Merryn's Blog

Rent controls are an awful solution to the high cost of renting

With the cost of renting accommodation rising fast, it might seem like there is a case for rent controls. But the problem isn’t high rents, says Merryn Somerset Webb, it’s high house prices.

The problem is not high rents, but high house prices

It is almost impossible for a year to pass in the UK without someone calling for rent caps. This year, things are kicking off early: think tank Civitas has a new report out calling for rent rises in the private sector to be capped to inflation.

On the surface, it might look as though there is a case for this. Ten years ago, a mere 10% of Britons lived in privately rented accommodation. Today, 18% do. The prices they pay take up, on average, some 40% of their incomes.

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That not only inhibits their consumption and their ability to save, but it also means a whopping housing benefit bill for the taxpayer. In 2003-04, 722,000 households in the private sector claimed housing benefit. Now some 1.7 million do (that's 6.5% of all UK households*) and the total bill is around £9.5bn.

From the taxpayer's point of view this is clearly nuts. But it doesn't necessarily follow that rents are the problem, or, for that matter, that capping rents is the answer.

I've written about this several times before and explain why rent controls are just so awful in some detail.

The key is that rent controls create two-tier markets (the controlled and the non-controlled sectors); they reduce supply when markets looking for long-term price falls really need rising supply; and they remove all incentive for landlords to properly keep up their properties.

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That said, it is clear that the UK does have something of a problem in the form of rising demand for rental properties. With that in mind, it is worth looking at why the demand for rent is rising, as Matthew Lynn does here.

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His main point is that in a country with high immigration you should expect to see rising rental demand new arrivals don't buy, and those planning to stay for only a few years are more likely to rent here and buy in their home country than the other way around. The same goes for all our foreign students: they are mostly renters, not wannabe homeowners.

It is not these groups that are the problem: it is the third those who want to buy, but can't afford to, thanks to high house prices in the south.

But here's the question: if this group want to buy, why is rent control the answer? Surely their problem is not high rents, but high house prices? And if that's the case, surely rather than pile bad policy on bad policy, it would be better to remove some of the distortions that prop up house prices in the south east?

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That might mean raising interest rates. It might mean cutting housing benefit payments. It might mean doing something about planning logjams or tackling housebuilder landbanks. It might mean dumping stamp duty for an inflation-linked capital gains tax on primary homes. Or it might mean changing the status of buy to let.

This last point is the key to the whole thing is, says Ross Clark in the Times. Only if owner-occupiers are given "a decisive boost in their losing battle against investors" can house prices in areas of high demand fall back towards historical norms.

How can that be done? Clark suggests putting covenants on new homes, limiting them to being bought by owner-occupiers, or by "reorganising stamp duty so that owner-occupiers pay nothing and investors pay double."

But far easier than all this is would be just to prevent investors setting their interest costs off against their tax bills: that would raise the cost of operating high enough to chase many of them out of the market, leaving (in theory at least) endless cheap choices for first-time buyers to pick up.

None of this is likely to be popular, but it would be markedly better than rent controls, and it seems impossible that something won't change soon. At some point, says Clark, "there will come a time when the constituency of aggrieved renters is so great that no party will be able to resist its demands."

Members of our property roundtable have been warning for some time that UK residential property comes with "legislative risk", in the form of everything from mansion taxes to rent controls and changes to tax law. That hasn't changed.

*Note that some 17% of UK households live in council houses, so in all, some 23-24% of the total number of households live in taxpayer-subsidised accommodation. Amazing.




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