Ed’s brave housing proposal

Rent House Showing Rental Property Estate AgentsRent regulation and three year tenancies. That’s Ed’s big housing idea for the private rented sector. It is what the people wanted. Well, quite a lot of people appear to support the idea.

But even before the formal announcement has been made it is apparent that some are vehemently against. The initial voices of outrage were those one might have anticipated. The incorrigible Mr Shapps and the Adam Smith Institute, ably supported by that other cheerleader for deregulated markets City AM were quick off the mark in condemning Labour’s proposals for ‘rent control’ in lurid terms. It is little short of socialism, red in tooth and claw. Assar Lindbeck’s famous quote about rent control being the best way to destroy a city apart from bombing was dusted off and given another airing.

Those in the red corner were supportive of the initiative as a follow-on to Labour’s energy price freeze. Mark Ferguson at Labour List welcomed the move and argued that Miliband needs to stick to his plan in the face of the inevitable criticism – this is a bold move and should be proclaimed as such.

Ferguson finishes his post by noting that a quarter of Conservative MPs are private landlords. Which is no doubt a useful piece of information when interpreting the howls of outrage which will inevitably follow today’s formal policy announcement.

But are rent regulation and longer tenancies a good idea?

That depends on whether we’re talking politics or economics.

I suspect this is probably smart politics. That’s certainly George Easton’s reading of the situation. There are a lot of people being squeezed hard by the cost of living and housing plays a big part in that, particularly for younger people and those living in the South East. Many more people are now living in private renting than was the case even at the last general election. What was a bit of a marginal issue now looms much larger in the political consciousness. This policy might well encourage some people to vote Labour who wouldn’t otherwise. I have certainly been part of discussions where it has been argued that polling suggests there are undecided voters who will cast their vote in the light of the parties’ stances on housing. That is, if they are going to vote at all.

If we turn to the economics then the picture is a bit murkier.

The ASI tried an interesting tactic in referring to a recent survey of (US) economists where 95% of respondents thought rent control had a detrimental effect on the housing market. The pitch is that not all of the respondents could have been right wing free market loons so this is not a party political issue – there is a near consensus among the people who are supposed to know about these things that rent control is a bad thing.

Now I wouldn’t dispute the results of that survey. Indeed there have been similar – indeed broader – surveys every decade since at least the 1980s which find pretty much the same thing. But I would dispute its significance.

Few if any of the respondents to that survey are specialist housing or urban economists. Yet, as any economics student knows, rent control is always wheeled out at the start of the course as the textbook example of the negative side-effect of well-intentioned attempts to control prices through regulation. It helps students understand the whole paraphernalia of supply and demand curves, price adjustment, excess demand, and equilibrium. Indeed, the ASI case against the Miliband proposal is no more sophisticated than you’ll find on page two – or maybe page 10 – of many introductory economics textbooks.

My suspicion is that many of the respondents to that survey are relying on basic principles and intuition rather than any great familiarity with the applied economics of housing markets. It’s a bit like asking me for my views on development. I could give you a view based on what I vaguely remember from the textbooks on development economics. But I’ve no real knowledge of the detailed literature in the field. So I wouldn’t put a huge amount of weight on anything I said.

That doesn’t mean that rent control isn’t a problem. It comes with all sorts of potential problems.

My point is that the effects of these types of intervention are fundamentally contingent on the housing market context, the detailed design of the regulatory mechanism, and the interaction between the two. Lindbeck’s comments were made about first generation rent controls, which could be a very crude way of controlling prices in nominal terms. That approach can certainly have a devastating effect on housing supply and the quality of the housing stock. Much of the early intervention in the UK private rented sector – back at the start of the twentieth century – was of this type. And you couldn’t sensibly dispute that they had a negative impact on supply, although they weren’t necessarily the primary cause of the decline of private renting. And, even then, the problems with nominal controls really start to bite in periods of high inflation, either in general or of house prices specifically.

The problem for the critics is that this is not the sort of intervention that Miliband is proposing. The discussion over rent regulation has, for the last twenty years at least, been wrestling with more sophisticated forms of intervention that do not have the same disincentive effects. Indeed, there are countries in Europe which operate systems of longer tenancies with regulated rental uplifts, of the type Miliband is proposing – and the sky hasn’t fallen in on them. Indeed, it is possible to find countries where negative consequences from rent regulation are quite hard to detect.

