They won big at the Golden Globes with their Bohemian Rhapsody biopic, but Queen aren’t the only icons back from the 1970s. Nearly half a decade since the Ed Miliband bacon sarnie drama, the ex-Labour leader’s favourite policy is back on heavy rotation again: rent controls.
This time, it’s part of the London mayor’s re-election campaign. Cue lots of press coverage reporting how favourable such a plan would be with the capital’s renters. The Turkey Union apparently prefers Hanukkah over Christmas too, I hear.
Predictably, while this Guardian article reports rent rises up to 2016, it doesn’t look too closely at more recent pricing trends which show rents flattening out and declining in some areas. Nor does it question how much actual affordable housing has been built under Khan (although in fairness, much of what’s coming through now will have been consented – or not – under Boris Johnson’s tenure as mayor).
Suggesting market interference will somehow cure a multi-generational disease of poor policymaking is at best lazy, and at worst deeply cynical. It’s easy to see why Khan has chosen it, although you could question why he needs a re-election campaign at all, given the lack of any credible opposition.
Right on right to buy
London Assembly housing spokesman Tom Copley is totally right to call out Right to Buy for the shambolic piece of policymaking it has turned out to be – a well-intentioned move turned sour by consistent failings over more than 35 years. In his campaign, Copley rightly says what so many weirdly seem afraid to.
So if ending Right to Buy is correct, how can rent controls be wrong? Well, there are several reasons.
- Pretty much all economists say it’s a terrible idea
Economists love to quote Princeton’s Alan Blinder, creator of his self-proclaimed ‘Murphy’s Law of economic policy’: ”Economists have the least influence on policy where they know the most and are most agreed.”
This astutely summarises the fact that pretty much all economists are aligned. While a 1992 a poll of the American Economic Association found 93 percent of its members agreeing that “a ceiling on rents reduces the quality and quantity of housing”, more recent papers, like ‘Rent Control: Do Economists Agree?’ by Blair Jenkins, are pretty comprehensive.
“Economic research quite consistently and predominantly frowns on rent control,” Jenkins writes. “My findings cover both theoretical and empirical research on many dimensions of the issue, including housing availability, maintenance and housing quality, rental rates, political and administrative costs, and redistribution… The economics profession has reached a rare consensus: Rent control creates many more problems than it solves.”
Markets aren’t perfect and any additional distortions create further disincentives – whether it’s encouraging landlords to stop investing, leading to deteriorating housing stock, or reducing labour mobility, because people are scared to move.
Remember, most landlords in the UK are individuals with only one property. So capping rents is effectively saying “we’re having your pension off you”. That’s why encouraging professional investors – such as institutions – is largely seen as a major solution to the very real problem Londoners face.
- This will spook the market at the worst possible time
George Osborne’s sledgehammer of buy-to-let taxes is now slicing through the face of the amateur landlord sector. He removed mortgage interest relief and slapped a three percent stamp duty purchase on second homes. Now these policies have filtered through the system, mortgage approvals for new buy-to-let mortgages have been sinking. Meanwhile, the omni-shambles of Brexit has anyone not on the boat to Singapore folding their arms and holding their nose at the stench of Westminster’s incompetence. Market confidence is at an all-time low, and all rent controls do is kick sentiment in the Ed Balls.
- It assumes everyone in the private rented sector has the same needs
If you ask a thousand Waitrose customers if they’d like to pay less for their organic dog food or fresh mozzarella, they’d probably say yes. If you ask a thousand Porsche owners if they’d like a helping hand with their car insurance, they’d probably nod as well. Some people are more in need than others though.
Many in the private rented sector are quite happy and thousands get a good deal, benefiting from flexibility, choice and the ability to live somewhere better than they could afford to own. But many are only there because there’s not enough social housing; because policy has failed them and left the private sector to clear up the mess. These people absolutely need support, but rent controls will make investment that could help them less likely to arrive.
- It distracts from the real problems
A staggering 13 percent annual increase in food bank usage was reported by the Trussell Trust last year, with more than 70,000 emergency three-day supplies in London alone reported between April and September 2018. Universal Credit is blamed for a large portion of this.
