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’.