But this all depends on what is happening in the rest of the housing market. It also depends on investors’ motivations and the sorts of returns they are seeking. So it depends not only in the housing market but also on what’s happening with a broader range of asset markets.

One view in the housing economics literature is that if you think you understand the impacts of rent regulation then you probably haven’t thought about the issue hard enough. It is complex and highly contextual.

It is, however, absolutely clear that rent regulation is treating a symptom rather than a cause. And when we think cause we immediately think of shortage of supply and the need to build more houses in areas people wish to live. That is undoubtedly a big part of the story.

But we also need to factor in the way in which the housing finance market is currently functioning – for example, making it easier for landlords to raise finance than first time buyers. And, in my view, we need to look more closely at landlord motivation, which we know very little about.

The imposition of rent regulation on a private rented sector where institutional landlords are thinking long term and looking for a steady but unspectacular income stream to balance out more volatile investments in their portfolio will have a very different effect on the market to imposing exactly the same set of regulations on a market characterised by landlords trying to maximise income returns in the short-term as well as expecting to cash out soon with a substantial capital gain.  Similarly, those different types of landlord are likely to react differently to the imposition of longer tenancies.

Over the last couple of weeks we have had reports that the returns on Buy to Let investment outperformed that on almost all other investments over the last several years.  There is nothing God-given about those returns. Landlords are clearly exploiting short –side power and seeing what they can get away with. It wouldn’t be implausible to suggest that gouging may, on the odd occasion, be occurring.

Personally, I am not against rent regulation, as long as it is very carefully thought through and part of a broader package of measures to address causes as well as symptoms. But I would like to have seen a broader prior discussion about the appropriateness of some landlord practices, as a way of problematizing them. The aim would be to shift norms and expectations about what is appropriate and acceptable. That would lay the groundwork for a conversation about regulation.  It would delegitimise exploitation and provide greater legitimacy for intervention.

My suspicion is that Miliband may have approached the task in the wrong order and as a consequence will face more of an uphill struggle than might otherwise have been the case.

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10 replies »

  1. Landlords get subsidies through FLS (BoE), low rates (BoE) and government (infrastructure/HTB2), lack of housing supply.
    Is it not about time that the state taxed them (Removal of BTL tax allowances/ change of CGT/IHT) in order to get these subsidies back? This can be only applied while the supply constraints are in place.

    Also why not have rents follow the BoE base rate? This way , tenants do not get punished by low return on their savings and high rents..

  2. Really interesting to hear that there is literature to suggest that rent control is not wholly a bad thing. But it would be nice to get a glimpse of what that literature argues, rather than being hit by a wall of expertise.

    Incidentally, Admin’s contrast between saintly long-term institutional landlords, and wickedly short-termist private landlords seems overdrawn. I have excellent relations with my very charming private landlord. Let’s hope regulation doesn’t discourage him from providing me with great housing, forcing me to live in dwellings provided by an institution.

    Difficult to imagine what SK is talking about. Live-in owners are exempt from CGT when they sell. Landlords are not. They must pay CGT. The longest-term extant study of private house capital gains (on Amsterdam’s Heerengracht canal) shows that private housing has only 0.01% annual above-inflation capital gains, and similar data is available from the US. So if private landlords are taxed on capital gains, they are being taxed on valuation fluctuations – i.e., taxed if they sell in good years, and unable to claim anything back in bad years. The whole thing is unfair and hugely counter-productive. Why subsidize the owned sector and tax the rental sector, which provides huge social benefits?

  3. Hello Matthew

    I’m beginning to think that it would be a good idea to write something longer than a blogpost on rent regulation. I think that in the right institutional context a carefully designed mechanism can bring reasonable levels of stability and predictability without having too negative an impact on supply.

