Here’s why rent controls will only aggravate the UK’s housing crisis

Dani Bolt October 10, 2016 1
Here’s why rent controls will only aggravate the UK’s housing crisis

In his 2016 Labour Party Conference speech, Jeremy Corbyn claimed to have a great plan to ensure that “every British family” would have the “basic human right” to a decent home. His great plan? The same plan that has failed over and over again to provide homes for the most needy, from New York to Francisco to Stockholm: rent controls.

We are in a housing crisis with record numbers living with their parents and Britons paying the highest rents in Europe. Unless there is some drastic increase in the housing supply, young people are going to find it more and more difficult to find rental properties at all. And the best way to prevent the much–needed growth of the housing supply? Rent controls. Ironically, the very same measures that so many young people rave about will be the measures that later come back to bite them. To ensure the housing market supplies enough homes for future generations, it must be allowed to work properly – and that means freedom not control.

In a well–functioning market, supply will, eventually, match demand. At any given price, sellers will supply a certain amount of whatever product they offer to the market. The higher the price, the more they will be prepared to offer. A relatively high price is an indicator that demand outstrips supply and it encourages sellers to push more of their product onto the market. In the rental market, a high price encourages landlords to invest in building more homes.

Conversely, when prices are low, they don’t bother. The cost of opening up new rooms and homes to renters can be very high and, when the return is pittance, there can be little incentive to do so. Normally this is fine – the price is low because there’s no demand and so building extra homes would be a pointless exercise. However, when prices are held low despite booming demand, disaster strikes; there are lots of people wanting homes and an insufficient number being rented out. That’s the ugly inevitability of Corbyn’s great plan.

As with most government policies, with rent controls there are winners and losers. Whilst the losers here overwhelmingly dwarf the winners, it is worth looking at who the winners are to assess whether rent controls actually work to help the poor at all. The evidence would suggest not. When rent prices are held artificially low, current renters have little incentive to move out. These people are getting a good deal and they know it. With huge waiting lists for rent–controlled accommodation, moving out would mean moving into a less attractive area with grossly inflated prices. And why would anyone do that? These winners – often with higher incomes than those living in non–rent–controlled properties – stay in their homes for far longer than they otherwise would. New entrants to the property market don’t stand a chance.

A good demonstration of the colossal number of losers that rent restraints can produce is Stockholm. The Stockholm system is similar to that proposed by Corbyn, characterised by very slow rental rises and massive failures. There is a huge shortage of rental properties available making it nearly impossible to get a direct contract; with a queue 500 000 people long it can take well over twenty years to get to the top of the pile. Without connections or a willingness to enter the black market which inevitably formed as a result of the restraints, poor would–be–renters are stuck. Even the “winners” are losers; the lack of new housing means that they suffer a Stockholm syndrome–esque predicament, attached to houses they would rather leave due to a lack of alternatives rather than out of any real desire to stay.

Stockholm’s tragedy could become London’s. Sadiq Khan’s calls for rent controls to be introduced in the capital are just another in a long stream of proposals intended to help the poor but actually likely to have quite the opposite effect. Rent controls tend to work a treat for relatively wealthy long–term tenants who pay small sums for homes others would be prepared to pay much more for. However, for every household that benefits from the bargain, there are many more that get left behind. Young people wanting to live near where they grew up face a terrible choice between living in their parents’ back bedroom (and quite possibly never finding a place of their own) and having an unwanted property to themselves, one many miles away from their preferred location, outside of rent controls and so with rent far greater than that which they can truly afford.

Rent controls do not protect the poor; they punish them for not getting their hands on rent–controlled property first. There is an abundance of evidence showing that rent controls are an ineffective tool to help the poor, with economists from across the political spectrum practically unanimous in saying that rent controls reduce both the quantity and quality of available housing. Rents are high because there aren’t enough rental properties available – to bring them down we must allow prices to indicate this shortage. This means freeing the market rather than trying to control it. Rent controls nearly destroyed Britain’s private rental sector before; let’s not let them come back to finish the job.

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