‘Slum landlords’: The Economist is barking up the wrong tree
4 January 2012
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4 January 2012
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Economic Theory
There is agreement across the political divide in Britain that there is a serious shortage of affordable housing. But the debate about the causes seldom goes beyond red herrings and side issues, such as immigration, a trend towards smaller households, reductions in the public housing stock, or cuts to Housing Benefit.
The latest example is the Economist’s praise for the local authority of Newham, a borough in East London, which has started to take action against ‘rogue landlords’. Newham authorities have uncovered a variety of cases where landlords rented out mouldy garages or dilapidated rooms for sky-high prices. The borough is now inspecting properties on a more regular basis, including through the use of aerial photographs. It will also use the planning system to curb the practice of breaking up family homes into several tiny residential units.
Strangely enough, the Economist does not mention the elephant in the room. If a landlord can find tenants who are willing to pay a lot of money to live in a mouldy garage, then this is a stark indication that something is going profoundly wrong in the housing market. Try offering a mouldy garage on the rental markets of other Western European capitals, and you will at best attract a few bewildered gazes. Given the extreme imbalance between supply and demand in London, it is weird to suggest that things can be sorted out by hiring a few inspectors and shooting a few photographs from the air.
Moving towards greater regulation of the rental market is not just a pointless symptom treatment; it is the wrong policy direction altogether. Heavy-handed regulation of rental contracts does not protect tenants from crooked landlords (any more than employment protection legislation protects employees, or mandatory licensing protects consumers). Rather, it deters property owners from supplying rental units, thus reducing competition among landlords and choice for tenants. A recent OECD report on housing policy finds: ‘An illustrative correlation shows that across countries, stricter rent control tends to be associated with lower quantity and quality of rental housing, as measured by the share of tenants who lack space and who have a leaking roof.’
It is not a deregulated rental market that causes the abuses described above. It is an over-restrictive planning system that causes a severe shortage of homes, and within these constraints, it is thanks to a lightly regulated rental market that things are not even worse. The fairly light level of rental regulation is one of the very few positive aspects of Britain’s housing market. If Britain had the intensely regulated rental market of the Netherlands or of Germany, there would be no point in even starting to look for a flat in London.
The problem in Newham, and many other places, is not a lack of inspectors and busybodies; it is a lack of housing supply. The Economist argues: ‘When demand outstrips supply against a background of profound housing need, tough action is required.’ But how about the following counterproposal: when demand outstrips supply against a background of severe supply restrictions, an easing of these restrictions is required. Make sure supply can catch up with demand, and landlords will find that the only ‘tenants’ interested in their mouldy garages are rats and pigeons.
The latest example is the Economist’s praise for the local authority of Newham, a borough in East London, which has started to take action against ‘rogue landlords’. Newham authorities have uncovered a variety of cases where landlords rented out mouldy garages or dilapidated rooms for sky-high prices. The borough is now inspecting properties on a more regular basis, including through the use of aerial photographs. It will also use the planning system to curb the practice of breaking up family homes into several tiny residential units.
Strangely enough, the Economist does not mention the elephant in the room. If a landlord can find tenants who are willing to pay a lot of money to live in a mouldy garage, then this is a stark indication that something is going profoundly wrong in the housing market. Try offering a mouldy garage on the rental markets of other Western European capitals, and you will at best attract a few bewildered gazes. Given the extreme imbalance between supply and demand in London, it is weird to suggest that things can be sorted out by hiring a few inspectors and shooting a few photographs from the air.
Moving towards greater regulation of the rental market is not just a pointless symptom treatment; it is the wrong policy direction altogether. Heavy-handed regulation of rental contracts does not protect tenants from crooked landlords (any more than employment protection legislation protects employees, or mandatory licensing protects consumers). Rather, it deters property owners from supplying rental units, thus reducing competition among landlords and choice for tenants. A recent OECD report on housing policy finds: ‘An illustrative correlation shows that across countries, stricter rent control tends to be associated with lower quantity and quality of rental housing, as measured by the share of tenants who lack space and who have a leaking roof.’
