Rent control: the failed idea that never dies
20 May 2024
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Economic Theory
Economic Theory
Trade, Development, and Immigration
4 November 2024
Political arguments are often 80% about framing and vibes. A common rhetorical strategy in political debates is to present your own view as ‘the common-sense position’, the position that any fair-minded, reasonable person would adopt, while presenting your opponent as a deluded, wilfully blind ideologue.
Rent controls are a good example. Opinion polls consistently show that rent controls are a popular policy, but some scepticism still remains. Their proponents cannot deny that rent controls would represent a major departure from the way rental markets – and markets in general – currently operate. In most markets, prices are mutually agreed between buyers and sellers. If you own a property that you don’t actively use, if I want to live in that property, if you are happy with me living there, and if you and I agree on a price that seems acceptable to both of us, then that’s an agreement between two consenting adults. What right does any government official have to override that agreement?
Yet in a recent interview with the Corbynite media platform PoliticsJOE, the Housing Correspondent of The i paper, Victoria Spratt, has tried to turn this argument on its head. Her argument is that rent controls are, in fact, the norm. For most of the 20th century, Britain used to have rent controls of one kind or another. They were first introduced as an emergency measure during World War I, and later relaxed, but not entirely abolished until 1988. So it is really the absence of rent controls that is the radical policy experiment. And how did that turn out?
Spratt is, in one sense, right. Rent controls are a fairly conventional policy tool. They have been tried many times, in many different places, and in many different forms. You can still find contemporary examples of them today.
The issue with rent controls is not that they are novel or radical. The issue with them is just that every time they are tried, the results are exactly what the Economics 101 textbook would predict. They lead to a decline in the supply of rental properties, a decline in housebuilding rates, a slowdown in tenant mobility, a misallocation of existing properties, and a decline in the quality of rental housing.
The Journal of Housing Economics has recently published a meta-study on rent controls – a literature review of all the empirical studies on the effects of rent controls that have been conducted over the past fifty-odd years:
This is about as consistent as it can realistically get in economics.
Some would say that most of those studies are from North American or Continental European housing markets, and that each country is different. (Although if a study of a dozen rivers in California or Berlin-Brandenburg showed that water runs downhill, we would not dismiss it by saying that British rivers are different somehow.) But the British experience is perfectly consistent with it.
While Spratt is right to point out that Britain had rent controls for most of the 20th century. What she fails to mention is that they led to a steep decline in the size of the private rental sector. Before World War I, the vast majority of the population (nine out of ten households) lived in private rental accommodation. By the time rent controls were abolished in the late 1980s, that proportion had dropped to less than one in ten. Since the abolition of rent controls, it has gone up to one in five again.
Spratt is also correct that housing affordability in the UK has deteriorated since the abolition of rent controls. But this confuses correlation with causation. We cannot meaningfully evaluate the private rental sector in isolation; we can only evaluate it in the context of the overall housing market. House prices have trebled in real terms since the mid-1990s, due to a general housing shortage. It would be very strange if private sector rents were unaffected by that. If the cost of buying a house shoots up, of course the price of renting a house will also shoot up, for the same reason that if a shortage of cars (like in Cuba) leads to exorbitant car prices, the cost of car rental would be similarly exorbitant.
As it happens, I have recently written a report set in a hypothetical – but eminently possible – future (the year 2035) in which Britain has solved its housing crisis. In that future, the crisis in the private rental sector is also sorted out:
The flooding of the rental market with new rental properties has put landlords under a degree of competitive pressure they could not previously have imagined. A situation in which too many tenants were chasing too few rental properties has been replaced by a situation in which too many landlords are chasing too few tenants. As a result of this, tenants have become a lot pickier and choosier. Attitudes among tenants have changed from ‘Beggars can’t be choosers’ to ‘Choosers won’t be beggars’.
But in my version of events, this is not achieved via rent controls. It is achieved via a series of planning reforms that unleash a private-sector building boom, which leads to an increase in housing supply across all tenures. This is the common-sense position that any fair-minded, reasonable person would adopt, you see. Only a deluded, wilfully blind ideologue would oppose it.
This article was first published on CapX.
