Driven by data; ridden with liberty.
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.
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