Should I support ‘rent control’? The devil is in the detail.

At the beginning of the month the Independent reported that ‘almost nobody in the UK is opposed to rent controls’; polling showed that 59% of people supported their reintroduction. 7% were in opposition and a sizeable 34% didn’t know.

And to be honest, if you were to ask me only whether I supported the introduction of ‘rent controls’ without any detail I’d be with the 34%.

Like any kind of regulation, not all rent control is good or bad. It depends on exactly what the proposal is and where it will apply. As the rather more nuanced editorial that accompanied the article said “…the choice is not between sledgehammer controls and nothing at all.” The devil is in the detail.

And the opportunity for widely different detail is significant. Rent controls are typically divided up into belonging to two or three ‘generations’ depending on whether they limit absolute rent levels, increases in rents between tenancies or just rent increases within tenancies. But even this distinction can over-simplify the extent of the difference between different regimes and how they act in practice.

In practice, an absolute freeze on all rents at existing levels is very different from an enforced cut to below existing market levels or instituting a ‘fair rent’ regime. A 10% limit on rent increases between tenancies is very different from a 100% limit. And so is the difference between always limiting in-tenancy rent increases to inflation and establishing a municipal board to annually decide the maximum increases landlords are able to charge.

Nor does the complexity end with the detail of regulation that concerns rents directly. How the policy interacts with other national regulation matters hugely. Because in a situation where, for example, rent increases are limited during tenancies, the minimum legal length of a tenancy is critically important. If your landlord can just kick you out and get a new tenant at a market rent then restrictions on rent increases are relatively meaningless.

The Cambridge Centre for Housing and Planning Research in their 2012 comparison of international rental markets produced six regulatory indicators that are a good starting point for considering the extent of the regulations effecting rents:

  • Initial rent setting
  • Rent increases during a tenancy
  • Length of a lease
  • Capacity to get a property back during lease
  • Capacity to sell/transfer to other tenure
  • Enforcement or eviction if contract broken

All of which leads to the possibility of a large number of different regimes of rent regulation, with different advantage, disadvantages and trade-offs.

It also acts as a reminder that even in the current English sector, private rents are lightly regulated, albeit extremely minimally. Because landlords can’t just hike up the rent whenever they want, even within an Assured Shorthold Tenancy. Rents are fixed within fixed-term contracts and can only be increased once every 12 months under a rolling (statutory periodic) contract. This may mean for example, that landlords can and do absorb cost pressures like an interest rise hike for up to a year before they are able to increase rents.

But despite the plurality of options and England’s existing regulation, the choice on rent control can often be characterised as a binary choice between nothing and everything. And the public debate about rent control can sometimes descend into a stale ideological row between people who are vehemently in favour or against rent controls on point of principle.

For some in favour, the dizzying unaffordability of private rents justifies almost any intervention. For some against, any increase in regulation threatens to send the English housing market into an End of Days scenario.

The problem is that both the concerns of those in favour of and against rent control in principle are founded on reasonable worries.

Concerns about the contraction of the sector and a crash in house prices are perfectly legitimate. As Steve Hilditch over on the Red Brick blog rightly points out, house price crashes are carnage, never something to be relished.

The burden of such a crash never falls principally on those most able to pay, but – as Amir Sufi and Atif Mian identified in their cracking appraisal of the 2008 US house price crash – on those with the largest debts who are least able to pay. The net effect in the US was a dramatic regressive redistribution of wealth from the indebted poor to rich savers. There’s no reason to assume the same wouldn’t happen here, with equity rich homeowners able to withstand a fall in prices and mortgage holders left dangerously over-exposed.

But it is equally legitimate to be concerned about the high cost of private renting in England and the fact that nationally it on average hoovers up 40% of renters’ take home pay – well over the 33% that is typically thought to be affordable. In high demand areas like London, it can take even more, pushing people further out or away from the city entirely. With more and more families living in private renting long-term, high and rising rents can make housing insecure and unstable.

We shouldn’t pretend that there is an ideal form of rent regulation that will make private renting affordable for everyone. But that shouldn’t stop us from trying to work for the best possible one that we can hope for in England – one that improves affordability without leading to catastrophe. And such a policy lies somewhere in the detailed middle between the poles of absolute rent caps and no regulation at all. Remember that we already have a form of very light regulation.

