With Jeremy Corbyn elected as leader of the Labour Party, it might be fun to think through some of the policies that he's used as the basis of his campaign. I've tried to reason things out rationally but my personal biases will no doubt escape, no matter how I dress things up. I thought I'd start with rent control.
(There is a post coming about the pros and cons of Corbyn becoming Labour leader. I want to wait a bit to see how things settle down: at the moment it's impossible to tell what will happen, much less whether it corresponds to my prediction of events. Also, I'm curious to see how things evolve and reserve my judgement for later.)
I will write generally about rent control rather than the specific policy that Corbyn proposes (Note: the linked post is from 2012, he has campaigned on this issue for a while1). I will sketch an outline of the problem that rent control aims to solve. Then I will discuss what rent control is for the purpose of this post and how it might be used to solve the problem. Of course, we also discuss the potential problems that arise from implementing rent control and whether these problems are more harmful than those we set out to solve.
House prices are so far above household income in many parts of the country that many families cannot afford to buy a property. The mean age of first home ownership in this country in 2012 was 35. As this forces many families to rent their homes, this increases demand for rented homes and this drives up rents thanks to the law of supply and demand. Not enough housing is being built to increase the supply of homes that are affordable to rent or affordable to buy.
Why does the problem exist?
The following is just one of the reasons why this problem exists.
When a landlord buys a property to rent out, they look for yield or return on investment. This is what they can earn from the property relative to the amount of money they spend on acquiring the property. The landlord wishes to maximise this yield. Because capitalism.
The problem for the landlord is that even in the currently overheated rental market, yield does not scale with outlay. If you spend £200,000 on one property and £400,000 on another, it is unlikely that the rent that you get for the second property will be double that of the first – even though you have double the outlay.
So our landlord decides the best way to maximise their return on investment is to buy several small cheap properties where the yield is higher relative to outlay. Buy them cheap and pile them high.
Thus landlords target exactly the same sort of properties as first time buyers. Even though landlords don't want large outlays, because they can outspend first-time buyers to obtain these properties they inflate the price of properties. Current economic conditions exacerbate this. Increased prices lead to increased numbers of renters, leading to higher rents. Higher rents mean that people cannot save to buy their own property, which makes it easier for buy-to-let landlords to dominate the housing market. It is incredibly profitable. The name given to the ever-growing population that is the victim of these forces is Generation Rent. In the interest of full disclosure, I count myself among them.
This article in the Guardian gives a better overview of the problem and why it exists (but it doesn't overtly mention rent control as one of the possible solutions). Spookily it was published about eight hours after I started writing this post. Perhaps I need to return to my draft about internet tracking.
How would rent control help?
I assume that a rent control is a fixed cap on annual rent. We would base the control on either the size of the property or its market value. This manipulates the yields that landlords receive from their properties. This could shape the market to direct investment away from the lower end of the market. By allowing potential yields to increase nonlinearly with property value – in the sense that the cap would grow faster than the value – there could be less restrictive rent control in the middle and upper end of the market. This would (theoretically) spread demand more evenly across the market.
The increased savings potential of those at the lower end of the market would replace the demand for lower-end properties, while disinvestment from lower value (now lower yield) properties by landlords would provide the supply. This has the societal benefit of increasing home ownership without depleting the stock of council owned houses. People living in lower end properties would live in better quality houses and lead healthier lives with a greater sense of entrepreneurial spirit and wellbeing.
Meanwhile the curvature of the increase in yield to value could provide another tool for the government to fine tune and control the housing market and, to some extent, the wider economy.
- Rent controls can create rather than prevent gentrification. There would need to be a way of dissuading those above a certain income from living in smaller properties. It won’t work to remove rent control for renters that earn more as this would motivate landlords to discriminate against low earners and could also create financial barriers for people who wish to earn more.
- If the emphasis on low end of the market is too strong there is a risk of creating a new bubble in the middle or top of the market. This may mean that developers don't build new housing at the affordable end of the market, while buyers of entry-level houses could end up cut adrift from the rest of the market.
- The above problem suggests that the inflection points for yield and value have to be carefully considered and regularly revised in order to keep the market stable. If the system is too complex, it won't help renters (because complexity of the system will affect their ability to make forward plans) and it will likely drive smaller entrepreneurs from the market (housing is a popular investment because it is relatively stable).
- Decreasing yields for landlords could lead to unsold properties. While it is virtually unheard of in the UK for residential properties to go unsold and fall into disrepair, it is possible that rent controls could decrease the supply of rentable housing.
Alternatives and additions
- Make landlords pay council tax. A government would have to introduce this measure after either a ban on above-inflation increases on rents (or after the introduction of rent control) in order to prevent the shift of its cost to the tenant. I can't understand why this isn't already done. Landlords would contribute more to areas in which they buy properties and it would provide extra funding for councils without further taxation of citizens. It would also provide councils with income from student properties.
- Reduce stamp duty and/or provide tax breaks for landlords selling properties below a certain value to first time buyers. "Stuff their mouths with gold."
- Increase tenants' residency rights including the right to buy a rented property for market value after five years. Provide protection for tenants from landlords that might evict them for this reason.
- A larger state intervention, including licenses for landlords, a register of properties and the capacity for local authorities to take back ownership of properties and land from landlords who do not comply with legislation. This would be a backward step though, essentially breaking up private sector renting entirely. I could fill a whole blog post with the problems that this could create.
- Actually, Corbyn’s post explains little about how he would carry out rent control. This is my misgiving about him – he articulates the problems very well while appearing not to think through the solutions. If you can't produce demonstrable evidence that your solution will actually work, and won’t create more problems than they solve, then you’re in trouble.↩︎