Shooting the messenger: Rent controls have always and everywhere ended in failure
15 September 2016
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Rent controls are back on the political agenda. Their reintroduction is now official Labour Party policy, and the Conservatives will probably follow with a somewhat milder version in due course. It is easy to see why: according to a recent Survation poll, two thirds of the public support rent controls, with most of the remaining third being undecided rather than opposed.
No doubt, the issue of escalating rents is real. UK rents are the highest in Europe, both in absolute terms and relative to incomes. On average, private tenants in the UK pay between 40 and 50 per cent more than their counterparts in the Netherlands, Belgium, Germany and France. It is only when we include Monaco in the rent level rankings that the UK is pushed into second place, and even then, Inner London is in the same league as that playground of the rich and famous.
So clearly, there is a problem here, and this is not just a problem for tenants. It is a problem for taxpayers, employees, employers and consumers as well.
High rent levels beget high levels of spending on housing benefit, which costs the taxpayer £24.3bn every year – that is £870 per household. Then, since the problem is worst in those parts of the country which have the best jobs and earnings prospects, high rents reduce labour mobility, and thus economic productivity. Further, the problem is not limited to residential property, but affects commercial property no less, adding to the cost of doing business. This is the main reason why grocery prices in the UK are about a fifth higher than in comparable countries. The list goes on.
Rent controls, however, are not the solution. In a market economy, prices, including rents, are just messengers of scarcity. Rents are high in the UK because rental properties are in high demand and in short supply. Controlling rents, then, is like shooting the messenger – just far worse. It is more like hijacking the messenger and forcing him to tell a comforting lie. A controlled rent is a messenger who tells us, at gunpoint, that there are plenty of rental properties to go round.
In practice, what would happen if rent controls were introduced?
On the supply side, London, in particular, is full of what we could call “reluctant landlords”. These are people who did not purchase a property with the express intention of becoming landlords. They became landlords when they realised that, in London, every underused room represents foregone income. This is why London has so many basement flats and converted studio flats.
If rents were capped at a level noticeably below market rates, a lot of these reluctant landlords would be among the first to take their properties off the market, and simply use them for themselves and their families. On the demand side, a lot of people who live in shared accommodation would look for a place of their own. More people would chase fewer properties, making the gap between supply and demand even wider.
Rent controls have a terrible track record. They have always and everywhere ended in failure, which is why over nine out of 10 economists oppose them.
There is no targeted solution for the rental market. We have an overall housing shortage, and we need a holistic solution for the housing market as a whole. We need to liberalise land use planning, replace the Green Belt with a selective system of land conservation, relax height restrictions, and make sure that communities which allow development are able to reap the associated fiscal benefits. And we need policy-makers with the courage to confront the organised Nimby resistance to housing development.
Dr Kristian Niemietz is the author of the IEA Current Controversies paper ‘The key to affordable housing. A critique of the Communication Workers Union’s rent control proposal‘.
This article was first published in City AM.
No doubt, the issue of escalating rents is real. UK rents are the highest in Europe, both in absolute terms and relative to incomes. On average, private tenants in the UK pay between 40 and 50 per cent more than their counterparts in the Netherlands, Belgium, Germany and France. It is only when we include Monaco in the rent level rankings that the UK is pushed into second place, and even then, Inner London is in the same league as that playground of the rich and famous.
So clearly, there is a problem here, and this is not just a problem for tenants. It is a problem for taxpayers, employees, employers and consumers as well.
High rent levels beget high levels of spending on housing benefit, which costs the taxpayer £24.3bn every year – that is £870 per household. Then, since the problem is worst in those parts of the country which have the best jobs and earnings prospects, high rents reduce labour mobility, and thus economic productivity. Further, the problem is not limited to residential property, but affects commercial property no less, adding to the cost of doing business. This is the main reason why grocery prices in the UK are about a fifth higher than in comparable countries. The list goes on.
Rent controls, however, are not the solution. In a market economy, prices, including rents, are just messengers of scarcity. Rents are high in the UK because rental properties are in high demand and in short supply. Controlling rents, then, is like shooting the messenger – just far worse. It is more like hijacking the messenger and forcing him to tell a comforting lie. A controlled rent is a messenger who tells us, at gunpoint, that there are plenty of rental properties to go round.
In practice, what would happen if rent controls were introduced?
On the supply side, London, in particular, is full of what we could call “reluctant landlords”. These are people who did not purchase a property with the express intention of becoming landlords. They became landlords when they realised that, in London, every underused room represents foregone income. This is why London has so many basement flats and converted studio flats.
If rents were capped at a level noticeably below market rates, a lot of these reluctant landlords would be among the first to take their properties off the market, and simply use them for themselves and their families. On the demand side, a lot of people who live in shared accommodation would look for a place of their own. More people would chase fewer properties, making the gap between supply and demand even wider.
Rent controls have a terrible track record. They have always and everywhere ended in failure, which is why over nine out of 10 economists oppose them.
There is no targeted solution for the rental market. We have an overall housing shortage, and we need a holistic solution for the housing market as a whole. We need to liberalise land use planning, replace the Green Belt with a selective system of land conservation, relax height restrictions, and make sure that communities which allow development are able to reap the associated fiscal benefits. And we need policy-makers with the courage to confront the organised Nimby resistance to housing development.
Dr Kristian Niemietz is the author of the IEA Current Controversies paper ‘The key to affordable housing. A critique of the Communication Workers Union’s rent control proposal‘.
This article was first published in City AM.
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Higher rents presumably means lower discretionary incomes. Why is it then so many Europeans want to come the UK to live?
UK rents are skewed by a number of factors that makes the authors comparison flawed. For a start, London is by far the biggest city in Europe, with concomitant wages, amenities, opportunities and demand. Not only that but half the households now rent. Many of them will be on Housing Benefit, which acts in an opposite way to rent controls in Europe, artificially raising them here, lowering them there.
Furthermore, rental values of commercial property are driven by locational advantage. Prices are not set by rents. If they were, we’d see large differences in pricing across the country. We only see any real differences in prices in the middle of cities like London, where for some sectors like pubs and restaurants, demand outstrips supply, so do we see some embedded rent.
If groceries are more expensive in the UK, which I’ve seen little evidence for, then it has little to do with rent levels.
I would agree with the author that supply in the UK is not being matched with demand, except in the private rented sector. So, while rent controls would help with lowering housing costs, they come at the expense of worsening allocational efficiency, but not as badly as does owner occupation for the same reason.
The answer to this conundrum of how to square efficiency and costs is therefore quite simple. If rents are the optimal way of allocating scarce resources, like valuable location, then everyone should pay (land)rent for their right to exclude others from using it, just as renters do now. Only owner occupiers and landlords would pay it in lieu of other taxes.
Property taxes should not be local, as the author suggests, as this distorts allocational efficiency. If you insist on a local tax it should be on income or such.
Not only would housing fall to it’s capital only value, reducing house prices by two thirds, we’d see a vast reduction in vacancy and under occupation. Investment and demand would no long be distorted in favour of London and the SE, and would instead be redirected by a functioning market to where capacity and the potential for growth is highest. Negating the need to wastefully build much, if any, of the proposed extra new housing for a growing population.
Furthermore, the discretionary incomes of working households would significantly increase from any shift away from taxing wealth creation to land values instead. Making housing, particularly for those that rent, far more affordable than today.
So, while rent controls are most certainly not the best option, they are a good second best to fundamental changes to our tax system.
As for building more houses, thats a very distant third best option, as the efficiency costs are potentially even worse (like rent controls on steroids) and the effect on house prices/rents likely to be minimal.