What happens if you distort a market? You end up feeling as if you have no choice but to distort it further. And so it is with the UK’s property market.
Over the last few years our government has devoted pretty much all its energy and the majority of its policies to its desperate effort to stop UK house prices falling to levels a free market would bear (think low interest rates, funding for lending, QE etc). This has left them far too expensive relative to most people’s incomes. That in turn has produced policies designed to help people who really can’t afford to buy houses at current levels to buy houses (‘help to buy’, shared ownership and so on).
But that’s still not enough. There are some people who can’t afford a house regardless of how much George Osborne insists they can – they can’t afford the deposit; they can’t afford the mortgage payments; and – crucially – they can’t afford the stamp duty payments. Those people have to rent instead.
Their demand is in turn pushing up rents. The average across England and Wales is now nearly 4% higher than it was a year ago and in some areas, 4% is just a starting bid: in London average rents are up 7.6% (if you use the median, it is 9%). In a rational world, everyone would look at this little difficulty, realise that the manipulation of the housing market was having unpleasant consequences, and think that it might be time for the government to stop interfering. Let prices fall to where they should be, they might say, and odds are rents would soon follow. That makes sense. But it is not, obviously, how it works.
In our last property roundtable, James Wyatt of John D Wood raised the issue of “legislative risk” in the housing market. He worried that with house prices still so high, and rents rising, we would soon begin to see conversations about rent controls. That is exactly what has happened.
A report just out from the London Assembly’s Housing and Regeneration Committee has called for “rent stabilisation” measures (this is a phrase they have nicked from New York where it is used as a euphemism for rent control) to deal with the fact that rents have “become increasingly unaffordable even for Londoners on average wages”. It has demanded various other things too which you can read about here.
Some of them make sense – longer tenancies would be no bad thing, for example. But rent controls just make no sense. The arguments for them are obvious. Instead of raising supply of housing (the usual answer to overly high prices), they cut supply. If you can’t charge a market price or even a price you can choose – and if new regulation shifts the balance of power too far in favour of the tenant – you might decide not to rent out your flat, and if by any chance you were thinking of a build-to-let project, you will instantly think again.
They discourage anyone who does rent out a property from taking care of it. And at the same time they also increase demand – who wouldn’t want a cheap flat?! They also – like all market distorting technologies – open the way for corruption and abuse. Both things we can really do without much more of.
The property hand wringers will say that dismissing rent controls isn’t good enough. After all “something must be done”. But this is yet another case in which nothing is better than something.
Let the market alone. Let prices fall to a clearing level. And at the same time, let prices dictate new supply. Look at London: prices are high; rents are high. And what’s happening? A visible effect on local supply.
Look almost anywhere and you will see either building or plans for building. There are 1,000 flats coming here in White City. There are 5,000 at the Olympic Village, 7,500 on the way in Earls Court (maybe more), 5,000 at Battersea Power Station (the “real estate opportunity of a lifetime”), 800 at Lots Road, 700 in Ealing, 7,300 in Croydon, a few thousand more at King’s Cross and 5,000 at the Royal London Docks – and that’s just the beginning of a long list. That in time will bring prices down – unless the government decides to step in to make things worse before the market makes them better, of course.
One final note on this. Rent controls would be nothing new to London. According to the Guardian’s Dave Hill, there are currently around 100,000 properties in the UK operating under special rules that apply to pre-1989 tenancies (under the 1977 Rent Act). There is, for example, a flat in Hampstead Heath that comes under the “fair rent” rules. It costs £384 a month. A similar flat, available on what passes for a free market today, is on for £1,500 a month.