Rent controls are a good example. Opinion polls consistently show that rent controls are a popular policy, but some scepticism still remains. Their proponents cannot deny that rent controls would represent a major departure from the way rental markets – and markets in general – currently operate. In most markets, prices are mutually agreed between buyers and sellers. If you own a property that you don’t actively use, if I want to live in that property, if you are happy with me living there, and if you and I agree on a price that seems acceptable to both of us, then that’s an agreement between two consenting adults. What right does any government official have to override that agreement?
Yet in a recent interview with the Corbynite media platform PoliticsJOE, the Housing Correspondent of The i paper, Victoria Spratt, has tried to turn this argument on its head. Her argument is that rent controls are, in fact, the norm. For most of the 20th century, Britain used to have rent controls of one kind or another. They were first introduced as an emergency measure during World War I, and later relaxed, but not entirely abolished until 1988. So it is really the absence of rent controls that is the radical policy experiment. And how did that turn out?
Spratt is, in one sense, right. Rent controls are a fairly conventional policy tool. They have been tried many times, in many different places, and in many different forms. You can still find contemporary examples of them today.
The issue with rent controls is not that they are novel or radical. The issue with them is just that every time they are tried, the results are exactly what the Economics 101 textbook would predict. They lead to a decline in the supply of rental properties, a decline in housebuilding rates, a slowdown in tenant mobility, a misallocation of existing properties, and a decline in the quality of rental housing.
The Journal of Housing Economics has recently published a meta-study on rent controls – a literature review of all the empirical studies on the effects of rent controls that have been conducted over the past fifty-odd years:
- Out of 16 studies that concentrate specifically on the impact on supply, 12 studies find a negative one.
- Out of 16 studies that concentrate specifically on the impact on housing construction, 11 find a negative one.
- Out of 20 studies that look at the impact on the quality of rental housing, 15 find a negative one.
- Out of 17 studies that investigate whether rent controls drive up prices elsewhere in the housing market, 14 find that, yes, they do.
- Out of 13 studies that look at whether rent controls cause misallocations of the housing stock by, for example, preventing downsizing, 13 find that they do.
This is about as consistent as it can realistically get in economics.
Some would say that most of those studies are from North American or Continental European housing markets, and that each country is different. (Although if a study of a dozen rivers in California or Berlin-Brandenburg showed that water runs downhill, we would not dismiss it by saying that British rivers are different somehow.) But the British experience is perfectly consistent with it.
While Spratt is right to point out that Britain had rent controls for most of the 20th century. What she fails to mention is that they led to a steep decline in the size of the private rental sector. Before World War I, the vast majority of the population (nine out of ten households) lived in private rental accommodation. By the time rent controls were abolished in the late 1980s, that proportion had dropped to less than one in ten. Since the abolition of rent controls, it has gone up to one in five again.
Spratt is also correct that housing affordability in the UK has deteriorated since the abolition of rent controls. But this confuses correlation with causation. We cannot meaningfully evaluate the private rental sector in isolation; we can only evaluate it in the context of the overall housing market. House prices have trebled in real terms since the mid-1990s, due to a general housing shortage. It would be very strange if private sector rents were unaffected by that. If the cost of buying a house shoots up, of course the price of renting a house will also shoot up, for the same reason that if a shortage of cars (like in Cuba) leads to exorbitant car prices, the cost of car rental would be similarly exorbitant.
As it happens, I have recently written a report set in a hypothetical – but eminently possible – future (the year 2035) in which Britain has solved its housing crisis. In that future, the crisis in the private rental sector is also sorted out:
The flooding of the rental market with new rental properties has put landlords under a degree of competitive pressure they could not previously have imagined. A situation in which too many tenants were chasing too few rental properties has been replaced by a situation in which too many landlords are chasing too few tenants. As a result of this, tenants have become a lot pickier and choosier. Attitudes among tenants have changed from ‘Beggars can’t be choosers’ to ‘Choosers won’t be beggars’.
But in my version of events, this is not achieved via rent controls. It is achieved via a series of planning reforms that unleash a private-sector building boom, which leads to an increase in housing supply across all tenures. This is the common-sense position that any fair-minded, reasonable person would adopt, you see. Only a deluded, wilfully blind ideologue would oppose it.
This article was first published on CapX.
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