No, rent controls don’t work

I’m not really sure why we are having this debate. I would not be writing an article explaining that water is wet, why the sky is blue, and that hot is hot, and cold is cold. But as we are in a world where policy is mostly through the looking glass, where we are proving once more that rent controls do not work.

Last week, the Chancellor’s top team leaked that she was considering a one-year rent freeze in the private sector, to counter the ongoing affordability crisis. However, nothing is more permanent than a temporary government intervention. Whilst the mandarins and economists in the Treasury are very much against this mad policy, as I have been reliably informed, their concerns will not placate left-wing Labour backbenches looking for concessions.

Rent controls do not work. It is not that they cannot work, but that would require building at a rate never achieved in this country so that supply can be adequately replaced. It is worth, once again, explaining why it cannot work today, and where it has been tried recently to much failure.

Berlin in 2019 was a city in revolt. Rents had doubled in a decade, and as was standard in Germany, 85 per cent of residents rented as a population surge of 300,000 had turned a famously cheap, bohemian capital into somewhere ordinary Berliners could no longer afford to live. 

The previous federal rent brake introduced in 2015 had proved toothless, riddled with exemptions and barely enforced. So Berlin’s SPD-Left-Green coalition did what left-wing coalitions do when markets produce answers they dislike and unleashed the regulatory hammer. The “Mietendeckel” froze rents for 1.5 million apartments at 2019 levels and set hard per-square-metre ceilings. Polling showed 60 per cent approval, much like today’s over 70 per cent approval for rent control in the UK.

As is standard in the history of rent controls in supply constrained markets, the apartments didn’t get cheaper but instead got scarcer. Landlords pulled listings, converted rentals to sales, left units vacant on the reasonable bet that the law wouldn’t survive constitutional challenge (which was the correct call), and shifted supply into the exempt new-build sector where prices promptly surged. Advertised listings in the controlled segment fell by around 40 per cent. The policy was, in other words, a subsidy to insiders funded by the young, the mobile, the newly arrived outsiders. Or, more precisely, the people a housing policy ought to help. 

When the Constitutional Court duly struck the “Mietendeckel” down in April 2021, around 130,000 tenants who had received reductions faced backdated rent demands. The intervention had failed on its own terms, and the people it hurt most were the ones it claimed to protect. This is one of dozens, if not hundreds of examples of failure caused by rent controls, going back through forty centuries of wage and price controls. 

But it is not just the concern of rent controls for the UK that landlords are having to contend with. The Renters Rights Act is three days away from coming into force, and has already forced 220,000 landlords to rethink their portfolios and sell-up. While economists assume rational behavior, some renters damage properties, default on rent, or harass neighbors. The RRA compels landlords to tolerate such tenants in their property, increasing costs and risks that are driving many to exit the market. 

To add insult to injury, housing starts have dried up in London and the South East — in Southwark, Islington, Barking, and Harrow, there were fewer than 50 new starts last year. That means less choice for future tenants, who have been driven out of an already white-hot market. There is little hope for the housing market moving forwards. The construction sector is in pieces — there are widespread expectations that redundancies are coming over the next two years, and as with an industry as complex and specialised as building things, the loss of capacity will hinder further efforts to boost supply.

My message to the Treasury: don’t go down the route of rent controls — build some damn houses

For renters like myself, and almost all of my friends and peers who do the same, there is no justice in bringing in rent controls. We know that rents are rising, but it is the fact that wages are not keeping pace. The government is causing this by over-regulation of capital and labour, mass immigration suppressing wages and clogging up the rental market, and stopping housebuilding with greedy Section 106 and Community Infrastructure Levy demands on developers. Rent controls, even if temporary, will cause agony for tens of thousands of ejected renters, old and new.

A sensible solution would look at the hundreds of studies into rent controls, and digest the unintended consequences of these short-sighted but popular policies. They do not work. As Assar Lindbeck, the Nobel Prize winning Economist, “next to bombing, rent control seems in many cases to be the most efficient technique so far known for destroying cities”. Even so, as the President of the Adam Smith Institute has corrected him previously “at least bombing wipes out supply and demand”. My message to the Treasury: don’t go down the route of rent controls — build some damn houses.