Yahoo News Mark my words – rent controls don’t work, and will never work
I always find it baffling when I read an article by someone who proclaims to be an expert and has no skin in the game.
I am referring here to Nick Bano and his mission to rid the world of landlords.
We can both agree there is a housing crisis, but that’s the end of the commonalities.
I can understand Mr Bano’s populist opinion which appeals to the many millions of tenants, and in theory, the idea of rent controls sounds good.
It is the practice which makes it much harder – and, in reality, unworkable.
The major issue that Mr Bano has overlooked is that being a landlord is not without risk. You put up a large amount of capital and in return you expect to get payment for that risk.
There are many different ways investors can deploy capital – whether that be in the stock market, gilts, or just in cash Isas.
The main thing is: there is a choice.
There is a risk-to-return calculation investors make before they choose what they will do with their money.
And the inconvenient truth that so many property commentators overlook is this: investors will only invest if they believe there is money to be made.
Take away the profit and you’ll soon have a non-investable investment. The problem with risk and properties is the long-term horizon.
It takes many years to amortise the upfront costs of investing in property, which is why most people – including the big operators – have long timelines that they expect to be invested in the market.
Guidance can be sought for how the legislative landscape may change, but in theory, if governments want to tempt long-term investors they need stability.
Talk of rent controls does not contribute to stability. The actual experience of rent controls doesn’t live up to the hype either.
In fact, according to the Institute of Economic Affairs (IEA), a free-market think tank, rent controls have led to a decline in all areas.
When applied, they have caused a decline in rental housing supply and quality, a decline in housebuilding rates, a slowdown in tenant mobility and a misallocation of existing properties.
The IEA highlights the recently published meta-study on rent controls over the past 50 years by the Journal of Housing Economics.
Overwhelmingly, the results are negative:
Out of 16 studies that concentrated specifically on the impact on supply, 12 studies found a negative one.
Out of 16 studies that concentrated specifically on the impact on housing construction, 11 found a negative one.
Out of 20 studies that looked at the impact on the quality of rental housing, 15 found a negative one.
Out of 17 studies that investigated whether rent controls drove up prices elsewhere in the housing market, 14 found that yes, they do.
Out of 13 studies that looked at whether rent controls caused misallocations of the housing stock by for example preventing downsizing 13 found that they did.
Even the author of the analysis concludes: “Although rent control appears to be very effective in achieving lower rents for families in controlled units, its primary goal, it also results in a number of undesired effects, including among others higher rents for uncontrolled units, lower mobility and reduced residential construction.
“These unintended effects counteract the desired effect thus diminishing the net benefit of rent control.”
It doesn’t get any clearer: rent controls don’t work, and won’t work.
We only need to look to the recent Scottish experience to see how the idea catastrophically failed (average rents in the 12 months up to April 2024 increased by 10pc in Scotland vs 8.9pc in England and 8.2pc in Wales).
What people need to remember is this: the rental market does not operate in a vacuum.
Other legislative and regulatory changes also have their own impact.
If the data were collected on reasons why Section 21s were given, I’d wager the huge spike we’re seeing is because of the threat of Section 21 being abolished and landlords exiting the market.
The other really important thing that non-landlords need to remember is this: every landlord has a choice.
If property investment isn’t worth the squeeze, you won’t have any juice.
