There aren’t many things that economists across the political spectrum agree on, but the vast majority of respected economists from all sides concur: rent controls are a terrible idea. Swedish economist Assar Lindbeck, a man of the left, perhaps put it best when he famously asserted that “next to bombing, rent control seems in many cases to be the most efficient technique so far known for destroying cities.” Yet despite this consensus, Mayor of London Sadiq Khan has declared that his reelection campaign this year will be fought on his proposal to introduce such measures to the city. Such an ill-conceived proposal from the incumbent leader of our global capital is deeply worrying. It is undeniable that London is in the midst of a serious housing crisis, but rent controls are the last thing that Londoners need.
The impulse some people have to promote rent controls is understandable at first. The housing crisis means that rents, especially rents in London, are high. Londoners can, on average, spend more than half their income on rents according to some measures and more than 60% according to others. This is all the more significant because more of us are renting than in recent times. Since 2008, there have been more new private rent lettings per year than new sales. The high cost of living means that saving to put down a deposit has become far more challenging than in the past, not least because the housing crisis also means that house-buying has also become a lot more expensive. Capping these rents, advocates claim, is the obvious answer to keep the costs for tenants low and reduce the cost of living.
Oh, were it so simple. Far from improving the lot of renters, rent controls lead to worse living conditions and would exacerbate the current housing crisis. This is because rent controls act like any other form of price controls, distorting the market in such a way that ultimately harms consumers. Landlords who want to receive income at the market rate are limited to selling to new freeholders, reducing the number of properties available for the rental market. Moreover, the renters who do manage to land a rent controlled pad have little incentive to move property even if their circumstances change. They can continue to cash in on an artificially cheap cost of living, again reducing the number of properties on the market. These few tenants are the lucky winners who do benefit from rent controls, but everybody else suffers.
This inefficient allocation of resources isn’t the only problem. Rent controls harm investment in existing housing stock. Landlords, who already have a strained margin of return, are less likely to invest in repairs and renovations to their holdings, leading to the proliferation of increasingly dilapidated living conditions. Moreover, rent controls precipitate a decrease in the construction of new housing as the return is artificially capped by state intervention. Such measures result in the degradation of the housing stock and most hurt the people they are most supposed to protect. Pursuing rent controls would be a purely populist move with disastrous consequences for London.
Pointing out the folly of rent controls doesn’t preclude recognising that the rental market is tough for many renters. There are, moreover, policies that are much more likely to address the housing crisis and decrease the cost of living by reducing rent costs. Easing the vice-like grip of green belt restrictions around London would be an ideal start. As Bright Blue’s recent conservation report pointed out, much of the land is not of substantive environmental value and eco-friendly residential developments could provide new havens for plants and animals as well as new homes for humans. Recent research suggests that building on just 3.9% of the green belt around London could free up enough land for one million new homes. Prioritising construction of new homes near existing public transport infrastructure, primarily commuter belt railway stations, can also safeguard the local environment.
There is significant work to be done reforming our antiquated property tax system. Stamp duty is an indefensible transaction cost, and there are some compelling arguments for moving towards a land value tax for commercial as well as residential property. It is disappointing to see some businesses pour cold water on the prospect. Measures could also be introduced to relax the current regulations on changes to existing properties and combat the abuses of rogue landlords. It is encouraging to see the Government take steps in the right direction on both these matters, relaxing restrictions on extending homes vertically without planning permission and giving tenants greater security by reforming rules on no-fault evictions. Regulators must always temper the rights of landlords with those of tenants, but the increase in the number of renters does necessitate ensuring renters are protected from the excesses of some irresponsible practices by a minority of landlords.
Sadiq Khan should ditch the populist rhetoric on rent controls and focus on the credible ideas to make the lives of renters in London better. If he is determined to make the upcoming mayoral election a referendum on the proposal, Londoners ought to reject it and reject him.
Joseph Silke is Research and Communications Assistant at Bright Blue.
