is in a better position to accept a lower rent doesn’t have to and this is the first area where greedy landlord’s exist. General statistics will never have the granularity to unearth the private affairs of individuals.
If the landlord does have a mortgage and are relying on income from rent their mortgage is linked to interest rates which the BoE has kept low in previous years. An average rent is substantially more than a mortgage and has been for the past 6 years. So it could be argued that the low interest rates are set at an optimum level to satisfy cost of living for tenants and the landlord’s margin of financial risk. This is another hiding place for greedy landlords to hide. The landlords will base their asking price on their mortgage which already takes the future risk into account. If this is the landlord’s approach and they have a fixed mortgage, then the landlord is passing on the burden of financial risk onto the tenant simce the landlord will base rent on their fixed repayments.
If the landlord has a variable much lower rate, whilst they possess more risk from a variable interest rate, they have a lower repayments and can therefore base their rent on their fixed rate counterparts in the area. The latter strategy has worked out well for landlords over recent years and is another example for where greed can exist.
Tenant Arrears
What about risk from damage?…insurance and maintenance are covered by the landlord and this would be dependent on age of property, location (for all sorts of reasons), occupants.
The age and quality aren’t properly reflected in the asking price but they are to some extent. All but the last is summarised in the price. Tenants undergo credit checks after the price is verbally agreed, so whilst risk has been minimised, it doesn’t lower the price before signing the contract. Furthetmore, the credit check costs the tenant so it is unlikely they will pull out after this point and wouldnt want to risk the tenancy by trying to renegotiate before signing.
Deposits
The landlord also takes further security from the tenant with a deposit. This is sometimes up to 2 months deposit. The greedy landlord lurks in this area too if they’re savvy.
The tenancy deposit schemes aithorised by DCLG arent sufficient to protect a tenant’s deposit. The landlord-depositscheme relations are much stronger than tenant relations. When the decision is in the balance, the deposit schemes have interests that could favour the landlord. There has been an increase in proprtions that landlords win since the legislation came in and exploitative landlords attempt to tap into it by learning how to cook their inventories to manipulate decisions to there favour and avoid their own duties. (To illustrate this watch http://youtu.be/wAzGh8ZYrHI ).
Value – supply and demand
Materially the average dwelling is worth around £100,000 but even this includes the profit the development included. The added value on a dwelling is the circumstancial value of location, style and subjective whims of the purchaser.
it could be true as the article points out that less development of housing causes rising prices. The narrative of restrictive planning is a persuasive one, but incomplete without presenting a narrative of developers interests.
A developer ideally wishes to make a profit, this is the primary driver of their business, housing people is secondary. A recent report by Joseph Rowntree Foundation clearly shows drivers for private developers and RSLs. http://www.jrf.org.uk/sites/files/jrf/sustainable-homes-full.pdf The report looks into sustainability and it would be interesting to see the same driver analysis across all subjects of development. The striking statistic is that consumers matter less for private developers. Meanwhile regulation and planning is something that private developers are acutely aware of. It would be sensible for developers to therefore create a narrative for why they are unable to build as many houses (hence deregulate which i fear this article is propelling without considering consequences of such measures) If regulation and planning were relaxed, not only there is a risk of declining quality, but it doesn’t guarantee higher volumes of construction. The reason being that the developer classes know that any over concentration of housing would reduce asking price. For the developers to remain competitive they would need to substitute the expensive parts of the construction process. This might be minimise labour, substitute products, simplify design etc. If none of these are possible, developers will lose profit. Regulations and planning are the easiest items to generalise as being a quick win hurdle that can be overcome. These are easier than attempting to innovate and often the minefield of arguments of what innovation means can be bound up with restrictive policy reinforcing the developers position.
One thing that is true to say is developers are professionals, they are very clever with their strategies and are very calculated in protecting their interests. The know their market and they are also acutely aware of diminishing/stagnating wages and increasing costs of living. They know that if a house costs £100,000 to build and they can only sell it for £120,000 it doesnt cut it as much for them as developing luxury apartments where they are able to put an extra £50,000 of capital in and gain an extra £200,000 in return simply because its in the South East.
Another example of where greed is present is in the policy for allowable solutions for Part L. after extensive lobbying by developers. This measure allows developers to put provision of energy efficiency into a house but relax the mandate that the house shpuld be ‘zero carbon’. A zero carbon house ultimately benefits the occupant, lower energy costs etc. But the government deregeulation agenda has accommodated this relaxation by allowing developers to pay into allowable solutions instead. This means that the house price would be the same in the market, but the occupier won’t personally benefit even though they’ve paid for it. This type of policy is obviously only disadvantaging the occupier, not the landlord (other than the point that theyre paying for something their property doesnt have but this is passed on in rent as I went into earlier), and it doesnt disadvantage the developer as the paying into a kitty will be a saving inthe build process for them.
Unless all these factors can be exhausted to the nth degree, it would be difficult to dismiss Owen Jone’s premise completely as the article concludes, and hopefully readers can recognise the narratives that are present and the interests they serve. I hope ive introduced something to the debate that highlights in very few cases tenants interests are protected and in this sense I dont think Owen is wrong, he just hasn’t gone far enough.