11 thoughts on “We are the 6.6%! Why everybody is wrong on rent controls”

  1. Posted 05/08/2016 at 08:38 | Permalink

    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?

  2. Posted 05/08/2016 at 08:47 | Permalink

    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.

  3. Posted 05/08/2016 at 09:40 | Permalink

    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.

  4. Posted 05/08/2016 at 10:02 | Permalink

    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

  5. Posted 05/08/2016 at 13:00 | Permalink

    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.

  6. Posted 05/08/2016 at 13:57 | Permalink

    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.

  7. Posted 07/08/2016 at 11:27 | Permalink

    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.

  8. Posted 09/08/2016 at 12:16 | Permalink

    “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.

  9. Posted 09/08/2016 at 13:23 | Permalink

    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?

  10. Posted 09/08/2016 at 19:08 | Permalink

    “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.

  11. Posted 10/08/2016 at 08:17 | Permalink

    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

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