IEA - Tenancy rent controls won’t make housing more affordable

9 Sep 2014 11:25 AM

Home seekers would face higher rents and restricted choice if tenancy rent controls were introduced in the UK. New research released today argues that policymakers should instead look to radically shake up planning laws in order to facilitate more private rented accommodation and improve individual wellbeing through increased affordability.

In The Flaws in Rent Ceilings, Ryan Bourne looks at the Labour Party’s proposal to bring down the cost of renting and improve tenant security through the introduction of tenancy rent controls. The paper finds that instead of achieving its desired aims, such constraints on the market would result in higher initial rents, a misallocation of housing and a reduction in the supply of homes to rent – without improving affordability.

The study also calls into question claims that individuals suffer from a lack of security of tenure in the private rented sector. Secure tenancies are provided by the market for those willing to pay for them.

The private rented sector’s share of the total housing stock has rebounded from a severe collapse having been subject to draconian rent controls between 1915 and 1989. Only since its liberalisation has the industry improved, with private rental accounting for over 16% of the housing stock in 2013, up from 10% in the late 1980s and early 90s.

The success of the German rental market, where similar restrictions exist, cannot be used to justify the implementation of tenancy rent controls in the UK. Germany’s ability to meet rising demand through the building of new homes has meant rents have become increasingly affordable since 1980. The same cannot be said for the UK.

With 1.3 million households in the UK renting from private landlords, the sector is in desperate need of policies that will stimulate desirable rentable accommodation at an affordable price. A lack of new property development continues to push up the cost of rent and Labour’s plans will only make things worse. Liberalising planning laws, in contrast, would enable the supply of rentable property to catch up with increasing demand, bringing down the cost of rent.

Problems with tenancy rent controls:

• Despite claims from politicians, controls such as these will not improve the affordability of renting, other than in the very short term. These controls are likely to push up rents, due to greater uncertainty over future regulation and the risk to landlords associated with increased security of tenure.

• New tenants would face high initial rents as landlords insure against within-tenancy risks and compensate for future losses.

• Security of tenure is not a major consideration for the majority of those groups dominating the private rental market, namely young people, students and more mobile households. Over 35% of private renters remained in residencies for less than a year in 2013. Because rents will be initially higher, fixed term tenancies would allow less mobile households to enjoy low rents at the expense of the more mobile – harming labour mobility.

• Landlords will make the highest profit at the beginning of a tenancy and will seek out tenants that are likely to be more mobile. This increased selectivity would make it increasingly difficult for households seeking longer tenancies to find accommodation, further fuelling the UK’s housing crisis.

• The existence of tenancy rent controls is likely to result in maintenance being carried out between tenancies rather than during them, compromising quality for some tenants.

• While previous forms of rent controls were ultimately unsustainable due to their shortcomings, rent regulations such as these would prove extremely difficult to reverse. Statutory bodies that support the policy would have a vested interest in its maintenance and tenant lobby groups would gain the upper hand over small landlords, young people and mobile households.

Commenting on the research, Mark Littlewood, Director General at the Institute of Economic Affairs said:

“It is absurd that households across the UK have to pay such a large proportion of their monthly income on rent.But imposing rent controls on the market will do nothing to improve affordability, and will simply result in a number of perverse incentives that will harm those very individuals which such a policy sets out to protect.”

“The government needs to wake up to the fact that only through increasing the supply of rented accommodation can we really address the problems of high rents and poor tenancy security. If we are serious about helping the most vulnerable in society, we need to radically liberalise planning laws so we can build more houses."

Notes to Editors:

To arrange an interview (live or pre-recorded) with an IEA spokesperson, please contact Camilla Goodwin, Communications Officer at cgoodwin@iea.org.uk or call on 0207 799 8920/ 07821 971 443.

The Flaws in Rent Ceilings, by Ryan Bourne 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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