Are rent caps the answer?

Renters are understandably angry about the unaffordable cost of renting. In the capital, average rent for a two bedroom flat is now a whopping £1,495 a month. Other parts of the country are also experiencing record highs.

Shelter is deeply concerned by how unstable and unaffordable private renting has become.  The record high costs of private renting have led to renewed calls for some form of rent control.  But we’re not convinced that comprehensive rent caps are the best answer.

Is rent capping the answer?

There are two different ways of using the law to control private rent levels:

1)      The old-style rent cap involved setting overall maximum rent levels, giving tenants indefinite contracts, and limiting the rent increases that could be charged to tenants once they were in a contract. It was originally introduced in the UK in 1915 as an emergency wartime measure to deal with housing shortages caused by the absence of any building workforce. However, few comparable countries have such an intensive set of controls today.

2)      Germany, France and Spain use what is sometimes called second generation rent control to calm rents without directly setting prices: rents are determined by the market at the outset; renters have longer term contracts and, as long as renters are in these contracts, their rent can only be increased by an inflationary index, such as RPI or CPI.

We think that the second option would dramatically improve private renting in England- and we’ll explain why later on. Although we wouldn’t call it rent control as this often adds to the confusion.

Whether the first option, old-style rent caps, work depends on how landlords respond. Historic and international evidence suggests that the side-effects can be pretty undesirable:

  • In markets where demand outstrips supply, landlords may discriminate on a tenant’s characteristics rather than price.
  • This could see people with lower incomes pushed even further to the bottom of the market (or into a black market with fewer protections) as prospective tenants with higher incomes are viewed as more reliable.
  • Landlords may attempt to maintain their margins by cutting down on repairs.
  • Or they may try to game the system. In New Jersey, where rent caps exist, landlords have been subdividing their apartments. These landlords end up benefitting while ordinary renters are forced into even more cramped living conditions.
  • Equally, if capped rents do not cover mortgage payments, landlords with large mortgages may be forced to end the tenancy and sell the property. This could leave those families who have no choice but to rent privately with even fewer options.

So, how can we bring down the cost of renting?

Rent levels are high because there are too many people who have to rent, and not enough homes available. Rents can only be reduced sustainably by increasing the overall supply of all types of homes, so that more people can get a social home or buy their own with a mortgage, and fewer private renters have to compete over each available home.

Competition for rented homes is particularly acute in London, which is why Boris Johnson has to get a grip on London’s housing shortage. The Mayor’s current plans do not come close to London’s objectively assessed housing need, for market or affordable homes. Unless we build at least as many homes as London needs – and especially more genuinely affordable homes – we cannot expect the cost of housing to become less prohibitive.

What can we do in the meantime?

But even with concerted action, building the homes we need will take time. So private renting needs to become more stable for the 9 million people who rent, and quickly. To achieve this Shelter has proposed the Stable Rental Contract: a five year fixed-term contract, during which renters could not be evicted without very good reason, and their rents could not rise by more than inflation. Not only would this give renters the stability they need to put down roots and raise a family, it would also have a calming effect on rents by reducing churn and increasing renters’ bargaining power. Similar measures have worked well in other countries.

It is often the instability of renting that is so damaging. Each tenancy ending means a huge deposit, more agency fees, unpredictable rent increases and moving costs. The Stable Rental Contract is not rent capping – but it would help to reduce the upward pressure on rents.

What next?

At Shelter we are desperate to make renting better and more affordable- no policy is ever off the table. The trouble is, no-one has yet produced any strong evidence that suggests rent caps would really benefit renters. However, with the sector growing so rapidly in some parts of the country, the issues associated with private renting have become increasingly location-specific. In this context there is an argument for London’s Mayor, and local councils in pressurised renting hotspots, to be given greater power to intervene to fix private renting.

In the late twentieth century, Britain moved from having the most, heavy-handed regulation of private renting in the world to having the most deregulated, uncontrolled system anywhere. We are now seeing the impact of the almost complete lack of consumer protection for renters. Rather than swinging the pendulum back from one extreme to the other, we should be trying to find sustainable, modern methods of preventing rents spiralling out of families’ reach. 

  1. The solution, at the stroke of a pen, is to introduce
    German style rent and tenancy controls. Inadequate landlords will leave the market, releasing
    swathes of properties for purchase. Those that remain, willing to offer a
    useful service fitting of their pivotal role in the community, will be
    able to attain a fair rental but no more. The system works in Germany
    and there is no justification for it not being applied here despite the
    usual protestations from the self-interested parties. The options of
    licensing and fines will allow policing of the sector.

  2. I cannot believe Shelter oppose rent capping, the one thing I am looking for in political parties’ 2015 manifestos.

    £65 per bedroom per week from Harris to Hampstead and no exceptions. Total flexibility below that limit. Collapse house price inflation caused by the domestic and international buy-to-let tier, return homes to real buyers, allow tenants to save and/or flood the economy with spending power, slash housing benefit spend.

    There is no downside to rent capping. Would you rather your minimum wage went up by £5 a week or your rent came down by £50? One option impacts employers, a necessary tier, the other impacts buy-to-let, an utterly useless tier of society who could turn their talents to something beneficial.

    There are clear ways to tackle any ‘down side’ to rent capping. If a logged repair isn’t looked at within a week, the tenant could have the right to repair and deduct costs from rent. New Jersey subdivisions?
    Number of bedrooms is held with councils, and rents are based on that.

    Not enough new homes are going to be built to level out the market and lower rents. They will be bought-to-let at today’s extortionate rates. It’s time for action on this issue.

    1. This is a campaign I wish to start/get involved in. You are right no one anywhere is just stating the obvious: rents are too high. If you want to be involved in a campaign let me know.