It is not a deregulated rental market that causes the abuses described above. It is an over-restrictive planning system that causes a severe shortage of homes, and within these constraints, it is thanks to a lightly regulated rental market that things are not even worse. The fairly light level of rental regulation is one of the very few positive aspects of Britain’s housing market. If Britain had the intensely regulated rental market of the Netherlands or of Germany, there would be no point in even starting to look for a flat in London.
The problem in Newham, and many other places, is not a lack of inspectors and busybodies; it is a lack of housing supply. The Economist argues: ‘When demand outstrips supply against a background of profound housing need, tough action is required.’ But how about the following counterproposal: when demand outstrips supply against a background of severe supply restrictions, an easing of these restrictions is required. Make sure supply can catch up with demand, and landlords will find that the only ‘tenants’ interested in their mouldy garages are rats and pigeons.
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It is, of course, not surprising that when you have rent controls quality falls as quality is subjective and, even if rent control levels are based on quality (as the fair rent principle required in the UK) it is easy for the market to adjust by lowering quality if adjustment by increasing price is illegal. Then, of course, you end up with the situation that only those who are more indifferent to quality but want a low rent choose to rent so the whole market becomes a low-rent/low-quality market.
One of the most pernicious regulations introduced by New Labour in this sector was the compulsory licensing of housing in multiple occupation. This significantly raised the costs facing landlords supplying cheap accommodation (many had to spend thousands altering their properties to pass council inspections). Thus it is unsurprising that a black market has developed to bypass such an imposition. It is also telling that the coalition has failed to rescind this legislation, despite its professed commitment to deregulation.
I remember comments long ago about the Parker-Morris standards for new houses. The requirements pushed the cost of houses up. Don’t know what happened to the standards, probably quietly abandoned? And then there was the “How many meat balls in the Matzo” or something like that – referred to President Nixon’s price controls, and people found that as the manufacturers could not increase the prices they dropped the quality. One less meatball in each tin. And earlier in the USA, large numbers of transit systems had their fares overseen by local politicians – always adverse to fare rises – so with inflation reducing the value of money, and their fare revenue, but expenditure increasing, they went bankrupt or substituted low quality buses for trams.
Always regulation affects the market, and unfortunately usually in a way adverse to the general run of people. The Law of Unanticipated Consequences holds good every time.
And quite recently, banks are forbidden to ‘red-line’ certain areas (where the expectation is that people living there are unlikely to repay 100% mortgages) so banks issue the mortgages as required, but being sensible, bundle them as ‘securities’ and sell them off to unsuspecting insurance companies. Comes a downturn and the banks get the blame, but it was the politicians who interfered with the market who created the GFC.
The article in the Economist was poorly researched. In my view the journalists were victims of the well oiled propaganda machine at Newham Council. No doubt journalist were taken to a few awful properties, shown around and then told the entire Borough is like this.
If the Economist, had done their homework and spoken to some of the high-end Estate Agents, which have opened up in Newham it would have been a balanced story. They would have looked at the various property web site and look at some of the great properties on offer.
As a Landlord in Newham, I have a two bedroom property. It was rented to two young men. However, the tenants decide to sub-let to another two friends. I was not happy. For the tenants, it was good as they were only their rent was £200 per month. It is not that the tenants cannot afford the rent, but they are being extremely frugal. Of course, it is not so great for my property, as I have 4 people instead of 2.
With Newham’s introducing Licensing. I have to start eviction proceeding to get these tenant out, for breach of contract. For me Licensing is unfair, as it places obligation on landlords, to ensure the property is meet occupancy levels, but it places no compultion on tenants to behave.
In another case, lots of landlords find tenants on welfare (housing benefit), will wreck properties in order to get the landlord to evict them. Once they have an eviction order, they can go to Newham Council, to be on the priority for government council housing. The current system perversely encourages bad behaviour from welfare tenants. it is not worth the money, to recover the damages, even if the court awards you damages.
There are problems with the deposit (security). Landlords are obligated to lodge the tenants deposit in a secure government scheme, but it is a waste of time, as most tenants will stop paying the rent, so as to recover their deposit. So there is no incentive for tenants to look after a property. The laws do not protect landlords.