Daniel Freeman is the Managing Editor of the Institute of Economic Affairs
One of the reasons free marketeers struggle to win political arguments is that our opponents have the best sob stories.
Whether it’s the populist right calling for protection for domestic farmers, or left populists demanding price caps at supermarkets to help struggling families, you can always find very sympathetic people who believe they will benefit from the policy.
To put it crudely, populist politics on both the left and right tend to revolve around the principle: we will take from unsympathetic people (bankers, multinational companies, people who send their children to private school) and give to nice, sympathetic people (nurses, farmers, pensioners, and so on).
Advocates of markets sometimes try to play the same game. When there is a call to punish another industry with extra regulation or taxes, you’ll get the opponents of state intervention trying to convince the public that [x] unpopular group are not quite as rich, greedy or unlikeable as might be expected. It rarely works.
Take rent control. Despite heroic attempts to remind the public that there are good landlords and awful tenants, 7 in 10 Britons support a statutory cap on rents.
Zach Polanski has spent the last couple of days showing just how effective this approach can be with a speech to the New Economics Foundation in which he calls for the introduction of rent control. He’s accompanied this with a publicity video in which he hands over a giant cheque for £2400 to various members of the public, which is apparently what the average UK household would receive if landlords could be forced to be a bit less greedy.
As so many more people have been renting than letting properties, pushing back on landlord bashing is never likely to be very successful. So instead I’m going to take the opposite tack.
I’m going to assume that you, dear reader, are not a fan of landlords (maybe you’re Polanski, who knows). I’m going to assume that you think every landlord is actually a greedy, narcissistic parasite who likes kicking kittens and drinking Earl Grey with milk in it.
But suggest that even if (and actually, especially if) you think landlords are universally loathsome, rent controls would still be a disastrous way of spiting them.
The first problem with rent controls is that they exacerbate the problem they are seeking to address.
The reason rent in the UK eats up so much income for so little is that there is much less housing available than in most European countries. This in turn is because we have severely restricted building through our planning laws for over three-quarters of a century, while demand for housing has increased.
Rent control leads to fewer houses being built for the simple reason that the returns on investment are capped. Remember, landlords and their collaborators, housing developers, are greedy and fickle creatures who want to maximise their returns, so the more you reduce their returns, the more likely they are to seek out some other evil way of making money.
“Not worry”, say some advocates of rent control, “we will have an exemption for newly built rental properties.” There are a couple of reasons this does not in fact deal with the problem. Firstly, properties do not become available for rent exclusively, or in Britain even primarily, through construction. Often an existing property, or a part of it, will become potentially available because a member of the household moves out or dies. The owner of this property will then be faced with the choice of whether to use the additional space personally as, say, a guest room or a second home, or lease it out.
We absolutely do want rental accommodation to be created through physically building it, but freeing up existing property that is currently underutilised in the short to medium run can be at least as important. As George Stigler and Milton Friedman showed in Floors or Ceilings, their famous 1946 paper, this process is seriously retarded by rent caps.
The second issue is that once the state has engaged in a form of expropriation once, it can be very difficult to persuade people that they will not do it again. Rent control is a (often but not always) mild form of expropriation in which the investment potential of an asset is constrained. This may explain why the introduction of rent controls, is associated with lower rates of construction for rent even when it is exempt from it. The extra element of risk can dissuade investors.
Sometimes you will hear people criticising policies by saying they ‘don’t address the root cause’ of the problem. Rent control, is worse than this, it doesn’t just fail to address the root cause of poor quality and expensive housing; it makes it worse.
The introduction of rent controls tends to reduce the share of housing in the private rented sector as landlords sell up.
Hooray, you might say, this means fewer landlords (who we have established we hate) and more people owning their own homes.
But this creates problems. The private rented sector, it turns out, does serve a useful economic purpose. There are plenty of people who may want to live in an area who do not have enough savings to cover the deposit on a house or who might not want to buy even if they could, maybe because they only plan to stay in the area for a short time.
