Rent Control: Arguments For And Against

By Londonist Last edited 36 months ago
Rent Control: Arguments For And Against

Photo by Andy Worthington from the Londonist Flickr pool

Rents in London are too high. It's a rare (and brave) soul who'll deny this. One possible solution often bandied around is rent control — the majority of Londoners (not just those renting) are in favour, but the majority of economists are not. We've asked two people with different solutions to the problem to give us their point of view.

We DO need rent control

Becky Ely rents privately in north west London. She started a petition in favour of rent caps nine months ago — you can follow the campaign on Twitter.

Rents are out of control. Due to the shortage of housing in London and the fact that many people need to live in London for work, landlords are charging such high amounts for accommodation that they are pricing many families and young people out of the capital. A few months ago I started a petition for a London Rent Cap, which now has over 66,000 signatures and counting. It seems to have really struck a chord with Londoners — over 50% of Londoners rent and 24% are private renters. Several people who have signed my petition have said that they had to move out of London because of the high rents. Others are worried they will have to move out very soon as their salary is no longer enough.

The Guardian reported that a lecturer at the London March for Homes has to spend three quarters of his salary on rent. Others who have signed my petition have reported that they are spending a similar amount. Yet anything above a third of your salary is seen as an unaffordable rent by housing charity Shelter. The National Housing Federation recently reported that many private tenants are being forced to cut back on food to afford their rent. This is a shocking situation and needs urgent action by politicians.

My petition calls for a rent cap at levels much closer to social rents, similar to the Swedish model, where private landlords are not allowed to charge more than 5% above social rents. My petition states that no one should have to pay more than £200 a week in London. I chose this figure because I thought that anything over £200 a week would be very difficult for a family with an average income to pay. Either both parents will work and will need to pay child care costs — which are extremely expensive in London — or one of them will stay at home to do the child care, which will mean they have to survive on one income. The average UK income is about £27,000 or £409.90 a week after tax so even £200 a week is almost 50% of that.

A Rent Cap would also stop a small group of landlords becoming rich from all our rent money. A rent cap would be good for the economy: tenants will have more disposable income to spend on consumer items and this will help boost small businesses in London. Tenants will be more able to save, more able to pay for essential items like food and bills and will be less likely to get into debt and have to resort to payday loans.

Rent control works in other countries like Switzerland, the Netherlands and Germany, where tenants have much greater rights and the landlords are happy with the situation. Around 50-60% of the German population rent, and renting is not seen as an inferior option. Most European countries have some form of rent control and we had it in the UK until 30 years ago.

There is no evidence to support the claim that a rent cap would see landlords remove their properties from the market. When Thatcher deregulated the rental market, there was not suddenly an influx of private landlords who had previously been deterred. Numbers remained very similar. I would be glad if there were fewer buy to let landlords in any case, as it would mean it was easier for first time buyers to buy properties instead of being outbid by the buy to let landlords.

Introducing a London Rent Cap would be a very popular policy with the public and will mean ordinary people and families will not be forced out of London, the city they work in and love. We need politicians to recognise that property should not be seen as an investment but as a home.

Building more homes is the answer, says Ryan Bourne. Photo by Simon Crubellier, in the Londonist Flickr pool.

We DON'T need rent control

Ryan Bourne is Head of Public Policy at the Institute of Economic Affairs.

'The rent is too damn high' — on that we are all agreed. The annual housing benefit bill now stands at around £24bn and yet still more and more families spend over a third of their incomes paying rent. It’s tempting then, particularly for those who believe high rents arise because of landlord power or 'exploitation', to suggest government capping of rent levels.

This is hugely misguided. Rent caps are probably the best researched and understood form of price control. There’s an overwhelming consensus of economists who believe they are very damaging. Why? Capping prices at below market levels creates shortages of rentable property — especially in areas where demand is very high and hence rents high in the first place. It’s more profitable for landlords to find other uses for the property. That’s why in the 20th century, rent controls in Britain were associated with a collapse in the rental market from 90% of overall properties to just 10%. Introducing rent caps then would mean fewer people who want to rent would be able to.

For landlords who continue to rent, the suppressed return means they are more willing to let properties fall into disrepair — worsening landlord-tenant relations. Of course, those lucky enough to be able to continue to rent with charitable landlords benefit from below-market rents, but international evidence suggests that this might not help the poor. It depends of course on how the properties are allocated.

Just because rent controls would be damaging, however, doesn’t mean we are powerless. High rent levels are really driven by the same phenomenon as high house prices more broadly — a chronic under-supply of new properties in areas where people want to live. In fact, if anything recent rent rises have been below price rises — suggesting landlords aren’t being greedy, but setting rents according to market conditions.

Unfortunately, the UK’s extremely tight planning laws, including green belt restrictions which prevent the expansion of cities where people want to live (like London!), height restrictions on buildings and the extremely long development process (including section 106 agreements etc) severely constrain new supply. So as demand keeps rising, prices are just pushed up and up. This increases the burden on families through increased rents and the taxpayer through housing benefit payments too. It also makes it more difficult for people to live or move to the areas where they work.

Academic estimates suggest that these planning restrictions have raised rental and housing costs by as much as 35-40% above what they would be in a more liberal regime. This, not rent controls, also explains why it is so much cheaper to rent in other countries such as Germany.

If we really are serious about reducing rents and making it more affordable to live in the capital, we should not hark back to the failed policies of the past, but instead pressure our politicians to make it much easier to build — especially in areas where price rises are telling us there’s huge demand. For London, this means liberalising planning restraints so we can build both up and out.

Last Updated 13 February 2015

TC

I am a landlord outside of London however changes on London regulations could possibly affect other parts of the country.

