Rent controls - evidence says "no"

This post presents a report which examines the experience of rent controls in Europe and the USA. The report presents an analysis of the impact of rent control policies and offered practical reasons why they have proved to be of limited value in addressing housing shortages in key locations.

The conclusions of the research are a warning to those who seek their reintroduction in England.

Introduction

Rent controls have been proved to be unsuccessful across Europe and America – yet continue to be lauded as the panacea for all tenants’ ills.

This is despite evidence from across the two continents showing rent controls not only have a profoundly negative impact on the housing market, but also on local economies and communities.

In several European cities there is now a black market for housing contracts, such has been the impact of rent controls on supply.

In other cities, controls have simply been ineffective, with rent rises still outstripping wages.

UK rent controls were phased out in the late 1980s, yet campaigners want them revived in an attempt to address the country’s lack of affordable housing.

Concerns of landlords

From the landlords’ perspective as a small business owner, the biggest concerns about possible rent regulation have included the following:  

• Controls over rents at the start of a lease may not allow landlords to make a business return.
• Rigid rent-adjustment systems may not accommodate unexpected changes in the value of the rental stream or in costs (e.g. because of inflation or energy efficiency requirements).
• Tenure security and enforcement procedures sometimes makes it difficult and costly for landlords to obtain vacant possession when the tenant does not keep to the contract.
• Governments themselves build in uncertainties by continuing to make changes to their regulatory regime – with implications for both risk and return.

The evidence: Europe

Evidence shows rent controls in other European cities have had little impact on affordability. For example:

• In Berlin a price brake introduced in 2015 failed to slow down rental growth
• In Italy controlled rents have increased at a faster rate than income levels
• In Sweden long standing rent controls have reduced the supply of housing to the point where there is now a black market for housing contracts.

Research from across Europe (and America) also highlight issues with high administration costs, extensive red tape, the over-involvement of politicians and complex sets rules and exemptions for landlords to navigate, offsetting many of the anticipated benefits.

The evidence: USA

Rent controls exist in many major US cities, where a shortage of homes to let has driven up rents irrespective of whether rent controls are in operation or not. From looking at the body of research we can see:

• Rent controls covering part of a city’s private rented housing stock push up rents in the other neighbourhoods
• Although tenants may pay less for their rent-controlled home, their landlord also provides less support and investment
• Landlords affected by rent control often leave the sector, either selling their property or converting it so it falls outside the remit of the controls – hitting supply and further exacerbating housing shortages
• Rent controls do not necessarily equal affordability. In San Francisco for example, rent-controlled units are becoming less and less affordable
• People tend to remain in rent-controlled accommodation, even if their circumstances improve or it no longer meets their needs. As a result, labour becomes less flexible, affecting the wider economy.

The politics of rent controls

Rent control is a highly politicised policy. Lobby groups are strong and reaching consensus is difficult. Information on which to take decisions can be costly to collect. The commissioning of independent research is also expensive and may require long time frames. Independent research is also open to challenge.

Attempts to satisfy all stakeholders can lead to an administrative muddle in which landlords can take advantage of moral hazard and push the envelope of regulation. Court reform is beyond the scope of local rent control regimes. But without such reform, incentives to push the envelope of rent controls exist.

Evaluation needs to be robust, but there are immense difficulties in demonstrating policy impact, whilst unintended effects can be significant. 

In the absence of robust evidence, then a policy which delivers its intentions is hard to formulate.  This vacuum allows politicised decison making to come to the fore.

The removal of rent controls

At some point any rent control system will be dismantled – also as likely to be for political/ideological reasons rather than any evidence.  

The Scandinavian experience shows that deregulation of a regulated PRS can lead to further costs , these include the redeployment or redundancy of administrators as the apparatus of regulation is dismantled.   In addition, there is evidence that by replacing urban planners with regulatory administrators, local authorities will need to re-recruit the skills necesssary to address housing shortages in a post-rent control environment. 

These post-costs simply exacerbates the policy and welfare costs incurred while rent controls are in operation.

Once the abolition of rent controls increases the demand to build housing, the construction sector may need to turn to migrant labour to meet labour shortages. This itself may also have profound implications for the economy.

It is noteworthy that where rent controls have been removed, public policy is driven by recognition of the need to provide a range of locally-beneficial incentives – Norway and Italy (at least where there has been deregulation of rent controls) have been good cases in point.  The debate does not shift back to re-introducing the blunt instrument of rent control.

Are “High Rents” to blame for distortions in the PRS?

As a final point: the NRLA as part of its research function collects data on economic growth, price change and wages change, as well as public sector house-building. The evidence collected indicates that:

1. In the UK, as elsewhere, public sector housing has not kept pace with demand.
2. Price change in the Private Rented Sector has for the last few years, lagged other inflation indices. This suggests the real cost of rented property is presently falling. This itself means the need for rent controls at present is not as strong as, say, in 2015.
3. Any gap between housing costs and affordability in the Private Rented Sector seems to stem from a low (even stagnant) growth in real wages.

Conclusions

This evidence seems to suggest that for workers objecting to housing availability and affordability, the target of their anger should not be landlords.

Instead current levels of housing costs are a product of the failings of planning authorities and employers. These two groups have, respectively, restricted housing supply and kept wages below the level necessary to keep pace with living costs.

These factors have become a common feature of western democracies, whether rent controls are in place or not.