Are rent controls the answer to Britain’s housing crisis?

David Kingman asks whether rent controls are the best solution to the problems facing “Generation Rent”Landlord

Back in 2012, another IF blogger compared London’s private rental market to the “Wild West”. This expression neatly encapsulated the sense of powerlessness that many of the millions of Britons who now live in the private rented sector (PRS) feel when it comes to dealing with the private landlords whom they rely on to house them.

The PRS has changed out of all recognition during the last 30 years, as it now provides accommodation for around 4 million households in England alone, which is about twice the number in 1980. The number of households living in the PRS has recently overtaken the number of social tenants for the first time in decades.

Currently, there are few restrictions of how much rent landlords can charge new tenants; combined with short-hold tenancies which typically last only 12 months, this means that many people living in the PRS face high costs and constant instability as they regularly have to move from place to place in search of somewhere affordable.

Over recent years, a growing number of commentators have called for greater restrictions to be placed on landlords in order to redress the balance between them and tenants. On 1 May the Labour leader Ed Miliband finally put these calls into action, by pledging to introduce a relatively modest package of rent controls in the PRS if the Labour Party wins power after the next general election. His critics were quick to attack him for this policy, with the Conservatives arguing that evidence from other countries suggests it will lead to “poorer quality accommodation, fewer homes being rented and ultimately higher rents”. So, are rent controls the answer?

A modest proposal

As suggested above, the actual package of measures which the Labour leader unveiled looks relatively modest. The key elements are that all PRS tenancies would have to be for a minimum period of three years (with break causes to cover exceptional circumstances), rent increases would be capped during the lifetime of the agreement (meaning rents could only rise in line with inflation) and much stricter controls on letting agents’ fees.

It appears from the initial announcement that landlords would still be able to charge tenants the going market rate at the beginning of the tenancy, which should assuage concerns that it will become impossible for landlords to make decent returns on their investments.

The UK has experimented with rent controls in the past. Between 1915 and the 1980s, various pieces of legislation placed severe restrictions of the amounts that landlords could charge tenants, as well their ability to evict them. Between 1977 and 1989, renters had a right to become what were known as “sitting tenants”, giving them a legal right to occupy the property where they lived for life.

The problem with these measures was that they are now generally blamed for turning the PRS into a far less attractive investment for landlords, which led to fewer properties becoming available and poorer conditions for existing tenants, whose landlords had no incentive to maintain their properties to a good standard if they couldn’t charge any extra rent for doing so.

Compared to the past, these new proposals look pretty tame. Anecdotal evidence suggests that many landlords are already offering three-year tenancies with fixed rent increases because they are eager to retain good tenants, so it’s possible they won’t make that much difference. On the other hand, there is also the danger these measures might just be a first step towards far more draconian restrictions which would ultimately have a negative impact first on landlords and then on tenants, if they politicians feel they are a vote-winner.. Striking the right balance is the key.

A taxing issue

One of the main reasons why it seems unlikely that these new proposals would turn the PRS into a less of an attractive investment for landlords is that there are a host of other reasons why the returns on investing in property have been so positive over recent years.

Chief among them is the shortage of new housing supply in Britain, which is forcing a generation of young people – especially in London and the South East – to live in the PRS when they would prefer to buy because they simply can’t afford either a deposit or a mortgage. Millions of people on lower incomes have little realistic chance of ever becoming owner-occupiers, leaving them facing the prospect of being tenants for life.

Critics of Labour’s policy announcement have claimed that Britain simply needs to build more housing. Of course, this is true, but the chronic under-supply of new housing has been a consistent failure of the British housing market for over 30 years, and there seems to be little prospect of things improving in the near future.

Something that might do more to benefit tenants than introducing rent controls would be addressing the enormous tax subsidies that are given to landlords in the private rented sector. IF’s research into the PRS entitled Why BTL (Buy-to-Let) equals “Big Tax Let-Off”  concentrated on how the sector is taxed compared to other forms of investment. It demonstrated conclusively that landlords benefit from a number of tax subsidies, which mean they are currently able to claim as much as £13 billion per year in tax relief. The main cause of this is the fact that landlords can write off mortgage interest against tax – an option which has been denied to would-be first-time buyers ever since the abolition of the MIRAS scheme (Mortgage Interest Relief at Source) under Gordon Brown.

Given that the market is already tilted heavily in favour of landlords, the relatively modest set of proposals which Labour has made would go some way towards redressing the balance in favour of tenants. Altering the tax distortions dramatically, so that fewer people invest in property and more of today’s tenants could afford to buy, would be even better, but unfortunately tax reforms rarely make for eye-catching policy announcements.