    On the characterisation of landlords you are right that this is presented in very stark terms – and I don’t for one minute believe that virtue is the monopoly of any one type of landlord. Indeed, it is clear that even ‘good’ landlords engage in ‘bad’ practices at times, while I guess few bad landlords are entirely without redeeming features. My point was simply that the way the market responds to the introduction of a new regulation is not independent of the actors within the market and their motivations. It makes little sense to talk about ‘rental supply’ or ‘landlords’ in general. We know a bit about the profile of landlords and their characteristic and how it is changing. But we really know very little about their motivations. (That is, there is very little systematic research that focuses on the topic)

  4. You may be amused by our site’s guide to rent control, based on our quite extensive research into different systems. My then-economist was certainly a ferocious opponent of rent control! The article is now a little dated: http://www.globalpropertyguide.com/investment-analysis/the-pros-and-cons-of-rent-control and unfortunately he did not deal with the security of tenure issue, though it forms part of our global ‘pro-landlord’ versus ‘pro-tenant’ 5-star rating system, see http://www.globalpropertyguide.com/faq/guide-landlords-and-tenants and http://www.globalpropertyguide.com/investment-analysis/Housing-Sales-and-Rental-Markets-in-Asia

  5. Hello Matthew
    Thanks for the links. I’m not sure your guide to rent control strikes quite the same tone as I would adopt, but it is a good run through most of the key issues and it seems to me that in reality it is pretty even-handed.

  6. So I’ve just been to see Ha-joon Chang talk today and I think it’s worth injecting a bit of his radical spirit into the discussion:

    If people like the idea and economists don’t, we should be careful not to automatically accept the values underlying the analysis by economists.

    A particular example of this would be the notion that taxing (or other actions against) BTL would damage housing provision. The problem is that across the country (although London is something of an exception) BTL provides very little new housing, it’s mostly about change of ownership of existing stock. BTL’s are unlikely to be allowed to demolish that stock, so their options for removing it from the market are constrained.

    A less focussed but even more important objection is that the value of greater stability for the average family in rented housing is huge – it crosses from economics into crime rates, employability, health and more… So short term, narrow economic analyses need to be treated with caution.

    Now London is different, but we already know that London is radically different and probably requires a different approach to the rest of the country regarding both residential and commercial property.

    Of course, in the end, the brave move would be (in London and out) just a lot more council house building, as the biggest problem with our market is constrained supply of affordable housing.

  7. Hmmm… what about the advantages of mobility, only available through buy to let? If you want stability, you get a mortgage and you buy! The costs are about the same. Not obvious why you should make BTL more like a purchase, it reduces variety, and asymmetrically burdens the landlord, reducing the incentive to provide rental housing.

    I also disagree with the point about renting now providing new housing stock. What about the hundreds of thousands of conversions, motivated in great part by the existence of a smoothly-functioning BLT market?

  8. This figure that landlords make a 16% return is bandied about, but is missing an important element. The reason the return is so high is because it’s geared with debt, magnifying both the profit or the loss. If you look at the returns from property rentals where debt is not used, they are very similar to other asset classes. If you used debt to gear up investment in the stock market, bonds, venture capital etc, the returns would also increase, but so would the risks. With the base rate soon to rise, many landlords are only too aware of those risks.

    Although I strongly agree there are serious problems that need addressing, this Labour proposal looks like a dog’s dinner where the lack of detail makes it almost impossible to assess the impact. Anyone who claims housing can be resolved with simple solutions usually hasn’t looked at it long enough.

    There is apparently a get-out if the landlord’s mortgage terms prohibit tenancies longer than 12 months, where the new rules would not apply. It also seems the new rules would not apply to existing tenancies. If you remove those two groups, the remaining tenants affected are (at this point in time) likely to be a minority of tenancies. The latter issue would potentially allow any landlord to avoid the rules entirely for existing tenants by never issuing a new tenancy agreement, and instead leaving the tenancy to go periodic. What use are new rules if they can be easily bypassed?

    But the biggest flaw to me is that the three year increase cap doesn’t make much difference to the long term level of rent paid. If the tenant stays for over three years or moves, they will be paying a fresh market rent. The actual cost saving is almost non-existent, though there is a benefit in stability & security of tenure.

    This looks like political pandering and a sleight of hand to make us all forget about successive governments failing to build new housing, which is the real problem underlying the pain many feel in the South East at high rents.

    In a poll of one, I asked my hairdresser today what he thought of the proposals. He’s just rented a new place in London with his girlfriend. He told me “It won’t make any difference to rent levels, the real problem is stagnant wages”.