Why ‘second generation rent controls’ are not a solution to the affordability crisis (Part 2): beware false comparisons

The last blog piece on so-called ‘second generation rent controls’ (SGRCs) argued that while these controls would not necessarily cause a lot of damage, they would do nothing to solve the affordability crisis of the London rental market either. If high and rising demand meets low and inelastic supply, rents go up – with or without SGRCs. The latter can only change the timing and incidence.

Yet theory can only take us so far. Labour MP David Lammy argues that SGRCs have worked well in Germany, and would also work here. Does he have a point?

First of all, it is true that you could do a lot worse than being a tenant in Germany. I lived in various rental properties for six years there and found it to be a relatively tenant-friendly market. Perhaps the best ‘soft indicator’ for this is the fact that people there rarely talk about housing, whereas in London, the topic is constantly under discussion. The problem with Lammy’s argument, though, is that he looks at two rental markets which differ in a lot of respects, and simply assumes that SGRCs must explain the differences in outcomes.

However, we cannot isolate developments in the rental market from developments in the overall housing market. The main difference between the British and the German housing markets is that for several decades, Germany has consistently released more land for development than the UK, and has therefore consistently achieved higher levels of housing development (see Graph 1). This has nothing to do with SGRCs and has a lot to do with the fact that Germany has no green belts, no ‘Campaign to Protect Rural Germany’ and no National Trust. NIMBY hysterics are generally treated with the contempt they deserve.

Graph 1: Dwellings completed per 10,000 inhabitants, UK vs Germany

-based on data from Eurostat

You can see the results in the graph below. In Germany, income growth has been relatively slow since reunification, but house prices have remained constant, so the ratio of house prices to incomes has shown a gradual downward trend. In the UK, income growth has been quite robust, but house price growth has been explosive, leading to an escalation in the ratio of the two (i.e. a decline in affordability).

Graph 2: Ratio of average house prices to average incomes, UK vs Germany (1995 = 100)

-based on data from The Economist House Price Indicators

You cannot meaningfully compare the British rental market to its German counterpart if you ignore all this. When overall housing market conditions differ so drastically, of course the conditions in rental markets will also differ. In Germany, the release of sufficient amounts of land for development has kept both house prices and rents in check, and would have done the same in the absence of SGRCs. In the UK, the failure to release sufficient amounts of land has led to an escalation of both house prices and rents, and would have done the same in the presence of SGRCs.

What London needs is policymakers who do not continue the sentence ‘London needs more housing’ with a ‘but’. How about replacing the waffling that usually comes after the ‘but’ with something more like ‘…and therefore we need to abolish green belts and most height restrictions, while tarring and feathering the NIMBYs’.

Head of Political Economy

Dr Kristian Niemietz is the IEA's Editorial Director, and Head of Political Economy. Kristian studied Economics at the Humboldt Universität zu Berlin and the Universidad de Salamanca, graduating in 2007 as Diplom-Volkswirt (≈MSc in Economics). During his studies, he interned at the Central Bank of Bolivia (2004), the National Statistics Office of Paraguay (2005), and at the IEA (2006). He also studied Political Economy at King's College London, graduating in 2013 with a PhD. Kristian previously worked as a Research Fellow at the Berlin-based Institute for Free Enterprise (IUF), and taught Economics at King's College London. He is the author of the books "Socialism: The Failed Idea That Never Dies" (2019), "Universal Healthcare Without The NHS" (2016), "Redefining The Poverty Debate" (2012) and "A New Understanding of Poverty" (2011).

2 thoughts on “Why ‘second generation rent controls’ are not a solution to the affordability crisis (Part 2): beware false comparisons”

  1. Posted 27/03/2014 at 22:36 | Permalink

    Kristian – How do you know that Germany “has consistently released more land for development than the UK”? Just because they have built more dwellings doesn’t mean they’ve built on more land – it could be that they’ve used land more efficiently. Isn’t part of the problem here that planning regulations often mandate low housing density so we use land inefficiently? Do German taxes also encourage more efficient land use (genuine question – I don’t know). May the problem not be that we need to build more vertically (I’m not talking high rise flats, just three or four storey non-detached houses and flats of a reasonable height)?

  2. Posted 28/03/2014 at 11:34 | Permalink

    HJ – I’d recommend the publication ‘Unaffordable housing: Fables and myths’ by Oliver Hartwich and Alan Evans (http://www.policyexchange.org.uk/publications/category/item/unaffordable-housing-fables-and-myths), which is strong on international comparisons, even though the figures are now a bit dated. It says that about 12% of the German surface area is urbanised, compared to 8% in the UK, while population density is nearly the same. You could still be right, though, that differences in high-rise building plays a role too. I haven’t come across data on the average number of storeys, and I don’t know the answer to the taxation question.

    What I keep noticing, though, is the differences in attitudes towards development. A strong sentimental attachment to all things countrysidy is common to both countries. No difference there. The difference is that in Germany, the term ‘countryside’ is used more selectively than here. Not every muddy stubblefield qualifies as The Countryside that must be preserved at all cost. Of course, if you proposed to build over forests and the meadows, you’d get into trouble there too. Fortunately, that is wholly unnecessary, because there is enough unspectacular land left. Outside of travel brochures, there is no place in the world where every square inch is spectacularly beautiful.

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