In Defence of Liberty

Driven by data; ridden with liberty.

On Rent Control

During the election for the Mayoralty of London, the candidate Ken Livingstone pledged a “London Living Rent” system, stating that no-one should be paying more than a third of their wages in rent. Livingstone’s election campaign chair David Lammy MP also backed this proposal on BBC’s Question Time, whilst Labour MP Jeremy Corbyn questioned Housing Minister Grant Shapps over rent controls, forcing the minister to rule out a similar national policy. Guardian columnist Polly Toynbee has also claimed that “Labour will adopt one good policy. They will bring back rent controls”. Most rent control systems function as a price ceiling on residential housing rents, meaning there is an upper limit to what may be charged for particular properties. Forms of rent control exist in about 40 countries in the world, and were introduced in England and Wales in 1915, before their abolition under the Housing Act 1988.

Protesting against high rents is nothing new (photo provided by Kheel Center, Cornell University).

Rent controls, like any form of price control in a market economy, should be evaluated on their effect on demand and supply of rental properties. Artificially low rents mean that more people will seek to live in larger houses and in smaller groups, resulting in a shortage of rental housing, even though there is no physical shortage compared to the whole population. San Francisco’s 2001 Housing Data handbook found that 49% of rent-controlled apartments in the city had only a single occupant, despite many commuters travelling into San Francisco for their jobs. An individual’s demand for housing varies over their life, from living alone or with a friend, to having a family, to the children leaving home and so on. The total stock of housing is then circulated around according to changing demands and needs of families and individuals. The main impetus for this cycle is that high rents and mortgage payments mean that people move out of places they no longer need. When prices are controlled, this process is disrupted. New York City is cited by Ken Livingstone as a positive example of rent controls, as the American city which has had rent controls in place the longest. Due to the low turnover in housing, the New York City Housing Authority says “it is virtually impossible to establish an average waiting time for a family to enter conventional public housing”.

Rent controls also affect the housing supply, as it is often no longer profitable to build new rental properties. American economist Thomas Sowell observes that in Melbourne, there was not a single new building constructed in the nine years after the end of the Second World War, thanks to their restrictive rent control laws. It causes the deterioration of rented buildings, as landlords do not have resources to provide regular maintenance. Tenants also have less accommodation to choose from, meaning it is unnecessary for landlords to upkeep their properties. Under previous periods of rent control in the United Kingdom, Housing Minister Grant Shapps pointed out that the private rented sector shrunk from 55% of households in 1939 to just 8% in the late 1980s.

Rent control legislation tends to be a political success, as there are always more tenants than landlords. An unintended consequence of such legislation is that highly affluent individuals also pay these artificially low rents. Such consequences can already be observed in subsidized housing, with Bob Crow, leader of the RMT union, living in council housing despite earning over £100,000 per year. The biggest difference between the market price and the controlled price will be in luxury accommodation, meaning that the wealthy benefit far more than the poor who are used to justify rent controls. San Francisco’s Housing Data 2001 handbook, the first empirical study into rent control following its imposition in the city in 1979, showed that 26% of tenants in rent-controlled apartments had an income of over $100,000 per year.

Swedish economist Assar Lindbeck, author of ‘The Political Economy of the New Left’, said that:

rent control appears to be the most efficient technique presently known for destroying a city – apart from bombing.

Rent controls artificially inflate the demand for housing, whilst simultaneously helping to restrict the supply of housing, making it a very poor economic policy to pursue. This policy also helps the wealthy to enjoy cheap luxury whilst poorer tenants endure unmaintained housing. It is unbelievable that rent control is being proposed by politicians in Britain today.

This article was originally written before the London Mayoral election. A similar version of this article may be found here: http://www.thecommentator.com/article/862/_london_living_rent_system_how_to_artificially_inflate_the_demand_for_housing_whilst_restricting_supply

Advertisements

2 comments on “On Rent Control

  1. Simon O'Kane
    June 10, 2012

    While I broadly agree with your arguments against rent control, I think this article fails to put the debate in context, in particular the housing benefit cuts that have triggered the recent enthusiasm for rent controls. The argument is, “these cuts wouldn’t be necessary if rents weren’t so high.”

    This puts governments and councils in a difficult position. The status quo is obviously unsustainable in terms of its impact on the public finances, but the current policy is self-defeating. This is because cuts to housing benefit will force claiimants into poorer ares, which generaly have fewer jobs going, decreasing the chances of ever getting them off the benefit. (Yes, I am aware most claimants do some form of part-time work, but my point that moving claimants away from where the jobs are is not going to help stands.)

    So what to do? A lot of the fault for this lies with the Thatcher government’s moratorium on new social housing in the 1980s, yet there is no money in the kitty to build more now. Relaxing planning controls is the proposed answer, but this is deeply unpopular. My personal preference would be to provide subsidies for developers to build on brownfield sites, but even that is unaffordable at the moment.

    The best way to help in the long term would be to reduce the pressure on housing in the South by reducing the North-South divide. However, that’s very difficult to do when the North (and the nations) have been kept artifically afloat for the last decade by public sector employment. What I can say with confidence is that some of the proposed Government policies, such as regional pay structures, will increase the divide even further. Putting enterprise zones in the North, as the last Conservative government did, is also a good idea; however this time around the zones have been targeted in the Midlands, giving the impression that the Government have essentially “given up” on the North

    • anthonymasters
      June 10, 2012

      I accept that criticism of the debate’s context. I had originally written this for bathimpact, so it had to be roughly 700 words. Hence, my inclusion of the clamour for rent control, and my exclusion of the reasoning behind that clamour.
      I think a consequence of the “Right to Buy” legislation is that social housing stock depleted, with no incentive to rebuild, as what is newly built would just be sold again. I fully back the liberalisation of planning laws, but I know it’s never going to popular with people near prime building locations.
      It is understandable that regional pay structures have been met with much scepticism. However, I see them as a measure to temper economic policy to the economic conditions of the area. I will get the data on how having a national minimum wage affects unemployment with different regions that have different median wages. The North has a lot to offer, it’s just a matter of letting businesses grow and so reduce the dependence of government spending.

Comments are closed.

Information

This entry was posted on June 2, 2012 by in Economics and tagged , , , , .
%d bloggers like this: