In many ways, the frequent calls from politicians to implement rent controls are remarkable; insofar as, despite their repeated failure to solve the rental crisis, they are still being consistently proposed as the solution. In Scotland, where temporary rent controls have predictably driven down the availability of private properties by 20% and raised rents on new tenancies by 14%, the SNP have doubled down on their failure and is seeking to ban rent increases for up to five years.
When rent controls have been tried elsewhere the results have been identical. Take Berlin, where the 2020 rent caps which fixed rents at below market rates were accompanied by decreases in supply five times as large as reductions in prices. Equally in Stockholm rent controls have resulted in a shortfall of 27,000 apartments. As a result the average queue for a rental apartment in the capital is 11.3 years.
Unfortunately Sadiq Khan's most recent proposal for solving the housing crisis is likely to be just as much a failure in London as it has been everywhere else. His plan is to deliver 6,000 new homes in which rents would be capped at a third of local salaries. He has also urged the government to delegate him the power to freeze rents across the capital. If granted this would cause serious issues for an already troubled housing market.
Considering that policymakers are continuing to tout rent controls as the answer to our housing crisis, it’s worth once again explaining why they inevitably hurt the very tenants that they are meant to support.
The answer lies with one of the key insights of economics, incentives matter. Changing the incentives presented to the seller of a good will have an impact on the buyer and vise-versa. Rent controls have significant negative impacts on the incentives of landlords to operate in the rental market, and therefore generate adverse consequences for tenants
The impacts on sellers in the housing market are two-fold. Firstly, capping prices will weaken the incentive to rent out, encouraging landlords to sell properties and invest in other more profitable asset classes such as stocks or bonds. YouGov polling has shown 37 per cent of landlords would reduce the number of properties they let if an external agency like a council was given authority to set rents both during and between tenancies. Properties from this sell off tend to be sold to new those intending to live in the properties as unlike landlords they are unaffected by the rent caps. This will inevitably create shortages in the rental market, as demonstrated by decline in rental properties available following the rent cap policy in Scotland.
Secondly, it reduces the incentive to invest into the production of new housing. Developers and landlords know that their properties will be struck by rent controls, which will prevent them from generating adequate revenue to justify investment in new development. This will limit growth in the supply of housing, in the long run worsening the housing shortage.
There have been various examples of this effect, in 2023 Get Living paused its £200 million plan to build 1500 new homes due to the Scottish Government's rent control policy. As the Scottish LandLords association stated, “The rent control proposals, as has been seen in places like Ireland which has similar measures, will see reduced investment and more landlords leaving the sector, leading to higher costs for tenants.”
These combined effects mean that rent controls, aimed at keeping rents low for tenants will only result in a reduction in the supply of housing, creating housing shortages and preventing development.
The Greater London Authority's target for affordable housing starts by 2026 is between 23,900 and 27,100 per year, but by February only 4% have been started - just 874 new houses. As for the £4.8 billion "Building Council Homes for Londoners" program, council house building starts since last May has been precisely zero.
Without allowing for greater development significant increases in rents are inevitable, rent controls do not offer a genuine solution to this challenge. Unsurprisingly the solution to the London housing crisis is less- not more government- regulation. Deregulating planning leading to greater investment into property development would expand the supply of housing, reducing rent prices without creating property shortages.