We are the 6.6%! Why everybody is wrong on rent controls
While this is already a very low number, bear in mind that it is an idiosyncrasy of opinion surveys that any option that can be picked will be picked by some people, no matter how unpopular or absurd. The blogger Scott Alexander of Slate Star Codex calls this phenomenon the ‘Lizardman’s Constant’, which he puts in the vicinity of 4%. The basis for this is a US survey which asked people whether they believed that the world was run by intelligent lizards from outer space disguised as humans. 4% replied yes. Once we subtract the Lizardman’s Constant, there is virtually nobody left who opposes rent controls.
I am therefore glad that the author of the CWU paper, Alexander Hilton, has reserved 10 pages in his paper for a counterpoint written by myself, an anti-rent-control digression within a pro-rent-control paper. He did not have to do this: preaching to the converted is not such a bad strategy when almost everybody is a convert already. So this is rather as if a Church in a fiercely religious region reserved a ten-minute slot during mass for a Satanist to present their alternative case.
While Hilton and I are worlds apart in our policy recommendations, we agree on the diagnosis. Hilton does not exaggerate the scale of the problem. He is right, of course, that “renters are paying large proportions of their incomes on rents, undermining their quality of life and their ability to save.” 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. They also exceed those of Luxembourg and Switzerland, two countries that are vastly richer than Britain. In most of Europe, rent payments account for between a fifth and a third of tenants’ incomes; in the UK, they account for around 40%.
It is only when Monaco is included in the rent level rankings that the UK is pushed into second place, although parts of London are in Monaco’s league. South Kensington, Marylebone, Belgravia and Chelsea have overtaken some Monegasque boroughs; Mayfair is only marginally less expensive than Monaco’s famous Monte Carlo district, and Knightsbridge has actually overtaken Monte Carlo.
Add to this the fact that homeownership rates in the UK have recently fallen to their lowest level in thirty years, so that renting is no longer the stopgap solution it once was, but a permanent tenure for a large and growing proportion of the population. This makes the renewed interest in, and popularity of rent controls wholly unsurprising. But could they be a solution? Hilton claims that “there are commonly repeated myths – unfounded in evidence – that are used to attack rent control. These are principally that “Rent Control restricts housing supply”, “Rent Control disincentivises landlords from maintaining properties properly” and “Rent Control creates an opportunity for corruption in tenancy”.
Let’s have a look at how ‘unfounded in evidence’ these arguments are. Perhaps the most comprehensive review of the economic evidence on the subject is the paper ‘Rent Control: Do Economists Agree?’ by Blair Jenkins, which discusses over sixty different studies on various forms of rent control. She concludes:
“[E]conomic research quite consistently and predominantly frowns on rent control. My findings cover both theoretical and empirical research on many dimensions of the issue, including housing availability, maintenance and housing quality, rental rates, political and administrative costs, and redistribution […] “[T]he economics profession has reached a rare consensus: Rent control creates many more problems than it solves”.
This puts Hilton’s following statement into context: “Over the past couple of years I have spent time with several LSE economists who are studying the housing market and the PRS [private rental sector] in particular, and despite the plentiful availability of evidence, even they are ideologically incapable of diverging from an instinctive neoliberal stance on Rent Control. And I mean neoliberal in the sense that they seem at one with Friedman and Hayek on the matter.”
It is not ‘despite the plentiful availability of evidence’, but precisely because of it, that these economists oppose rent controls. And while it is correct that Friedman and Hayek were opposed to rent controls (which, for Hilton, seems to be enough of a proof that rent controls must be A Good Thing), they were not exactly alone in this. Let’s hear it from that arch-Hayekian, Paul Krugman:
“The analysis of rent control is among the best-understood issues in all of economics, and – among economists, anyway — one of the least controversial. In 1992 a poll of the American Economic Association found 93 percent of its members agreeing that ”a ceiling on rents reduces the quality and quantity of housing.” […] Bitter relations between tenants and landlords, with an arms race between ever-more ingenious strategies to force tenants out – what yesterday’s article oddly described as ”free-market horror stories” – and constantly proliferating regulations designed to block those strategies? Predictable. […] [T]he pathologies of San Francisco’s housing market are right out of the textbook, that they are exactly what supply-and-demand analysis predicts. But people literally don’t want to know. A few months ago, when a San Francisco official proposed a study of the city’s housing crisis, there was a firestorm of opposition from tenant-advocacy groups. They argued that even to study the situation was a step on the road to ending rent control – and they may well have been right, because studying the issue might lead to a recognition of the obvious.”
The basic problem is that rents, like other prices, are messengers. A high price of X tells us that X is in short supply (relative to demand), and a low price of X tells us that there is plenty of X. A price ceiling is, however, worse than just shooting the messenger. It means forcing the messenger to tell a lie. A capped rent is a messenger, who, at gunpoint, informs us that everything is fine, and that rental properties are available in great abundance. But while we can force the messenger to say anything we want to hear, the trouble is that that does not make it any truer. The shortage is still there. It will just manifest itself in other ways.
Hilton mentions Assar Lindbeck’s famous dictum (“next to bombing, rent control seems in many cases to be the most efficient technique so far known for destroying cities”), but dismisses it, claiming that “Germans, who have experienced both intensive bombing and rent control, are universally more favourable towards rent control.”
That is not true. I happen to be German, and I actually prefer bombing, for the simple reason that bombing raids end eventually – they do not create a political constituency that has an interest in sustaining them forever. A system of rent controls, in contrast, becomes politically self-perpetuating once it is in place, because no matter how catastrophic its overall effects, there is always somebody who benefits. You cannot ‘experiment a little’ with rent controls. You adopt them, or you don’t. And we shouldn’t.
We should instead view the private rental sector as a downstream market. Whatever nasty things it may wash up, these originate much further upstream, namely in the land and housing markets. Sorting out the upstream market will solve the problems in the private rental sector that Hilton correctly describes, and as an added bonus, it will also sort out the problem in the owner-occupier market, the social rental sector and the market for commercial property. That is the way to go. Burning your Econ 101 textbook is not.
Dr Kristian Niemietz is the IEA’s Head of Health and Welfare. His full response to Alexander Hilton’s proposal can be read here on pp. 45-54.
His IEA briefing on the UK’s housing crisis can be read here.