Why Rental Controls Would Fail and Only Worsen the Housing Crisis

Industry Insight August 12th, 2015
Why Rental Controls Would Fail and Only Worsen the Housing Crisis

Increasing talk of rental controls in the UK is an example of political populism. The policy will not help solve the UK housing crisis and is widely opposed by the majority of economists.

In recent weeks, the debate over the possibility of introducing regulatory rent controls for private landlords in the UK has become increasingly prominent. Berlin became the first German city to make rental controls a reality last month and Jeremy Corbyn has cited this as evidence that rent controls can work in his campaign for the Labour leadership. YouGov polls have shown that 59% of those polled supported the state introducing some form of controls, whilst only 6% opposed them.

Regardless of popular support, the policy of rent controls does not provide a solution to the housing crisis. The housing crisis itself is based on the reality that demand currently exceeds supply. Rents are going up as a result of scarce housing. The only way to tackle the issue is to either reduce demand or increase supply (or both). However, introducing rental controls would reduce supply (by providing less incentive for landlords to let out homes or build new homes earmarked for rental) and increase demand (by keeping rents low).

Rental controls would reduce tenant mobility, create front-loaded rental rates, and reduce investment in the housing market.

Rent controls are set according to market conditions when tenancies change. Therefore, rent prices would greatly increase when tenancies change. Consequently, renters would be less able to change tenancies, with tenants remaining in homes to avoid higher rents elsewhere. This would reduce the mobility of the housing market in the UK, which could increase commuter times and even increase unemployment and homelessness.

It is also plausible that rent controls would not increase affordability for tenants as landlords adjust rents at the start of the tenancy according to what they expect rents over the lifetime of the tenancy to be. New tenants would be more likely to face front-loaded rents set by landlords to compensate for any potential losses. These initial rates would be higher than in a free market economy.

There may also be a fall in investment in the housing market. Landlords would have less incentive to build new housing or convert existing housing into rental accommodation as they are exposed to greater risks. Furthermore, rent controls may be viewed as a precursor to further government regulation of the rental market, which would reduce private investment in the private rental sector as the market is seen as increasingly high-risk.

In the US, rental controls led to houses being left to decay and an arson epidemic.

Past examples of rental controls only show that they cause problems to the whole of the housing market, both landlords and tenants. When rental controls were implemented in the USA, it was noted that the benefit of lowered rents was offset by a loss in available housing due to deterioration and disinvestment. Tenants may have had lower rents, but had to endure deteriorating living conditions. In New York, rent-controls became such a burden for landlords that an insurance based arson epidemic became widespread in the Bronx! The danger of arson to tenants needs not be explained…

Popular support for the policy does not make it correct or wise. Economists – whose profession is to analyse the consequences of such actions before politicians can implement them – have shown consistent opposition to rent controls, regardless of their position on the political spectrum. A survey of 464 economists in 1992 found that 93% agreed that a ceiling on rents ‘reduces the quantity and quality of housing available’.

Rental controls would only be a (rather unwise) short-term solution, delaying and possibly worsening the long-term issue of a lack of affordable housing. Private investors would reduce new investment in the housing sector and supply would reach even lower levels. The only way to tackle the crisis is to incentivise an increase in supply from the private sector by liberalising the market, with possible policies including the release of government land to private investors. To penalise buy-to-let investors for taking risks would be an absurd policy.

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