One cannot possibly begin to address the high cost of living in the UK without examining the state of the housing market, where years of underdevelopment have left the UK with a constrained supply of housing which has contributed to driving up both house prices and rents significantly.
The figures on annual rents in the UK are indeed stark. Average rent levels across the country for those in the private rented sector are equivalent to 41.1 per cent of weekly gross household income or 29.6 per cent in the social rented sector (ONS & DCLG 2013). This includes state assistance which contributes to gross household income in the form of housing benefit too – the annual bill for which stood at £23.9 billion in 2013/14. Excluding this benefit, the average proportion of the remaining weekly household income going on rents stood at 50.7 per cent and 40.4 per cent respectively. This high cost is particularly acute in London.
Though overall rent levels have not increased dramatically in line with recent high house price rises, there is evidence that rents in new tenancies show significant increases. There is thus concern that rents will increase significantly in the coming years. This comes following years of squeezed living standards and a desire for more economic security for many.
In this context, it is understandable that policymakers are concerned about the plight of renters. Unfortunately, rather than seeking to address the key established underlying reason for high rents – namely, the lack of supply of accommodation induced by our planning laws – many are using these current conditions to advocate a return to some form of rent control.
We can be thankful that very few suggest returning to the sort of disastrous ‘first generation’ rent controls which were common through the 20th century. In my IEA Discussion Paper The Flaws in Rent Ceilings, released today, I begin by reviewing the academic evidence on these nominal controls. These are the perhaps the best researched and most well understood form of price control in economics, and the accumulated wisdom provides devastating evidence against their desirability.
Setting rents below market rates over long periods substantially reduces the quantity of private rented accommodation available. In Britain, for example, the private rented sector collapsed from nine-tenths of the housing stock at the start of the 20th century to just one-tenth of the total during the time rent controls were imposed. Similar effects were seen in other countries around the world. But more than that, there are substantial observed costs in terms of lowering the quality of accommodation available, misallocation of property, and reduced labour mobility.
Instead, interest groups and politicians now advocate what are known as ‘tenancy rent controls’. In the UK, the Labour Party has suggested that it would implement a system where there would be complete freedom of rent setting between tenancies, but within tenancies rents would be benchmarked so that increases were linked to average increases within a locality, some measure of inflation, or both during a three-year fixed contract. This, it is said, would help families, given the current high cost of living, and also improve security of tenure.
These controls would clearly not be as damaging as first generation controls. But it is unclear that ‘tenancy rent controls’ can fulfil either of the aims laid out by their proponents without negative consequences.
Since rents in this framework can adjust between tenancies, this sort of rent control can do nothing to improve affordability in anything other than the very short term. It may well change the timing of rents, as landlords ‘front-load’ rents to compensate themselves for the future risk of the controls binding. And the existence of the controls themselves is likely to increase overall market rents by increasing regulatory uncertainty and reducing the ability of landlords to use turnover to manage risk.
Some tenants would no doubt see improved security. Within the three-year contract, tenants would now be protected against ‘economic eviction’ – landlords raising rents sharply such that tenants could no longer afford to remain in the property. But this would come at the expense of more mobile tenants, and could result in a series of unintended consequences relating to landlord-tenant relations and labour mobility. Furthermore, there is actually little evidence that the lack of secure tenancies is a form of market failure which requires intervention.
Advocates of these sorts of controls like to point to the fact that something similar operates in Germany, where the market is regarded as tenant friendly. But the overwhelming difference between our property market and Germany’s is the fact that they have a much more sensible planning regime which has allowed substantial development of new dwellings. As a result, house prices have actually fallen over the past 30 years there.
Discussing rent controls is therefore a red herring in the debate about the cost of living. Traditional controls would be disastrous, whilst tenancy rent controls do nothing to improve affordability for tenants. Rent controls are a good example of how we continue to debate policies which treat the symptoms of problems rather than addressing the problems themselves.
The Flaws in Rent Ceilings can be downloaded here.