Rent control is not the answer

Richard Blanco, London Representative for the National Landlords Association (NLA) explains why the UK must not return to Rent Controls.
Richard Blanco, London Representative for the National Landlords Association (NLA) explains why the UK must not return to Rent Control.

Richard Blanco, London Representative for the National Landlords Association (NLA) explains why the UK must not return to Rent Control.

There has been a worrying increase in calls for rent controls recently.  In December 2012 the Labour Party Private Housing Policy Review called for annual indexation of rent increases once the initial rent has been set.  More worryingly, MPs including Jeremy Corbyn, and this week David Lammy, seem to be calling for a return to something akin to 1970s housing policy.  Lammy’s comments were in response to the testing of the Government’s overall benefit caps, equivalent to a benefit ceiling of £350 per week for single individuals and £500 for families.

During an interview about the caps on LBC Radio, David Lammy stated that rents in London had risen by 7% in 2012. This is indeed the case and it is so because house prices also rose by 6.8% in the capital during the same period; increasing rents merely reflects the increasing cost of buying and maintaining rental property.

The government hopes that the relaxation of planning constraints will encourage more house building and it has set local authorities ambitious targets.  The Bank of England’s funding for lending scheme has increased the flow of mortgage finance and the government hopes its help to buy scheme will enable buyers with small deposits to gain access to home ownership.  However, fundamentally we need to build more housing and free up mortgage finance to take pressure off rents.  The private rented sector now stands at just below 18% of all housing stock while social housing’s role continues to decline.

All of the government measures – if they are successful – could take years to feed through into the housing market.  Meanwhile, benefit claimants affected by the welfare cap are, on average, £93 per week short of the amount they need to pay their rent. The answer according to many is for landlords to reduce their rents accordingly.

But we forget that landlords need to cover their costs to stay in business and will only continue to invest if there is the possibility of profit.  Why is it that shops, garages, plumbers and other small enterprises can make a profit but landlords shouldn’t?

The idea that landlords are raising rents just because they can also seems to be gaining currency at the moment.  Yet according to the NLA’s latest tenant survey, 67% of tenants say their rents had not risen in the last twelve months. Many landlords opt not to raise rents once the tenant is in situ, only reassessing rents between tenancies.

So, are rents controls really a viable solution?

Residential letting contracts were de-regulated by the Housing Act of 1988 and the 1989 introduction of the Assured Shorthold Tenancy.  Prior to that, rent controls were the norm and the private rented sector shrank to 8% of all housing stock.  A re-introduction of rent controls would cause the sector to shrink back into decline.

In addition, lenders would be less likely to offer buy-to-let mortgage finance if there uncertainty over whether rents could cover mortgage payments. Landlords would stop buying and many would withdraw from the market as their businesses cease to be viable.

And institutional investors who work on a 20 to 30 year timescale and are just starting to take an interest in building to let on a large scale would certainly about-turn on any investment proposals.

Indeed, the artificial suppression of rents sounds like an easy solution.  But it would reduce the stock available through the private-rented sector.  The lack of growth in the social sector means that demand would not be met, so we would see an increase in homelessness and families would be placed in temporary accommodation at huge cost to the public purse.

Rent is a product of the value of housing, which is in turn a consequence of its availability and the cost of provision. You cannot influence the former without addressing the latter. Rent control is not the answer.

5 thoughts on “Rent control is not the answer

  1. Excllent article, clearly pointing out dangers of rent control.
    Landlords often seem to be seen as a charity with a duty to provide a great home for a cheap rent. In reality they risk a lot of money (and sometimes time), on which they want to have at least small return. That especially applies to smaller, individual landlords. For lots of them the controlled rent would be a disaster, as they often operate on a small profit.
    Saying that – rents in London and South East are indeed exorbitant, but as Richard mentions it reflects the property prices, (non)availiability of reasonable priced BTL mortgages, high deposit requirements, as well as compliance procedures Therefore calls for rent control will be heard more and more often, I assume.
    Let’s all hope it will not happen.

  2. While it would be hard to disagree with your analysis and all of what you say makes a lot of sense, having a roof over your head which is affordable is a number one priority for most people, and it just so happens that these people have a vote to cast come election time. As you must be aware to accommodate every person who wants to live in the Capital would entail. a building program far in excess of anything envisaged. So, we are left with pricing as a mechanism for allocation of scarce resources. Now most political parties, with one exception, have signed up to this agenda. However as its deficiencies as a means of providing us with the day day essentials of life become daily more apparent, London now leads the European league table for food banks, it is obvious that some serious rethinking needs to be done. Gorden Brown was one of the more recent converts to the theory that if the pricing of housing was given free rein this would generate a surge in supply and therefor produce a solution to the shortage of housing in London. This thinking seems to have missed the point that the supply of land it is possible to build on in London is to a large extent fixed and where a site is available the costs of putting something on it which is genuinely affordable are such that these projects never even get to design stage. Most people in work (unless they are CEO’s) are seeing their wages static in the face of price increases for just about everything they need to keep ticking over, food, heating and lighting, travel …. and rents. The pressure on politicians to come up with answers is going to grow. Regulator caps on energy pricing is a possible option, an equivalent solution to housing costs is one that both the Coalition and Labour will have to consider even if it means calling a halt to the planned rise in Council and Housing Association rents that are in the pipeline. If that happens you can be sure the PRS will be ‘asked’ to play their part.

  3. Excellent points and so true. Politicians must be very careful not to put plans in motion which will undermine the success of the PRS in proving homes to people at a time when other options are not open them. The housing crisis will not be solved, and rents may continue to rise, until there are more homes built and finance for home purchase is more easily available. In the meantime goverment and councils should work with private landlords and not do anything which would discorage them from investing in this sector which is so vital to meeting housing needs

  4. Landlords have been subsidised enormously by QE and a low base rate for 5 years now, without which house prices would have fallen through the floor.

    Savers, pensioners and non-homeowners are paying for this.

    Rent controls are needed in the UK more than anywhere else in Europe and it’s currently the only European country without them.

    The UK needs rent controls NOW.

  5. “A re-introduction of rent controls would cause the sector to shrink back into decline.”
    One dimensional thinking!! The net effect would be that the displaced private rental stock would increase the supply of properties for sale – thus decreasing market value, easing up mortgage finance and widening the opportunites for the renters to buy instead. We don’t need to be reminded that increasing property ownership was the reason Thatcher Govt abolished rent control in the first place. Evidentially, the act has outlived its purpose.

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