Second Generation rent controls: Solving a problem that doesn’t exist.

Hooray, let’s come back to rent controls.

This time, we’ve got an article by David Lammy, who joins Sadiq Khan in the London mayoral hopeful rent control club with this article in the New Statesman.

Lammy says he’s not advocating ‘old-school’ Rent Controls, which don’t work. Thank heavens for that, at least.

Instead, he favours a system as practised in Germany. You can’t go wrong praising Germany these days1.

Unfortunately, the system Lammy proposes appears to solve a problem that probably doesn’t exist.

How so?

Lammy opens with “The facts are stark. Private rents in London have risen nine per cent since December 2011.” Unfortunately, he doesn’t provide a source for this fact.

As far as I can tell, it’s from the Valuation Officer’s Agency data, which tracks the rent of properties being offered and agreed in the marketplace at any given moment2. This is dull but important, because the ‘raw’ VOA data shows a greater increase than either the CPI rental data, or the ONS’s Home rental data, both of which takes that same data but focus on a matched sample, so we can see what rent is being paid for the same property over time, whether or not it has been re-leased.

In fact, both the CPI data and the ONS data suggest that rental increases are running at below inflation levels, roughly 1 per cent a year. (Their similarity should not be surprising, as they are based on the same source)

This is a tedious but important technical point because one of the crucial things about the housing market is that landlords tend to hold down rents to keep existing tenants, then put them up when the  property is re-let.

Imagine a couple who’ve been paying rent for a year. If the landlord increases the rent and they left for somewhere new, the rent on their house would go likely go up. However, it’s often not worth the Landlord’s while to push the issue, as lettings fees, redecoration and perhaps a month with no rent while reletting would eat up any conceivable rent increase.  Plus, what if you replace a good tenant with a bad one? Tenant in hand beats rent increase in bush.

So when you look at the data which best factors in the rolling over of existing tenancies, you see that private sector rent increases have not been rising sharply.

Indeed, the ONS data suggests rent increases, even in London, have been below inflation for some time, and have not gone above 2.5% a year in any month since the current data began in 2006. Further, private rents have increased by less than either council or registered social landlords rents.3

 

If you accept this data, the picture that emerges is not landlords imposing sharp increases on tenants, but consistent below inflation rent increases.

So what explains the claims made about steep rent increases? Well, perhaps what we’re seeing is flat rents for existing tenants, but landlords increasing the rents on the open market when reletting the property. This would most adversely effect new entrants onto the housing market,  those who move around frequently, and who wish to live in housing hotspots.

This perhaps fits with the fact that the anger on this issue comes from younger, mobile, professional tenants, often those moving to London, or who have moved often due to a shared tenancies ending, who fit precisely this profile. Their picture might be substantially worse than that for older tenants, in relatively long-term tenancies, or in less fashionable areas, where both tenancies and rents are more stable. They would naturally protest more, and be right to feel they were getting the shitty end of the stick. Still, if Hackney matters that much to you, you’ll pay for it.

Unfortunately Lammy’s proposal would do nothing about their (real) problem. It couldn’t.

Imagine the situation for that same imaginary couple, if they  wish to move house because they’re expecting children and want a place with a garden. Under either scenario, their new prospective Landlord would be able to offer a market rent4. They’re no better off than they would be under the existing system.

What’s more, if their existing tenancy is controlled and happens to be in a property hotspot, they will be less likely to move out of their property and purchase/rent elsewhere, thus reducing the supply of rental properties in their current location. Unless supply increases (which it might do) you might even see new rents in high demand areas increasing more sharply than they do now, as existing tenants can’t move out. Indeed, over the last decade, German rents have been increasing far faster than British rents, although from a far lower base, possibly because of this phenomenon – residential building stalled in the recession, those in controlled rents do not wish to move, and demand for the remaining properties has cause dramatic rental increases.

Picture a new couple arriving in London when existing tenants benefit from rent controls. They are not protected, so have to pay a higher market rent as Landlords exploit shortage of supply and protect themselves from future pricing controls. There may be few homes to rent that suit them in the areas they wish to live in, as the existing tenants are staying put to keep their rents low. Absent more building, or more vigorous price controls, they will quite possibly face higher rents. This is, by the way, one of the reasons British commonwealth immigrants got such an awful housing deal when they moved to the UK.

So, it’s quite possible to imagine that in producing a solution for a problem that doesn’t exist in the way they think it does, advocates of second generation rent controls could make rent increases sharper than they would otherwise be, absent a major increase in property supply, while making things worse for immigrants and the most mobile renters.

Does this mean there’s no room for reform in the lettings market? Of course not. There’s always room for smart reform.

First, we do have a problem with insecurity of tenure.

We probably would benefit from a longer period tenancy that would offer security to both landlord and tenant. This is more or less Shelter’s proposal for a fixed five year tenancy. If many tenants showed a preference for a longer tenancy this would likely encourage larger landlords and discourage smaller landlords, which might in turn make it easier to regulate standards and quality in the sector, which is another major issue in the private sector.

