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Why we need rent control

Why we need rent control

On the issue of rent control people tend to slip from maths and economics to ideology without realising they are doing it. Otherwise-respected economists are so wedded to free markets that they start bending their own rules to accommodate their opposition.

The economic principles in play are:

  • Supply and demand
  • Cost of capital

Assumptions:

  • Supply and demand for rental homes determine price. Renters will pay whatever they can bear to live in an appropriate home and this price will be higher if there is a shortage of appropriate homes.
  • Supply and demand determines house prices.

Landlords are investors, even accidental landlords. They are choosing to rent out properties because, for the same level of risk they can’t get a better return. So landlording has a very low cost of capital because of its profitability. The huge profitability and low cost of capital increases the demand to invest in landlording above the demand for other investments. This means there is greater demand for homes, so house prices rise because of this demand. The reason why institutional investors generally prefer build to sell is that their business model has different risks than the majority of small landlords. It’s no coincidence that pensions are more appropriate investors in build to rent and that most small landlords see it as their pension.

So landlord profitability drives up house prices. 80% of the cumulative growth in housing stock since 2000 is in the private rented sector.

Therefore, a key lever for lowering house prices is to make landlording less profitable. Landlords benefit from about £30 billion a year in rents (including HB) and £30 billion in Capital Gain. There are huge CGT loopholes, Mortgage Interest Relief and the ridiculous “wear and tear” allowance, which with HB add up to about £20 billion a year of taxpayer subsidy. An attack on rents or the tax breaks, or ideally both, would drastically lower the profitability of landlording, increasing the cost of capital and encouraging investors to take their money elsewhere.

However, in doing so, the demand for house purchases drops, with fewer landlords willing to outbid buyers who simply want a place to live and are not hyperstimulated by the potential returns. This reduced cost means that new entrant landlords can purchase those homes and make decent profits, even with the rent cap – even without the tax break, and with a stabilised housing market where capital growth can only be achieved through improvements and maintenance of the property or the area, rather than just leaving it there for some time.

So firstly, a one third reduction in private sector rents could modestly recoup a one quarter reduction in housing benefit in the private sector, meaning a £2-3billion reduction in HB. But in lowering the price of land, you increase the viability of building affordable homes and social housing, which moves people out of the private sector altogether, probably saving you another £2-3 billion in HB, let’s say £5 billion in total – per year. And don’t forget, to do it you have to cut the tax breaks, for which you can probably save £7-10 billion a year.

Another effect would be the liberation of money for other parts of the economy, creating a jobs stimulus at the same time as a reduction in corporate land costs, making business more secure and London in particular more internationally competitive, all of which equals a rise in the overall tax take. This of course is accelerated if you spent these savings on building public housing.

So cutting taxpayer subsidies and implementing real rent controls (not Labour’s rent stabilisation policy) would save the taxpayer in the region of £20 billion a year.

My figures are from the back of an envelope but my logic is sound. Here’s our paper on implementing rent caps sensitively.

The real effect of rent controls is not the reduction of the rent but the reduction of the profitability of landlording and the suppressing of house and land prices.

Generation Rent is holding a public debate on rent control on 4th February. Registration is free at www.rentfreedomday.org

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