When taking out mortgages on my properties the banks requested that the potential rental income was a certain percentage over the mortgage repayments. This has always worked well as a guideline for me, allowing funds to cover the mortgage repayments and keep the properties in a good state of repair without overcharging.

There are many arguments for and against each side on this debate. Yes, rents in London are excessive (I now rent in London myself) and unfortunately there are some landlords who are taking advantage of the situation. There are also many who aren't but need to keep rents in line with the 'going rate' otherwise the properties appear to be substandard if available at too cheap a rent, therefore generating less interest.

I do feel that the guidelines the banks use are (for once) very useful, not so much however is comparing to social rents as these can be unrealistic.

JohnnyFox

I'm reluctant to pitch in with this because if you're on the side of the small-time landlord you get flamed by a succession of angry people who think 'someone' should subsidise their life. I started work when the Rent Act was in force and it was nigh on impossible to find ANY flat to rent, certainly no prospect of being able to rent one outright on your own - not because of the cost, but because the rent regulations gave tenants so much security and ability to appeal the rent that private landlords simply wouldn't risk their property like that. Later, when I owned a flat, and needed to rent it out because I was working away from home for a long period, my tenants changed the locks and the best legal advice I got was to bribe them with cash to leave because the law wouldn't help me.

Rent controls fail because they reduce the supply to a point at which tenants have to scramble shamelessly for any vacancy - that's no healthier than the current situation, and people get round them by charging 'key money' to top up the capped rent.

Most London landlords own only one or two properties, banking on the income to replace pensions raped and raided by employers, investment managers and bad government. If you cap the rent they can receive so they get a gross return below 4% (the benchmark calculator for rent), they'll simply sell up and invest the capital in the stock market, so who then benefits from that?

I do believe the answer lies in changing the London Transport zones so that affordable homes in Croydon and Romford, Enfield and Barking were no more expensive to travel in from than Clapham or Chiswick. This works in New York for example, where it's the same daily cost to commute from remotest Queens or Staten Island as it is from Manhattan. Not sure how much TFL would lose by extending the flat fare band, but it might be worth a look.

SE1gurl

I am against rent control. I have flatshared and I have rented privately and now I have bought my own property with the help of a substantial mortgage of course. Rent cap at 5% above social housing rent is completely unrealistic. Why would any landlord in their right mind rent out a property at such a low rate (particularly if they are renting out a penthouse apartment in Zone 1)? In order to live in London, you need to make compromises. You can either rent with other people or you can flatshare. This enables you to save up that mortgage. It's not easy, it will take time, but nothing worth doing is ever easy.

David Sankey

It is ordinary taxpayers who are paying for the rental income (and rise in capital) enjoyed by landlords, much of that money going abroad. Why should I, on national average wage and living in a council flat in London, subsidise over-priced rents paid by people earning substantially more than me (and they do) but who qualify for housing benefit because they live in Private Rented Accommodation. This can't continue. Either we stop benefits and families with children are thrown onto the streets - or we cap rents.... We can't let landlords milk our taxes anymore.."rent controls reduce supply" - nothing like as much as house-price inflation driven by private rents does. It is not true that the higher house prices get - more get built. The opposite is true, as ordinary folk are priced out of the market and forced to become/stay renters, reliant on benefits to pay jacked-up rents.

Nigel Lewis

Can I point everyone's eyes to the parliamentary summary of this topic, which cuts through a lot of the rubbish being talked on both sides of the debate. I believe that states are good at keeping markets regulated, when they try and restructure them with wholesale/blanket reform it usually ends in tears, as this points out:

http://www.parliament.uk/busin...

Andy Brice

Rent caps are nice idea, but they have never worked. They're a blunt instrument that causes all sorts of nasty side effects. However there are other forms of rent control which might help, like those used in Germany.

Matthew Barnes

You think London looked like crap after the Germans got through with it in the mid 1940s? Just wait and see what happens after 15 years of rent control.

Advice4Renters

It is simply not true that the rent controls of 30 years ago were the only (or even the main) cause for the decline in private renting. The main reason was the mass building of local authority homes (social renting) as well as the freeing up of mortgages (with tax relief) so that more people on middle incomes could buy their own home. The private rented sector started to grow rapidly again, not when Margaret Thatcher abolished rent controls, but when, a few years' later Buy-to-Let mortgages were introduced. These gave landlords a huge advantage over would-be owner occupiers, but like all measures that make it easier to pay more for houses, the prices increased to match.

If the re-introduction of rent controls did cause some landlords to leave the sector, this would actually ease the demand since house prices would start to fall, and this would allow more owner occupiers into the market, thereby reducing the demand for private renting. Those interested in this subject would do well to read the objective and balanced report produced last month by Civitas, The Future of Private Renting.

NYC Renters' Alliance

London has the same problem that New York and San Francisco have: too much demand and not enough supply, coupled with politicians who are only beholden to the current residents and a long and arduous planning process.

That's why pro-growth groups such as the San Francisco Bay Area Renters Federation and the New York Renters Alliance were formed -- to advocate for MORE housing.

On a personal level, the writer of this post has lived in rent controlled housing that was so poorly maintained that it was virtually unlivable (i.e. floors that hadn't been sanded since 1950, wiring from the 40s, etc.).

Rent controls are great for current tenants who never want to move, but anyone who plans on changing jobs or family circumstances will be put out; in New York we often see an entire family occupying a small studio flat that one parent got when she was 23.

HHGeek

"Yet anything above a third of your salary is seen as an unaffordable rent by housing charity Shelter. "

Which basically rules out anyone on minimum wage being able to afford somewhere in much of the south-east, let alone London.

So here's an alternative solution: press harder for minimum wage to resemble a living wage. I still don't begin to understand how it's politically acceptable for people in work to qualify for basic benefits which make up the difference between min wage & actually, you know, having a roof over their heads.