    2. You have no chance whatsoever of acheiving this. None. No political party will back this bar some extreme leftist ones who have zero chance of being part of government.

    3. Rent is the thing that underpins house values in the UK – cap it and you will cause a house price crash which will cause a recession which will cause huge unemployment which will cause poor people to lose their jobs. Be careful what you wish for. It is unfair for someone to have bought a house for £300,000 thinking they could get 5%pa in rent due to the market and then have that capped at say 2 or 3% their sums will no longer add up and they will be bankrupted.
      One reason why rents are so high in this country is because of housing benefit increasing the money available to landlords.

    4. If you cannot believe Shelter would oppose rent caps, wouldn’t it be a good idea to consider what they might understand from their experience of the housing sector that you don’t?

  3. So Shelter would rather rent continues to become unaffordable for many which in turn means they become homeless and then unemployed because they have nowhere to live. I expected more from you to be honest but this article just sounds like something that has come from the Tories propaganda machine

    1. Rent caps might be a nice idea in theory. But in practice they do not work. Shelter is offering pragmatic, workable solutions.

  4. No one has a right to live in Central London.

  5. I am a landlord and my expenses this year have been £12,000! The property is in Kent and I charge £800 pm for a 3 bedroomed property. As it stands I am making a huge loss, but am happy to spend money on keeping it nice as it is a long term investment and my tenants stay happy. I only let to professionals, as my lender will not allow me to take in people on housing benefit. A rent cap would destroy me. I agree with Shelters idea which offers stability all round.

    1. Rent caps are not meant for you.

      I pay £560 for a room in a 4 bedrooms house. Other 3 people pay about £500 average (i have the “biggest” room), so they are making more than £2000 on a 4 bedrooms house. Actually is a 2 bedrooms but they divided the living area in 2 “new” bedrooms. We have a kitchen so small that it doesn’t have a chair or table (i am the only one who have a table in the room to eat, others eat standing or on the bed). I’m living almost 1 hour from the center, Zone 4, London.

      Rent caps or any other type of regulation must be applied at least to London.

      With £800 pm in London (even Zone 4 or 5) is not enough for living in a property alone. Maybe you can have a decent double room, sharing the house, in a nice Zone 3 for that price.

    2. Owning a property has obvious maintenance costs but you won’t spend £12k
      every year – probably one year in ten. If you only charge £800 per
      month it is unlikely that you would be subject to a rent cap because
      this is not extortionate in the South of England, not even in Kent.

  6. You miss the option of reducing the demand by moving jobs out of London. I think it was the 70s when government agencies & others were encouraged to relocate. Some managed, but many found it would be too expensive – people liked living in London, and wanted substantial compensation to move.

    If you currently live & work in London, why? Is it that you can’t get a job elsewhere? If your employer moved to somewhere where housing was more affordable, how would you feel?
    (Rant: I typed a post in, then clicked to log in as Facebook. I’m now logged in – but have to retype the whole post!)

  7. Nice Post!

    But every home needs for maintanence because of increase our property value .

  8. There is a problem with suggesting rent caps as an isolated policy. First, rent caps should be properly controlled so that they track wages, not inflation. Rents and house prices also drive up inflation – but they have rarely driven salaries over the last 15 years – so affordability of housing should be associated with wages.
    Secondly, rent limits should be determined by the size of properties. Halving the size of a property would result in the an even lower rent (should really be half as much).
    Thirdly, there should be enough affordable housing in a local area to meet the locals’ needs. Professionals can afford to travel but cleaners, shop assistants and fast food/restaurant workers can’t so they have a right to live within a couple of miles of where they work, and take their children to a local school. Therefore, selecting renters but class or salaries should be illegal. It is likely that smaller houses will attract the lower classes anyway, and will have lower caps – or may be these properties should be reserved for the lowest paid on benefits, or nurses and other poorly-paid care workers. There is a problem with the few large poor families – these will always require proper Government benefits that the Tories are now wishing to cut – pushing the poorest and most vulnerable in society closer to the edge.
    But what about landlords being unable to meet their mortgage commitments? Won’t they just evict their tenants and sell up? It is still illegal to evict sitting tenants, although short-term contracts mean they usually only have to wait a few months – at most a year – to evict their tenants. However, such a rent cap should be combined with increased council housing so that the local council effectively underwrites the tenancy agreement and buys the property if sold or the landlord goes bankrupt. This would increase council housing stock, reduce house prices inflated by buy-to-let mortgages who require high rent to make their profits, and return housing stock back to public hands increasing the commonwealth of the country. Councils benefit this investment by creating a regularly rental income and assets that could be sold in the future once this current housing crisis is solved.
    But if we don’t look at the housing problem at all levels it will never be solved. The solutions may sound complex, but the aim is the same: get more publicly-owned houses to rent at reasonable levels; stop government subsides for private ownership – including help-to-buy and buy-to-let – which drives up house prices and by inference rents; charge council tax on empty properties to force owners to use or sell them – compulsory purchase if necessary; implement a progressive council tax that forces the richest in the largest houses to pay most of the local taxation not a small amount; and tie affordable house prices and rents to salaries, to reverse the cost-of-living crisis on the middle classes, which will probably result in all house building being done by councils at cost – rather than developers for profit – until once again house prices are linked to salaries and salaries increase with inflation.

  9. So rent caps are not the answer because if they were in place some landlords might decide to adopt illegal practices (which they don’t do now, nooo!). Let’s not, then; God forbid someone (the Councils maybe?) had to enforce anything on them.
    Seriously, whose side is Shelter on?

  10. For my friends and neighbours this may be something to consider landlords are cashing in on the housing crises it has to stop now! Please join in the discussion

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