Unanimity among economists is rare but if there is one issue that unites practitioners of the dismal science, it is rent controls. Almost universally, they consider them a bad idea.
Expertise, however, is fast going out of fashion in politics and this week Jeremy Corbyn raised the prospect of the state determining how much private landlords can charge.
In his speech, the Labour leader gave few details, saying only that “rent controls exist in many cities across the world and I want our cities to have those powers”. That opens a lot of possibilities, with different models operating from Pyongyang to Palm Springs.
The problem he is trying to deal with is clear at least. Rents have soared in recent years and now account for two fifths of the typical tenant’s income. Half of young people are renters, double the rate ten years ago. Many landlords have grown rich through luck rather than endeavour and often their properties are woefully maintained.
So where might Corbyn copy? Germany is often cited as having a well functioning and affordable rental market and has employed rent controls for years. There, landlords can set the rent as they see fit but once a tenant is in place, the cost can rise only with inflation. Tenants usually have indefinite right to remain and can be evicted only for non-payment. In the past two years Berlin has gone further by stopping landlords charging new tenants more than 10 per cent above the local average, curtailing their ability to force rents higher between tenancies. The law was introduced after rents started jumping in the capital.
The policy is already running into problems, though, and experts say the cheap rents Germans benefited from for years were a result of high rates of housebuilding and liberal planning laws, not the inflation cap. Only last week, a court ruled the new law was unconstitutional. Far from helping poor Berliners, the court heard the policy benefited only the better-off because landlords restricted by price were opting for the security of wealthier tenants.
Economists’ main objection to rent controls is that they cut the supply of homes because there is less incentive for landlords to enter the market and more to leave. Ontario, which introduced a cap on rent rises six months ago, has already seen one in every 25 homes in the planning pipeline shelved.
History shows that the more draconian the controls, the greater the drop in supply. New York is a case in point. For years, it has capped rent rises on half of properties meaning anyone who lives in one gets a great deal but everyone else pays much more than they would otherwise on the open market. The result is a chronic shortage of homes in areas dominated by “rent-stabilised” properties. Research also suggests that New Yorkers who benefit from the controls are not the poorest but those earning “far above the poverty level”. And economists say that linking support to properties rather than people creates incentives for tenants to stay in unsuitable homes.
A CEILING ON THE COST OF LIVING
Berlin Rents rise only with inflation during a tenancy. New tenants cannot be charged more than 10 per cent above the average
Ontario Rents are only allowed to increase with inflation during a tenancy, up to a maximum of 2.5 per cent
New York Half of properties have predetermined rent that can only rise by the amount decided by the Rent Guidelines Board
Arguably a similar system already operates in the UK. People in social housing pay below the market rate while everyone else pays higher rents in the open market. The result is more than a million low earners waiting for a council home and existing council tenants on high salaries staying put. Some people argue that the UK has already introduced rent controls by the back door by capping housing benefit. The result, they say, is that 90 per cent of private landlords now state “no housing benefit” on their adverts.
Rent controls are also much easier to introduce than to withdraw. In the UK, “temporary” rent restrictions were introduced in 1915 but did not disappear entirely until 1989. In the intervening years, the proportion of the housing stock made up by private rented homes collapsed from nine tenths to one tenth. The policy resulted in far poorer quality rental properties because landlords saw no reason to invest in maintenance.
Supporters of rent controls say they stop cities from becoming the exclusive domain of the rich. Some economists also argue that rent caps during tenancies are justified because the nature of property means landlords have disproportionate power that lets them set rents above the market rate. But if Mr Corbyn does his research he will see that rent controls, even in their most benign form, benefit only a small number of people who are usually not the most needy, while cutting the supply of homes and triggering unintended consequences that are hard to unwind.
So what can he do if he wants to make rents more affordable? The only answer, according to those much- maligned economists, is to get building. Scott Corfe, of the Social Market Foundation think tank, says: “Rent controls are a messy way of trying to deal with the fundamental problem, which is the lack of supply of homes.”