The return of rent control?

An idea that was supposedly buried a generation ago is rising rapidly up the housing policy agenda.

Last year saw modest proposals by Labour for rent regulation within three-year tenancies in the private rented sector. Now there are calls for something that goes much further.

The conjunction of two news items last Friday put the issue into sharp relief. The first was an opinion poll for the private tenants campaign Generation Rent that asked ‘would you support or oppose proposals for the government to introduce a “rent control” system in the UK’. The result was 59 per cent to support, 6.8 per cent to oppose and 34 per cent with no opinion. Levels of support rose to 77 per cent among private renters, 69 per cent of Labour voters and 64.5 per cent of Londoners. However, rent control also had the support of a majority of Conservatives (55 per cent) and homeowners (56 per cent).

In one sense the results are not very surprising given the political profile of the cost of living, a growing awareness of the powerlessness of private renters and the publicity around the campaign by New Era tenants. In London several of the contenders to be the new mayor back rent control and the Assembly’s housing committee called for rent stabilisation back in 2013.

However, until very recently there was an all-party consensus at Westminster that there should be no change to the deregulation of the sector that happened after 1988. Public opinion seems to be well ahead of the politicians at a national level.

The second piece of news was a call by the Civitas think tank for inflation-linked rent increases within indefinite tenancies. The report is interesting in its own right on the role of the shift to private renting and personal subsidies in exacerbating the housing crisis. However, what makes it really significant is that this call for reform is coming from a right of centre think tank that seems to have lost faith in free market solutions to the housing crisis.

The report argues that a long-term solution may depend on a dramatic increase in construction of new homes but that it will take years for housebuilding to catch up with demand and it may not happen at all in London. That means policies are needed to help low-income households in particular while there is still a shortage of affordable housing.

However, we have been going in the wrong direction since 1988:

‘The longstanding policy of subsidising demand rather than supply – dating largely from the 1980s where rent controls were abolished, too – has led to many of the problems afflicting housing provision in the UK today. It should be the goal of government to reverse this balance, in time.’

The report argues that housing benefit has exacerbated the problems by inflating private rents to local housing allowance levels and increasing the cost to government. Curbing future rent increases will mean fewer people rely on housing benefit: ‘Only by gradually reducing the influence of housing benefit can we achieve a fair market in housing – a market that promotes supply rather than choking it off, and forces landlords to compete on price and quality rather than too often taking desperate tenants for granted.’

If the arguments are familiar ones, it’s where they’re coming from that makes them intriguing. This is the point where a right of centre think tank would usually make the standard arguments against rent control: that it will damage the supply of new homes, deter investment and send the private rented sector into decline again.

However, the report points out that deregulation has not led to an increase in supply. Most of the expansion in private renting has come from the conversion of owner-occupied and social rented homes into private rentals rather than the construction of new homes. And there is no shortage of investment in private renting in Germany, despite the fact that it has indefinite tenancies and restrictions on rent increases.

There are also many different forms of rent control. Arguably many private landlords would be happy with the inflation-plus formula that applies to rent increases in the social sector, but that is a form of rent control and it is seen as vital to investment in new homes. In the private sector, it need not mean freezing all rents, as after the first and second world wars, or control of all increases in rents. Rent rises can instead be controlled within tenancies while allowing market increases when tenancies change.

Civitas proposes:

• Making indefinite tenancies the norm, with tenants allowed to stay as long as they like provided they observe the terms of the lease. This would give long-term protection to tenants, especially families with children, and would not deter investors who want long-term returns.
• Restricting in-tenancy rent increases to a ceiling linked to inflation or earnings. This would give an incentive to tenants to stay put and reduce the housing benefit bill over time but landlords would also gain from reduced voids and other costs but they would also be allowed to make reasonable increases in rents when they modernise a property.
• Greater incentives for private landlords to invest long term, for example in capital gains tax exemptions and depreciation allowances.
• Exempting new-build homes from the requirements on indefinite tenancies and rent restrictions to encourage landlords to invest in new stock.

It’s not hard to see some potential problems in the proposals and Civitas anticipates some of them. For example, landlords would have every incentive to charge as much as possible at the start of a tenancy, regulation might not be necessary in areas where supply more closely matches demand and buy-to-let lenders normally insist on short tenancies. On the first, the report argues that landlords can only charge the market rate; on the second that landlords in lower-demand areas may increase their rents by less than inflation; and on the third that there could be a role for the state-owned banks.

Other potential problems are not mentioned. More fundamentally, the impact might be to distort the market as a whole and effectively benefit existing tenants at the expense of new ones paying higher rents. Landlords will inevitably look for ways to evade the regulations and these proposals will give them an incentive to encourage their existing tenants to leave so that they can charge higher rents. Rachmanism was about exactly that but landlords also developed much more sophisticated ways of evading rent regulation in the 1960s and 1970s. See my blog on Rachman, rogues and renting for more on that plus the potential contemporary relevance.

However, these problems have to be set against what could be even greater flaws in the current deregulated system. The report makes much of the soaring cost of housing benefit in the private rented sector but arguably the bill could be even bigger over the longer term once millions of private tenants move into retirement.

My review of housing in 2014 concluded that rights for private tenants are firmly back on the political agenda. It’s too early to say that rent control is back but we are only a few days into 2015 and that momentum is already accelerating.

Originally posted on Inside Edge 2, my blog for Inside Housing