Why we’d end up paying more for rent controls

There are some ideas that keep on coming back, even though they are foolish and have always had bad results whenever they are tried. Rent control is one of these. Whenever it has been tried it has made people worse off and had disastrous results for the economy in general and city life in particular.

Some basic economics: if you restrict the price of anything to a level below the market price, the result will be a shortage.

We would not expect people in any other trade to stay in business if price controls meant they could not make a profit. Why should landlords be any different?

And so every time rent control has been tried in Britain, whereby a local authority or a quango determines how much a landlord can charge, the result has been a shortage of accommodation, and the physical decline of the existing rented properties as landlords give up on maintaining them because they have no prospect of a return on their investment. The result is homelessness and urban decay.

Yet now the Labour party are once again toying with the idea of reimposing the policies of the 1960s and 1970s. Jack Dromey, Labour’s housing spokesman, was recorded saying his party would introduce them “without hesitation.” His spokesman added they would be a “new model that works for both landlords and tenants”.

The reason cited is the rise in rents, which have gone up sharply in London in particular. Landlords are simply buying up all the existing properties rather than building new ones, it is claimed.

And so the solution, apparently, is to stop them making money. But those who advocate rent controls deal with the symptom – rising rents – rather than the disease. The disease is not landlords, or the buy-to-let industry, but the shortage of housing caused by our planning laws.

Last year Britain had the lowest number of new housing starts of any country in Europe. France built three times as many. It is this shortage of housing and the prohibitive cost of small building projects due to planning laws that forces up rents, and house prices, and stops small landlords building new properties as well as buying old ones.

Germany is often quoted as a country that has rent controls and a plentiful supply of rented housing. But Germany also has much less restrictive planning laws and a presumptive right for people to be able to build on their own land in urban areas, and as a result they do not have a shortage of housing, and so rent controls are much less harmful in their effects.

But if we return to the rent controls of the mid-twentieth century, as Labour appears keen to do, there will be little or no new property to rent, and existing properties will decay and fall into ruin.

Read the original article here.

Head of Education

Dr Steve Davies is the Head of Education at the IEA. Previously he was program officer at the Institute for Humane Studies (IHS) at George Mason University in Virginia. He joined IHS from the UK where he was Senior Lecturer in the Department of History and Economic History at Manchester Metropolitan University. He has also been a Visiting Scholar at the Social Philosophy and Policy Center at Bowling Green State University, Ohio. A historian, he graduated from St Andrews University in Scotland in 1976 and gained his PhD from the same institution in 1984. He has authored several books, including Empiricism and History (Palgrave Macmillan, 2003) and was co-editor with Nigel Ashford of The Dictionary of Conservative and Libertarian Thought (Routledge, 1991).

4 thoughts on “Why we’d end up paying more for rent controls”

  1. Posted 20/08/2013 at 15:06 | Permalink

    Why is this even a question?

    It’s obvious.

  2. Posted 21/08/2013 at 00:24 | Permalink

    I always chuckle to myself when yet another IEA commentator (Kris being the major culprit!) bemoans the UK’s planning laws. Could you outline specifically some ways in which UK planning laws might be improved so as to reduce barriers to new property development?
    Whilst I acknowledge there is much ‘nimbyism’ at work in certain areas of the country, I’m personally uneasy about swathes of “green” land being paved over en-masse & I worry about the potential impact with respect to global warming. Perhaps Britain’s high property prices are in large part down to a simple fact: our factor endowments, that is, we are relatively scarce on land with respect to population. Short of paving over most of our green/non urbanized spaces how much of a difference can we really make?

  3. Posted 21/08/2013 at 11:02 | Permalink

    @bemused – Kris and I do not entirely agree on this, but one way is to find ways of compensating those who might suffer from a reduction the loss of environmental amenities – we have got a good monograph available online by John Corkindale on this. I am a developer, I want to triple the size of a village in Sussex, I negotiate with the parish council appropriate cash and kind compensation for local residents (who will get benefits too – the village might now support a school whereas it could not before), we can also negotiate constraints that would reduce the amount of compensation payable (only using brick and flint for one third of the houses or whatever). Let’s recognise some implicit property rights and compensate people for their loss.

  4. Posted 28/08/2013 at 20:48 | Permalink

    … at some point an investing landlord will own some of the properties outright. The government could offer incentives of a lower capital gains tax where a tenant, provided that it is not a family member or investor, could purchase the property directly from the landlord under contract over a fixed term. Such landlords would be helping the economy and the young first time buyer and receiving recognition for doing that. In the rare situation where the tenant/buyer’s circumstances change, there could be a clause where a % of that paid will go to the landlord, a return will go to the tenant and the arrangement would revert back to a rental agreement. The landlord could use his/own discretion and personal judgementwhere there may be a short term default where there is a temporary loss of work

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