Why rent controls are not the answer
Labour’s decision to impose rent controls will do little to solve our housing problems. Rent controls are at best misguided and at worst could be counterproductive, longer term.
Misguided because rents have not actually been rising that fast in recent years. ONS figures show that rents rose by only 1% in England in the year to March (1.4% in London), a real terms fall. Indeed, since the beginning of 2011 they have only 4%.
Misguided also because this doesn’t deal with the root problem; a lack of supply in the housing market. Put simply we need to build many more houses, for rent and home-ownership, than we are building currently, around double to match the growing demand.
There are many different forms of rent control and this appears most similar to the German model. But Germany does not have a problem with housing supply, as we do here. It also begs the question whether there is scope for landlords to game the system; if they are not allowed to increase rents as much during the 3-year tenancy period, could they not simply put initial rents up to compensate?
Unless we boost supply in the rental market we will see future shortages. Figures from the DCLG English Housing Survey show that the private rented sector is growing fast, from around 12% of homes (2.4m) in 2005 to around 17% (3.8m) homes today. There are no signs this growing demand is abating so we need to increase future supply to meet it.
But more supply means more investment in the sector, from both Buy to Let and institutional landlords. Housing Associations also have a role to play. We need to create an environment that encourages investors to put more money in. Unfortunately rent controls do just the opposite and could damage future investment. Not only do rent controls reduce future returns for landlords – lower returns imply lower investment – but they send entirely the wrong signal to future investors creating more uncertainty, not less, with some asking “what next?”.
And as Simon Walker, Director General of the Institute of Directors, says “Basic economics tells us that if you artificially hold down the price of something, you get less of it in the market. This is as true for housing as it is for anything else. At a time when we appreciate there is a housing shortage, this policy is particularly short-sighted.”
I couldn’t agree more. This is just another example, alongside the energy price freeze, of policies that don’t attend to the root problems.