The shrinking number of private lets can particularly badly affect young people, without family support, who want to move to places with better or higher-paid jobs. By shrinking the private rental sector, you end up essentially locking people out of opportunities unless they have the good fortune to be born in high-productivity areas or come from well-off families.
Shrinking the private rental sector in this way doesn’t just lock people out of high-productivity areas but can also lock people into areas that are experiencing economic depression.
A fascinating recent paper by Swedish academic Jesper Böjeryd, found that workers in Norwegian oil towns who owned their own homes actually became less likely to leave when the local economy was in decline because their house values also took a hit. Those workers who rented, on the other hand much more likely to leave and look for opportunities elsewhere.
Economies with larger private rental sectors than the UK, such as the US, often enjoy higher levels of labour mobility and economic growth.
Remember, we’re assuming you believe that landlords are greedy parasites. When cities or countries introduce rent controls, landlords who do not sell up will try to maintain their margins by cutting back on costs.
This means repairs and upkeep are likely to be slower to be completed and are done on the cheap. Improvements to rental properties will be much less likely if they cannot be converted into higher rent or there is a bureaucratic and uncertain process to
The management of rental property can also decline in quality when rents are kept artificially below the market rate. In extreme cases, such as that of Mumbai where rents were effectively frozen in from 1947 to 1999, the result can be landlords collecting illegal key payments and hiring gangsters to threaten or rough up tenants.
Tenants will be forced to put up with this as the effects of rent control drive out the competition and eliminate the market incentives that encourage landlords to make their lets better.
None of the above points is particularly controversial among economists – which is a rare thing. If you want to get a good overview of the huge amount of empirical evidence that has formed this consensus, I recommend Konstantin Kholodalin’s paper analysis of almost every study conducted around the world on the impact of rent control. Or if you’re short of time, the IEA briefing, Rent Control: Does it Work?.
Ultimately, it doesn’t matter whether you hate landlords, love landlords or are a landlord; the problem with housing in the UK is that there is not enough of it. Rent control will only make this problem worse.#
What we’re reading
Snowdon-ed under. At The Critic, our Christopher Snowdon has argued that Gary Stevenson’s cause for an annual wealth tax rests on an unproven economic theory rather than convincing real-world evidence. Stevenson’s thesis that rising wealth inequality pushes up asset prices and drives down interest rates has been disproven by recent events without a major wealth tax having been implements, with monetary policy and other forces mattering more than nebulous ‘inequality’.
In Hockney to a long dead economist. For Project Syndicate, Angus Armstrong deploys David Hockney’s art as a metaphor for why economics should abandon its heavy reliance on a single-equilibrium-model of the economy and instead embrace multiple perspectives that acknowledge fundamental uncertainty. Deploying the late David Hockney’s art as a metaphor, he suggests that just as art, rather than perfectly represent reality, is an interpretation, so are economic models.
Sagamihara remembered. Reflecting on the tenth anniversary of the 2016 Sagamihara massacre for Engelsberg Ideas, which saw 19 disabled residents of a care home murdered, Christopher Harding suggests that the tragedy exposed deep-rooted prejudice towards disabled people in Japan and forced a confrontation with the country’s long and dark history of eugenics. Today, Japan is moving from seeing disability as a burden towards recognising the dignity of the disabled.
Tebbit tested. Eliot Wilson has been paying tribute to the late, great Norman Tebbit for CityAM. He suggests that Tebbit was not only one of Margaret Thatcher’s most effective ministers, but her natural political successor – a principled, working-class Conservative who lead the way in reforming trade union law and championing free markets. His decision to step back from frontline politics to care for his wife injured in the 1984 Brighton IRA bombing epitomised his conscientiousness.
Taking the biscuit. Over at Epicentre, Diana Nasulea has made the case that the European Commission’s proposal to replace website cookie banners with browser-level consent setting could have consequences for the open web. The proposal risks reducing publishers’ ability to raise revenue through targeted advertising, strengthening of the hand of dominant browser providers and undermining competition. Privacy should not come at the loss of diversity of thought.