Rough sleeping has been soaring, with a Shelter report claiming in November that 320,000 people were now homeless. While the government has pledged to eradicate it by 2027 – with a group of highly committed individuals clearly dedicated to the cause – many have questioned whether the £100m sum announced last August by housing secretary James Brokenshire has enough zeros on.
Rent controls could quell increases, but for those most in need, crippled by benefits cuts, trying to work in the face of poor childcare provision or in some cases, a tax system that doesn’t allow work to actually pay, this will not make housing any more accessible.
- Claims that rent controls are widely used across the U.S. are overcooked
Anyone who’s stepped foot in San Francisco can’t help but have been appalled by the terrible homelessness issue there, against a backdrop of billionaire tech firms who benefit hugely from subsidies and clever tax loopholes.
For $200,000-a-year coders at Facebook, the city’s sky high rents aren’t a problem. But Bay Area NIMBYs are some of the world’s most aggressive development haters. And it’s this – together with a lack of any proper public transit to the suburbs – that has lit the touch paper of draconian rent controls, causing a forest fire of a housing crisis, that’s now engulfing the regions growth prospects.
When it came to a vote on rent controls last November, nearly two-thirds of people opposed repealing a 23-year-old law (the Costa-Hawkins Rental Housing Act of 1995, in case it comes up in the pub quiz) that stops cities enforcing caps and allows landlords of rent-controlled homes to raise rents after a tenant departs.
Many companies are now taking matters into their own hands, although where that happens, there needs to be higher level of corporate social responsibility from major corporations. See if you agree with my views in this Sky News interview below.
- German comparisons are apples and pears
The other place proponents of rent controls love to compare us with is Germany. It’s true that housing costs are lower there than in Britain: average rents in Munich – the highest in Germany – are just a third of average rents in London. Most Germans spend less than 30 percent of their income on housing, when some Londoners can spend up to half their pay packet.
Legislation restricts rental increases for existing tenants, which is what Miliband proposed and presumably what Khan will want too.
However, this isn’t the real reason why rents are lower in Germany. The truth is they construct far more homes that we do – having built almost twice as many a year as we have for the past decade or so.
- Help to Buy is a ticking time-bomb that has pushed up prices
Unfortunately, the debate around our national inability to build houses has focused almost exclusively on the impact it is having on first-time buyers. Help to Buy has been shown to have pushed up prices for first time buyers, while those in first homes have been unable to move up.
Many with Help to Buy homes will find themselves unable to move – and some could even be in trouble when the initial 5 year period of free money runs out and they then have to pay interest on the equity loan element of their mortgage. We’ve seen many a story about mortgage prisoners and there’s a real risk that anyone perceived as sub-prime borrower by banks could end up in the same boat.
- He should focus on build to rent
As with his promise of an energy price freeze, the rent controls are a seductively simple solution to a complex problem. London has the potential to see a revolution in new rental homes being created by a raft of build to rent investors. Whether it’s Essential Living’s award-winning Union Wharf (formerly Creekside) scheme in Greenwich, which will open in spring, Grainger’s Argo project in Canning Town or M&G Real Estate’s Rehearsal Rooms project over the other side of town in Acton, London has a growing bevvy of build to rent at a range of price points.
If Khan is adamant on pushing through this policy, one way to moderate its potential impact on investment would be to look only at stabilisation for corporate investors (defined as institutional investors rather than buy-to-let folk with a big portfolio). Many already offer price certainty during the lifetime of a tenancy. Indeed, many professional build to rent landlords also offer family-friendly three-year tenancies – something you won’t often see in the mom’n’pop rental market. It is proving to be a great example of the new, professional market sorting out some the issues that years of speeches, consultations and rants has failed to.
Sadly, while many have been making the case for more density in housing, what they never intended was for policymakers themselves to get denser. Let’s hope Khan doesn’t make the same mistake as Leave by painting lies on the side of a bus. At some point, they’ll come back to bite you.
Andrew Teacher is Blackstock Consulting’s founder and managing director and has authored numerous reports looking at planning and build to rent. Please get in touch for more info.