Is discussing such a detailed middle possible?

Yes, I think so.

When it comes to something like income tax, we’re able to have a public debate to democratically determine this detailed middle. We’ve moved on from discussing the principle of whether there ought to be an income tax at all; that the answer is yes is almost unquestioned. The public debate is about bands and rates, how much and who should pay.

If we are going to get any closer to doing something about rent affordability we need to move in that detailed direction.

  1. Price controls are like squeezing a balloon animal. Wherever you squeeze, it pops out somewhere else. And that is the problem, attempting to apply controls in a market will have side effects, many of which are both unintended and undesirable. One of the problems is many of those side effects will not be clearly understood until it is too late. Shelter and others pay far too little attention to the likely losers from their proposals.

    Many tenants like the idea of rent controls. They think it means renting their next place will be cheaper. But unless you have absolute rent control (which no-one is proposing) this is not the case. All that it might mean is rent increases DURING a tenancy might be limited in some way. That only benefits ongoing tenancies, and many groups (esp students and younger working people) do not benefit from that. It’s also worth noting that studies regularly show that more often than not landlords do not increase rents to market levels for existing tenants. So actually the group least in need of protection from rent rises are the group who would be affected by rent increase caps.

    If rent increases are limited, and the Bank Rate then starts to rise (which inevitably it will at some point in the coming years) the landlord may be squeezed to the point where they cannot pay the more expensive mortgage which puts the tenancy at risk. The rent is only limited for the CURRENT tenants (not new tenants) so the rent controls are creating an enormous incentive for the landlord (whether through desperation or criminality) to replace the tenants and get the market rent. So rent increase caps create a perverse incentive – they turn landlords against good, long-term tenants. The majority of fairly decent landlords will just deal with it, but the criminals will benefit from that incentive. It also means tenants who will stay for a long time (like families) will become undesirable tenants. Rent increase caps make tenants that don’t stay long much, much more attractive as tenants – the opposite of the current situation.

    Shelter suggest some of these caps are only small changes. This is frankly nonsense. If for example rent increases were capped at 3% per year that sounds fair doesn’t it? Except what if transport links improve nearby, the block exterior (roof, windows etc) is refurbished by the freeholder (at the landlord’s expense) and the flat has a new kitchen & bathroom, but the tenants stay for ten years. Market rents would be higher because the property is much more attractive (transport, new kitchen etc) but the rent is capped using a completely arbitrary limit. That limit caps income, and will certainly limit what the landlord can spend on improvements to that property in future. In such a scenario after ten years the tenancy could easily be paying HALF what new tenants would pay for the same property. Over time, rent increase caps can have an enormous effect, and it’s not entirely positive for tenants.

    Of course tenants moving home will have to pay market rents. If their current place is capped at £750pcm, but market rents have risen to £950pcm then the rent controls have created a very large disincentive to moving home. Capping rent increases makes it harder for tenants to move, damaging mobility. It also penalises people who move regularly (younger tenants, students, people moving for jobs) versus those who stay put (eg families).

    Another issue is if a landlord’s income, instead of being agreed between the tenant and landlord, is capped in some way then that reduces the landlord’s revenues, which will inevitably lead to reduced investment in the property. All sensible landlords take a % of their profits and reinvest it in new boilers, decorating, roof repairs, kitchens, bathrooms, upgrades, etc. If the rental income is reduced the budget for repairs will by necessity be reduced as well (ALL businesses with falling revenues are forced to cut costs). Rent caps (of all kinds) reduce investment (and therefore quality and safety) of existing stock. That is not good for tenants either, and means long-term tenants will live in a property with lower long-term investment.

    Another very significant risk with rent controls is it scares landlords and potential new investors. Tenants might think “who cares”, well they should care. The more companies like Prudential, Aviva etc move into providing rental accommodation (often in purpose built blocks), the more properties are newly built, and the more supply there is in the market. That brings a downward pressure on rental prices, and increases competition which brings improvements in quality/safety/choice. Of course if the opposite happens and these investors are scared away by new regulation or rent caps, less new housing is built, rents go UP. Yes, a direct consequence of rent controls is to reduce investment in new rental housing, which means less supply and HIGHER prices for new tenants. It’s disgraceful Shelter never mention this very significant risk, even in this supposedly “balanced” piece.

