Rent controls - mythbusting

You will hear a lot of myths about rent controls - including from well-meaning people who should know better. Here are four of the more common ones debunked:

 

1) Isn’t the only problem supply?

Not really. Firstly, supply isn’t really as big of an issue as it's made out to be – for instance, there is a higher proportion of empty bedrooms in the UK than at any time since the Great Plague (!). The ratio of rooms to people has never been higher in modern history. We’re not against new builds, especially not new social housing, but the supply question is kind of a red herring.

Secondly, there isn’t much evidence that rent controls are that bad for supply or, perhaps more importantly, that our current system is any good for it. The rapid growth in the PRS has come at the expense of other tenures (former council or owner-occupied properties being converted to rented flats), not the result of new builds. UK Government statistics from a few years ago had the number of new PRS flats coming from new builds at less than one in ten.

There is, though, a reason that the supply argument is pushed so hard by developers and landlords – it’s an opportunity for them to make loads of money. This is partly through land banking – where developers buy land, often receive planning permission, but then never use that permission and sell the land on years later. There aren’t great estimates for the amount of this going on in Scotland, but it’s reasonable to assume it isn’t massively different to down south – where more than 400,000 homes with planning permission are going unbuilt by developers.

Another, perhaps more concerning reason the supply argument is the one favoured by developers and landlords is because it skirts around the issues of power, control and regulation. They know that if we simply build loads more private flats, without changing any of the patterns of ownership or usage, it will mean a huge windfall for them. If the new builds are publicly owned, that's another question - but the industry lobbyists who push for this aren't usually proposing that!

 

2) All landlords would leave the sector and tenants would have nowhere to live.

Landlords threaten to leave the sector if regulation is increased, but a quick glance across Europe is enough to dismiss this: the most heavily regulated private rented sectors are consistently the biggest. Germany, with the biggest PRS in Europe, is easily one of the most heavily regulated.

Besides, a huge portion of the income landlords receive from their properties comes not in the form of rental income, but income from capital gains – the value of the properties themselves increasing. With house prices predicted to continue to spiral, any reduction in rental income would have a negligible impact on the profits of landlords.

But perhaps most importantly, the properties these landlords are currently renting out already exist. Unless these landlords left these properties abandoned, leaving the sector wouldn’t impact on supply at all.

 

3) Didn’t they fail when we had them last time?

Landlords insist that the various rent controls which existed in the UK between 1915 and 1988 were disastrous for tenants. They point out that, over those 70 years, we went from almost nine in ten people renting privately to fewer than one in ten. They claim this is proof that rent controls devastate the private rented sector (PRS).

This argument, in fact, was a favourite of David Cameron, who told the House of Commons in 2013: “I do not support the idea of mass rent controls because I think we would see a massive decline in the private rented sector, which is what happened the last time we had such rent controls.”

But that change, by absolutely any measure, was an enormous success of public policy. The reduction in the private rented sector can be explained in three obvious – and positive – ways:

  • Millions of council homes were built to give people a secure, safe, affordable place to stay outside the PRS.
  • Millions of people were able to buy their own homes through real-terms increases in wages and the expansion of mortgage availability.
  • Millions of the properties that landlords were renting out were demolished in slum clearances because they were, well, slums.

All of these changes were the deliberate objective of successive governments, both Labour and Conservative, which sought to reduce the amount of people in the private rented sector because they recognised it was the worst of all tenures.

But bluntly, pointing to the relative decline in the PRS as evidence of the failure of rent controls is either a complete misunderstanding or a deliberate lie.

 

4) All economists agree that rent controls are bad

You’ll often hear comments bandied around claiming that all economists agree rent controls are unambiguously bad. There is a grain of truth to this – a poll from 1992 showed a surprising degree of consensus that rent controls would have negative effects.

But here’s the hitch. Nobody is proposing the type of rent controls that this supposed unanimous opposition is directed at. During the first world war, what are now called ‘first generation rent controls’ were brought in across most countries involved in the conflict – these were blunt caps or freezes on rent, and are rightly criticised for having negative side effects. But now we have 70 years of evidence from across the world about how to implement rent controls without unintended consequences.

In his article ‘Time for Revisionism on Rent Control?’, Richard Arnott, a Boston economics professor, says: “Economists’ traditional opposition to rent control is based on a combination of ingrained hostility to price controls and the experience with first-generation controls.” He goes on to conclude that “second-generation rent controls are so different that they should be judged largely independently of the experience with first-generation controls.”

Right now, Massachusetts is considering some new rent controls measures, and a number of senior academics have weighed in. Duncan Kennedy, a Harvard professor, has made these same points as above and highlights that studies of more modern forms of rent controls - like in Oregon - show positive results.

Another academic, Joshua Mason, an Economics Professor at City University of New York, and a Fellow at the Roosevelt Institute, makes the comparison between rent controls and the minimum wage. He points out that when the minimum wage was being introduced, critics - often critics with deeply vested interests - pointed to first-year supply and demand economics and said it would reduce employment. The fact is that it didn’t. Mason makes the point that the criticisms about rent control are largely similar and that, as with the minimum wage, “we are finding that the simple supply-and-demand story doesn’t capture what happens in the real world.”

What he says next is worth quoting in full:
“Contrary to the predictions of the simple supply-and-demand model, none of these studies have found evidence that introducing or strengthening rent regulations reduces new housing construction, or that eliminating rent regulation increases construction. Most of these studies do, however, find that rent control is effective at holding down rents.”

 

Sources and further reading:

The Myths and Realities of Rent Control. Hamish Kallin and Tom Slater. A Century of Housing Struggles: From the 1915 Rent Strikes to Contemporary Housing Activisms.

All That Is Solid: How the Great Housing Disaster Defines Our Times, and What We Can Do About It. Danny Dorling.

The Future of Private Renting. Daniel Bentley, Civitas. Available online at: http://www.civitas.org.uk/pdf/thefutureofprivaterenting

Developers leave 420,000 homes with planning permission unbuilt, new figures show. Independent: https://www.independent.co.uk/news/uk/politics/developers-real-estate-homes-planning-permission-unbuilt-social-housing-crisis-figures-a8212641.html

In Defense of Rent Control and Rent Caps. Duncan Kennedy:
Part one: https://lpeblog.org/2020/02/03/in-defense-of-rent-control-and-rent-caps-part-i-of-ii/
Part two: https://lpeblog.org/2020/02/04/in-defense-of-rent-control-and-rent-caps-part-ii-of-ii/

Considerations on Rent Control. JW Mason:
https://jwmason.org/slackwire/considerations-on-rent-control/