Free Lunch: Rent controls that aren't

Δημοσιεύθηκε: 27 Απριλίου 2015 - 11:23

Promises as safe as houses

Labour made two housing policy commitments over the weekend, only one of which was interesting. The uninteresting one was the promise to cut stamp duty for first-time buyers. That just aligns Labour with the coalition government in a silly rivalry for measures that help aspiring homeowners with one hand while pulling their goal out of reach with the other. In a supply-constrained market, the effect of demand subsidies (which all of these are) is just to drive up the price. That point is made in the best short guide to UK housing policy, a new election briefing from the London School of Economics' Centre for Economic Performance.

The interesting policy was the one designed to help tenants rather than housebuyers. Labour will require landlords to offer 3-year leases with no above-inflation rent increases allowed during the tenure. Politically, aiming to win the votes of "Generation Rent" is astute. A study last year found that one-third of the 9m private tenants in the UK are swing voters, half of these consider rents to be their biggest problem, and most importantly: 86 parliamentary constituencies have majorities smaller than this swing-vote group. Thirty-seven of them are Labour targets.

Then there's the economics. The policy has been slammed by landlords (no surprise there) and by the Conservatives (no surprise there either). "Rent controls don't work", is the common refrain. But when Boris Johnson and others find it necessary to drag out housing policy failures of Communist Vietnam or Swedish controls abandoned 40 years ago, it is a sign they protest too much.

The reason is that Labour's proposal is hardly a rent control policy at all - at best it is a "third generation" or "rent stabilisation" type of rent control, which has taken on board any lessons either Hanoi or Stockholm have to impart. Another LSE report gives some detail of such policies (basically, they limit control to within-lease rent adjustments) as well as a summary of other countries' experience with them. (A summary of the summary: It's complicated, and it depends on a lot of other things in the housing market and beyond.)

That means Labour's policy is not actually designed to lower rents for tenants. Landlords will respond by upping the rent at the outset of the lease, as Ed Miliband made clear on Sunday. Though perhaps not clear enough, for his party is enthusiastically confusing voters by calling the policy one that will "cap rents". In fact, the policy will simply smooth rents over three years. That is actually hugely significant. The disruption of unexpected rent increases, the sunk investments lost in a house move, and the distress of eviction are all huge costs borne by tenants on top of the admittedly high level of market rents. Labour's proposal has a fair chance of achieving this without distorting the market.

The party would, no doubt, like swing voters to think the policy will make rents fall as well. But for renting to become more affordable, you need the same thing that makes it more affordable to buy them. That, as both the CEP researchers and Johnson rightly point out, is more housebuilding.