    The reason rents are high (in and around London) is because property prices are high. Prices are high because demand is very high because London offers more jobs, opportunities, and attracts people from other parts of the UK and from outside the UK, PLUS the most absurdly low supply of new properties. Given the failure to build new homes, the market is doing what you’d expect (however undesirable) – prices are rising. The ONLY long term solution is to reduce demand (not an option) or hugely increase supply. Rent controls are not just a poor solution, they are a solution to the wrong problem.

    What tenants want is lower prices, low rent increases, better quality homes, security, and choice. The rental market has many huge failings and tenants currently clearly suffer, but these benefits they want are delivered in well-functioning markets where there is plentiful supply and fierce competition – just look at the supermarket price war currently ongoing. In areas where customers are treated badly (banks, utilities, councils etc) it is because of a lack of competition. Tenants will do best from a rental market with more supply of rental homes, and such strong competition that if a landlord doesn’t keep their property in excellent condition and look after their tenants (who are paying customers) their business fails because no-one rents from them. The lack of supply of new homes is reducing tenants’ right to vote with their feet.

    Rent controls are a silly distraction being lobbied for by Shelter (to try to stay relevant) and by politicians increasingly desperate to deflect from their own failure to build enough homes for us all. It’s also seen as a quick-fix and a vote winner, but what matters is improving the market for the long term. Shelter provides a greatly valuable service to tenants but its rent control proposals are naive and ill thought out to say the least and will do more to harm than good for tenants.

  2. It does not really add to debate to suggest that the posting is a “silly distraction” for Shelter (to try and stay relevant)

    There are many agencies and politicians of various political hue who are now discussing the issue of rent control as something that should realistically be considered,despite there being possible problems.

    Ollie suggests that more supply of rented accommodation (I presume he means private stock) will lead to competition and lower rental cost as landlords seek secure tenants against their competitors, in a similar way to what is happening in the food sector. I would suggest that the analogy is not appropriate for several reasons; firstly the food industry is in fact heavily regulated whereas the rental market is not (except in limited circumstances); secondly unlike in retail, tenants do not want to change their supplier according to price drops. Many tenants have to put up with what they can secure, often at short notice and with little choice; thirdly since the late 1990s the amount of private rental accommodation on the market has massively increased – but at the same time rents have increased at a significantly higher rate. This has lead to some BTL landlords creating a large portfolio of property without any significant change in the periods of time that tenants remain in their tenancies.

    Tenants move for various reasons; they can not afford a proposed rent increase after 6 or 12 months. The condition of the property and contents when first viewed was not an accurate assessment of its actual condition. (it is not always possible to check every single thing eg that a table leg is actually stable, or that the cooker works consistently. (as an aside, those are things that will not be included as issues of disrepair under the HHSRS Cat 2 notices)
    Often a landlord will say to a tenant that they want an immediate answer for the let as there are other people intending to view – take it or leave it. It is a sellers market, not a buyers.

    In recent years many families have had to rely on the private sector for renting when they would have preferred to have a tenancy with security of tenure in which they could create a home, and not just be a place where they live. ASTs do not normally allow for a person to put item of there own furniture in the property or to decorate; other reluctant tenants would have preferred to buy but cannot compete with cash buyers or secure a mortgage. It could be said that a tenant could negotiate for a longer tenancy and for the right to decorate, however if a person needs to move due to redundancy or for some other reason, a fixed term tenancy locks them in. A tenant could negotiate for an unfurnished property but 6/12 months later a landlord may end a tenancy and they then have to sell off their goods because they can not secure another unfurnished place.

    Private sector letting is good for students and young people obtaining their first place after leaving home (many students return home because they can not afford rent) but for families or couples who are just setting out it is not always ideal. Others may want a property for 6 /12 months for reasons of work.

    What is needed is an increase in the supply of public sector provided homes at rents that people can afford and still be able to have a reasonable standard of life. And at the same time a stabilisation of the purchase market and even a fall in prices so that wage levels get back to some reasonable parity with wages would be good. This applies not just in London but elsewhere. Unfortunately no government would be prepared to allow that to happen.

    In the meantime some form a rent control would be a step in the right direction to return some sanity to the private rented sector.