However, this isn’t consequence free – while you could probably get away with fixing rents within such contracts, tenants would probably have to pay a premium for such security, as Landlords who offered this would want to hedge against interest rate shocks (in much the same way that fixed mortgages and energy bills are more expensive).  That risk is probably worth it, though. We could probably do with a few big, well run, private rental companies with high standards and long-term financing in place. A sort of private housing association, really. You might even want some actually housing associations to expand in this way, to promote mixed tenure developments.

Second, everything comes back to supply. One of the points about the German model is that it is much easier to build in Germany than in the UK. Germany has consistently built more than we have.

This isn’t to do with social housing, as Germany’s social rented sector is much smaller than the UKs (about a third of the size of ours), but that there is a much stronger presumption in favour of building generally. So if you want to make even very loose rent control work, you must have a huge loosening of supply, not just in the social rented sector, but generally.

So, if there was a major increase in the supply of rental property, that would probably reduce rents anyway (Indeed, one of the interesting factors of the last two decades in the UK rental market has been the near doubling of the private rented sector, which is probably one reason rents are low, along with incredibly low, stable mortgage rates).

So if we want to fix the UK housing market, we need to fix supply, first and foremost. Everything else is pretty much fiddling around the edges.

Some of those fiddles will be helpful – like more stable contracts, and better landlord regulation.

Others, like rent controls will be neutral to negative. But without an increase in supply, they’ll all be marginal.

The problem comes in trying to fund and locate that supply. That’s the hard bit, and the bit that really matters.

 

  1. Though sometimes it is worth pointing out that Britain is not Germany. After all, one reason the German housing market is the way it is that Germany specifically encouraged private companies to build homes for middle class families to rent after the second world war, to ease the chronic housing shortage of that time. That quality private rented housing stock probably doesn’t exist to the same extent in the UK []
  2. It’s either that or from one of the lettings agency based surveys []
  3. Anecdotal experience seems to confirm this – rents in our apparently booming area of London for two bedroom houses are flat or slightly down to two years ago – though this may be due to a 2012 Olympics effect in Greenwich []
  4. though perhaps within a boundary of twenty per cent of similar properties, as Lammy suggests. To me, this seems either tautological or a mistake, as it depends on your definition of ‘similar properties’. If a luxury two bed flat is twenty-five per cent ‘nicer’ than another two bed flat in a local council block, but just as nice as another luxury two-bed flat, surely should I pay twenty-five per cent more than for the cheaper flat? Who gets to decide what is similar, and on what basis? If it’s simply by square footage or bedrooms, then we’ll just destroy the rental market at the higher end, or right next to tube stations, or in areas with good primary schools, or nice victorian terraces []

5 Responses to “Second Generation rent controls: Solving a problem that doesn’t exist.”

  1. Martin

    You say rent rises are below inflation, therefore they’re not a problem. But rent rises are above earnings growth by whatever measure you use (rent rises 1.6% compared to wage growth of 0.8% last year according to this report http://www.theguardian.com/money/2013/dec/20/rents-rise-twice-as-much-as-earnings) which means they are rising fast compared to people’s ability to pay.

    It’s this relationship, not the relationship to general price rises which matters to people. You can cut back on other things you pay, it’s much harder to reduce the rent you’re paying.

    And the impact of such rises is made harsher by the fact that UK residents spend a higher proportion of their income on housing costs than almost anyone else in EU (http://www.theguardian.com/money/2013/dec/20/rents-rise-twice-as-much-as-earnings)

    Reply
  2. Alan Ji

    Hopi, you’ve entirely missed the point about supply. What’s supply got to do with building (quite a lot, but the question needs asking in detail)?
    The supply of rented housing has rocketed in two ways
    1) renting out of previously owner-occupied dwellings
    2) various forms of landlord crime, such as illegal Houses in Multiple Occupation, Illegal flat conversions, sheds in beds, gross overcrowding.

    Landlord crime is currently being dealt with by enforcement of the Town and Country Planning Acts and the building regulations, which results in no serious penalties for professional criminals. What’s required is appropriate penalties: confiscation of the criminal asset and prison sentences.

    Reply
  3. Brian Hughes

    Buy-to-let seems to me to typify much of what’s wrong with housing provision in Britain. Do you know whether it’s so fashionable in other countries?

    Not only does it result in lots of individual landlords rather than the more desirable “big, well run, private rental companies with high standards”, it locks so many middle-class investors into the ‘house prices rises good, building more houses bad’ mentality even further than they already would be solely through ownership of their main residences.

    What’s to do about housing in Britain? Don’t ask me, it’s all far too complicated for such a simple soul.

    But, even if it’s aimed at a problem that allegedly doesn’t exist and provided it won’t make things worse, a policy that may attract a few votes from other simple souls isn’t such an awful thing for a party aspiring to be in government in 432 days time….

    Reply

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