Housing in the UK, and renting in particular, is the most expensive in Europe with average rents almost 50% higher than those in the Netherlands, Belgium, Germany and France. In the UK, tenants are spending 10-20% more of their incomes on rent payments than their European counterparts.
Rent controls are increasingly popular and firmly back on the political agenda. But contrary to popular belief, imposing price controls would do nothing to solve the housing crisis. Instead their imposition would simultaneously increase demand whilst reducing supply, pushing up living costs.
High rents are a consequence of a lack of supply in housing and act as a signal that we need to build more homes. Price controls will do nothing to help this. Worse still, because they would reduce rental incomes for landlords, many may leave the rental market. At the same time, cheaper prices would encourage more tenants to enter the market in the belief that there is a healthy supply of houses available. If high rents send the message that we have a housing crisis, implementing rent controls would be worse than shooting the messenger.
A new report from the Institute of Economic Affairs sets out the causes of the UK housing crisis, the ripple effects it has had on the whole economy and why rent controls would only exacerbate the problems.
The housing crisis and its effects
- Organised Nimby opposition to development has become more entrenched and more effective in capturing the planning process.
- Housebuilding rates have been severely declining.
- As a result of extortionate property prices, retail prices have also increased – for example grocery prices in the UK are a fifth higher than in comparable countries.
- Labour mobility is curbed by high property prices which in turn hurts the economy.
- Housing Benefit now costs the taxpayer £800 per household every year – that’s over twice as much as it did in the early 1990s in real terms.
- High property prices have also undermined people’s ability to save.
- The main driver of the housing crisis the UK’s highly restrictive planning system.
- 35% of the average house price can be directly attributed to planning restrictions and far more than that in London and the South East.
Why rent controls aren’t the solution
- High rents are merely an indicator of the fact that we do not have enough housing – imposing a price control provides no solution for this
- Rent controls will force marginal landlords – who without a certain level of monetary incentive may not rent out their rooms or property – out of the market. Simultaneously it will encourage tenants who either did not need to rent or could not afford to, to join the market.
- This will result in a reduction in the supply of properties to rent, increase demand for them & therefore lower quality.
- In Germany rent controls are not as damaging because they have a vastly more liberal planning regime than the UK, there are no greenbelts or Nimby groups
- As a result, Germany was building more than double the amount of housing units per 10,000 inhabitants than the UK in the mid-1990s
- Germany only introduced rent controls a year ago and they have so far not had any measurable effect and have certainly not been a success
Then what is the solution?
- Ownership of land should include the right to build on it, unless specifically prohibited
- Greenbelt status should be abolished and replaced with a system in which land is protected selectively on the basis of its environmental quality and amenity value
- Economic incentives around housebuilding must change. For example local authorities should receive most of their revenue from a local income tax and land value tax. This would mean the increase in land value when planning permission is issued would be fully retained locally incentivising the issue of more permits.
Commenting on the report, author Dr Kristian Niemietz, Head of Health and Welfare at the Institute of Economic Affairs said:
“The housing crisis is borne out of, and perpetuated by, the severe lack in supply of houses. Trying to tackle this problem by imposing rent controls will do nothing to address the root of the problem and will only cause adverse effects for landlords and prospective tenants alike.
“The housing crisis has become the single most important driver of poverty in the UK and so it is crucial that policymakers look to improve affordability by scrapping restrictive planning schemes and encouraging development. An increase in supply of houses will allow house and rent prices to fall – much more so than any government-set price.”
Notes to editors:
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The full report, The Key to Affordable Housing, by Dr Kristian Niemietz, can be downloaded here.
The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems.
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