    1. Colin,
      You are living in a dream world.
      Wake up and smell the reality.

  3. CL, I think you read my comment as an argument against tenants’ rights. I am arguing for tenants getting a better deal. But my view is rent controls are a stupid solution as they solve the wrong problem – a chronic under-supply of housing caused by successive governments utterly failing the population by not building enough.

    You said I “suggest” that prices will come down if supply increases. I’m not suggesting it, it is a fact. It has nothing to do with regulation, and everything to do with simple economics. You will see the same process on eBay. On the day the iPhone 5 arrived prices on eBay were obscenely high – low supply, very high demand. Today, prices are far lower as supply has increased and demand has softened a bit too. It is exactly the same with housing. You talk about tenants being pressured to grab any property they can, competing with each other, tolerating potentially sub-standard properties – all of these are symptoms of under-supply. If a tenant had a choice of 2 properties in their budget versus 37 properties, the latter situation means they are VERY likely to pay less, AND get a much better property.

    Many tenants see rent controls as a way to get power back, but it’s a false prophet. The BEST way to get power back is increased competition – the suppliers fight amongst themselves to lower prices and deliver a better product/service, the buyer just sits back and benefits.

    You suggest supermarkets provide good value because of regulation. In some respects that may be true, but broadly supermarket pricing is not regulated. The government doesn’t tell Tesco how much to charge for a chicken – supermarkets have competed to such a degree and customers can switch so easily that margins and suppliers are squeezed and the chickens don’t get a great deal either, but customers have a great choice and generally pretty decent prices and quality. Competition did that (mostly) not regulation. I’m arguing that the same happens in housing, but it relies on a a generous supply.

    The private rental sector has grown enormously. Prices have not come down. Why? Because demand has increased enormously in parallel, for several reasons. One is more people live on their own, so for the same population we need more housing. Another is people are living longer. Another is immigration. Another is that many people have suffered enormously since 2008 financially and those who could not buy (or had to sell) needed to rent. Then there’s the switch (for better or worse) of public housing to the PRS. The increase in rental accommodation has not kept up with enormous demand increases and this is why prices have not dropped.

    Obviously first-time buyers have every reason to be angry at landlords appearing to buy property they wanted to buy, but there are some benefits to the PRS increase in size, without those new rental properties rents would be much higher than they are now. Also bear in mind that a large number of brand new properties have been bought by landlords, and often because owner-occupiers could not buy (eg due to stringent mortgage criteria) and those purchases have kept housebuilding a bit higher than it would have been otherwise.

    Something else to consider is that ONS figures looking at UK rent rises (looking at all tenancies, including renewals of existing, not just new ones) shows that rents nationally in real-terms have barely increased at all in years. Quite obviously in London they have gone up more, but national policy should be decided based on a national view, not just London.

    You said a tenant cannot tell if a property is good or not, and I disagree with that. If a tenant views a property it absolutely IS contingent on them to look around, is it well-maintained, do taps, light switches etc work, are the carpets ok, are there any signs of leaks, how is security, is there double glazing? If the property, after proper viewing, looks ok and then later they find problems, and the landlord won’t sort them out, eg the boiler breaks and they take weeks to fix it, the laws are very clear about these things, and councils will generally act against landlords when asked. But ultimately if a tenant finds their landlord is delivering a shoddy service, they do need to vote with their feet.

    I once took a landlord I rented from to court, in a case relating to document forgery and poor quality workmanship. He lost, and I know only too well what dreadful landlords are like, but applying brute-force price controls remains a stupid and ineffective solution with many highly undesirable side-effects for tenants. Increased supply is what hands tenants the power they deserve to deny poor landlords their income and demand that they deliver better housing at better prices.

    1. “a chronic under-supply of housing caused by successive governments utterly failing the population by not building enough.”

      That is not entirely true. Many council homes were boarded up and many estate were no go area. The last Labour Government put in £40billion to upgrade council homes and bring them back in to sure. Housing Associations received huge funding from the Government.

      With the housing boom, many empty properties and unmodernised properties were brought back into use.

    2. “The BEST way to get power back is increased competition – the suppliers fight amongst themselves to lower prices and deliver a better product/service, the buyer just sits back and benefits.”

      “If a tenant had a choice of 2 properties in their budget versus 37 properties,”

      Having choice is a great thing. Long term empty properties are not good.

      You can see the problem in the North , where empty properties turn an area into problem estates.

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