Why ‘second generation rent controls’ are not a solution to the affordability crisis (Part 1)
Ah, rent controls. It is one of those ideas, like the Living Wage and higher taxes for the rich, that just about everybody seems to be in favour of these days, especially in London. And clearly, the problem of escalating rents in the capital is more than real. I have written a lot on this blog about the housing affordability crisis in the UK in general, across all regions and all tenures, and its implications for poverty. But even against this backdrop, the situation of the London rental market still stands out as particularly extreme.
The median rent for a two-bedroom flat in London is now £1,400 per month. Let’s put that figure into context.
The median gross annual full-time salary in London is £34,200, or £2,850 per month, so the median rent already amounts to almost half of that level. Somebody in this income range will pay about £8,000 a year in taxes and national insurance, so the median rent amounts to two thirds (!) of their net salary.
In other expensive cities, those who are unable or unwilling to pay high rents generally have the option of moving further outwards. Not so in London. The table below shows rents at the outer fringes of Greater London, which are still in the region of a third of London’s median gross salary. Of course, it is possible to move beyond those boundaries, but that will usually lead to a jump in commuting costs.
Another option that people in expensive cities have is cutting back on space and/or amenities. Again, in London, that will not get you very far. Apart from massive spikes at the top end, rent gradients within a given London borough tend to be fairly flat, which is why the difference between the median and the lower quartile is not that large. Presumably, the reason is that in London, average levels of space and amenities are modest to begin with, so there is not much that can be trimmed.
Median and lower quartile rents in Greater London and at its fringes
|in % of median gross earnings||49%||40%|
|in % of median gross earnings||35%||33%|
|in % of median gross earnings||39%||37%|
|in % of median gross earnings||31%||29%|
|in % of median gross earnings||33%||32%|
Somebody who is in the middle of the full-time wage distribution is, of course, much higher up the income distribution, because the latter also includes the non-employed and the underemployed. So if the situation is that tight for those in a comparatively comfortable position, what hope is there for low-earners, or for those who struggle to establish themselves in the labour market?
Still, rent controls are not the answer. I will not waste your time pointing out what’s wrong with the kindergarten version of rent controls. Instead, let’s have a look at the more nuanced proposals of Labour MP David Lammy, as well as the similar proposals by the homeless charity Shelter, who advocate so-called ‘second generation rent controls’ (SGRC). Under SGRCs, landlords are free to set the rent levels they see fit at the outset of a tenancy, but are restricted in their ability to raise them (in real terms) once the tenancy has commenced.
SGRCs are nowhere near as bad as primary rent controls, precisely because they are not, strictly speaking, ‘rent controls’. It would be more accurate to describe them as mandatory longer-term fixed-price contracts.
But while SGRCs need not be hugely damaging, they cannot be a solution to an affordability crisis either. Under SGRCs, landlords anticipate that they will be constrained in their ability to raise rents during a tenancy, and will factor that into their initial offers. Let’s assume a simple world with no inflation and no interest rates (hence no discounting), in which the average tenancy lasts for two years. You want to rent a flat from me, and I charge you 100 thalers initially. In the next year, rents in the area go up (as I expected they would), and I raise your rent to 110 thalers.
Under SGRCs, I would not be able to raise the rent in the second period, but I could simply have charged 105 thalers right from the start. I would have been able to do this, because competing landlords in the area are faced with the same constraints, and would respond in similar ways. You might still be better off under SGRCs. Maybe you value that predictability in itself, even if SGRCs do not affect your overall rent payments, but only their timing. But predictability and affordability are different issues. Under SGRCs, London rents would still be extortionate – the extortion would just become more predictable.
More realistically, SGRCs would lower average rents for some tenants while raising them for others. Under conditions of a general increase in house prices and rents, the introduction of SGRCs would mean that rents would go up more slowly during a tenancy, but show more pronounced hikes when a tenant moves out and a flat is put on the market again. So one could think of SGRCs as a redistribution from those who move frequently to those who stay put for longer. Again, this need not be a bad thing. Households in the former group will be younger on average, and less likely to contain children. But shouldn’t we actually tackle the problem, rather than just redistributing its burden a bit?
And then, there are the unintended consequences. Suppose you rent a flat from me for 100 thalers, a price which I cannot raise. But if I put the flat on the market anew now, I could charge 150 thalers, because rents in the area have gone up in the meantime. So SGRCs could not be introduced on their own; they would have to be coupled with strict regulations deterring the termination of a tenancy. In this way, there would surely be an impact on the supply of rental accommodation. And while landlords can be locked into a contract, that is hardly the basis of a great tenancy relationship.
So much for the theory. Yet SGRCs, claims David Lammy, have been tested in Germany, and worked. Part 2 will explain why this comparison is misleading.
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 Approximated by the median rent at the borough level, in the boroughs which are furthest away from the centre in the respective cardinal direction.