Labour are promising Rent controls

Well, that cuddly, honest uncle Jeremy has stated that he wants to introduce rent controls.

Mustn’t have the greedy capitalist landlords making any profit, must we?

Hmmm.

As a tenant, or especially a student, the thought of rent controls sounds appealing; easier budgetting, no rapid or unfair increases in rent, so landlords can’t take advantage. Well, it’s not so simple. Read on….

As a bit of background, unfortunately Osborne, when Chancellor, introduced a number of regulations and penal taxes for landlords, and his replacement hasn’t removed these. There’s no votes in hammering landlords. Nevertheless, they will result in landlords increasing rents or leaving the marketplace because it will surprise you that the net profit on many properties around the country is already wafer thin and is why many landlords have decided this year to sell up. This would require a separate article to explain it, but for the purpose of this post, just trust me on this. So, the Law of Unintended Consequences will apply.

We now have the real face of Labour, Comrade Corbyn saying he will introduce rent controls.

My initial reaction is “you are kidding”. So, what happens when interest rates rise? This is a certainty. Don’t let the politicians, central bankers or the media mislead you into thinking they control interest rates. The markets decide (ie the lenders), and governments react to those interest rates. Currently with interest rates being at historic lows, it means that lenders to governments are extremely relaxed about risk of default, so they only take a very small risk premium, which is resulting in 1% interest rates. Well, what is the risk of Greece defaulting? Probably 100%. Italy, probably 99.9%. To lend to these countries (and many others) at 1% is a really crass bit of business and means the lenders are expecting that they will get bailed out! Not sure from where as many counties are already drowning in debt. So, when a country  defaults, how will lenders get repaid? Risk premiums on future lending will have to take a major hike. I remember having to sell my house when interest rates leaped to 15% in the early 90s, as will many older landlords.

The point that I am making here is that interest rates are not likely to be tweaked by just one quarter of 1%. They could leap up by 5% or more at some time in the not too distant future. If this happens, then how will landlords be able to survive? They will not be able to put rents up, but instead will have to sell their properties. What will be the result of this on the number of properties available for rent?  How does this benefit tenants or the economy?

This is how governments bugger the economy. They interfere with maybe the right intentions, but do not understand the consequences. In this case I am not sure that he understands how the economy or markets work. The NLA refers to it in this case (correctly IMHO) as economic illiteracy.

There are other reasons (and evidence) of why rent controls are a bad, typically 1970s idea (which is sadly where most of our Cuddly Comrade’s ideas come from), so I’ve reproduced an article below posted by the National Landlords Association, of which I am a member. They are far more eloquent than myself, but you may think they have a vested interest in looking after landlords. Well, their interest is in ensuring that the Private Rented Sector works fairly. Tenants need decent housing at an affordable price, and landlords need to make a profit.

Have a read and see if you agree…

https://www.landlords.org.uk/news-campaigns/news/jeremy-corbyn-restates-support-economically-illiterate-rent-controls?utm_campaign=8747369_Focus-Members-2017.10.06&utm_medium=email&utm_source=National%20Landlords%20Association

Jeremy Corbyn today restated his supported for introducing rent controls as he addressed the Labour Party’s Autumn Conference in Brighton.

Setting out his key housing policies, Corbyn said:

“[W]e will control rents – when the younger generation’s housing costs are three times more than those of their grandparents, that is not sustainable.

Rent controls exist in many cities across the world and I want our cities to have those powers too and tenants to have those protections.”

While not going into detail on what exact controls Labour would seek to impose on rents, the wording hints at going further than previous policy to introduce caps on rent rises. Labour’s 2017 manifesto pledged to make three-year tenancies that include an inflation-cap on rents the norm.

The National Landlords Association (NLA) does not believe that imposing an arbitrary cap on rental levels would have the effect desired by Jeremy Corbyn and other proponents. Government intervention through rent controls would be counter-productive to encouraging supply at a time when it is so badly needed.

As recognised by the House of Commons Treasury Select Committee, access to an affordable housing market, which includes private rented properties, is crucial to labour mobility and the overall efficiency of the labour market. Any impediment to labour mobility will reduce employment, economic activity, and the economy’s long-run productive potential.

Rent control, or the artificial suppression of rents, may also serve as a barrier to further investment in the stock of private rented properties if the rent generated is too low to allow the landlord to operate a proper maintenance regime without making a financial loss.

Labour point to other cities, such as New York, that have rent controls but do not understand the impact said controls are having. As a 2014 report commissioned by Camden Council on rent stabilisation by the LSE’s Kath Scanlon and Christine found:

Evidence from New York and San Francisco, two high-demand US cities, shows that those living in rent-stabilised apartments generally remain for considerably longer than those living in units whose rents are not controlled. Nonetheless, it tends to be well-off households who benefit from the system, while those trying to enter the market face worse conditions than they otherwise would.”

Likewise, a report for the European Commission in 2014 found that:

“The drawbacks of rent controls in terms of unintended consequences for housing market stability and negative effects on labour mobility would advise against their use for redistribution purposes. Social concerns such as the provision of affordable housing opportunities for young and low-income households and the prevention of homelessness situations require more targeted policies, which would be welfare-enhancing while not taking a toll on rental market efficiency.”

Germany’s system is often pointed to as an example to imitate but it has not quite been the success promised. As noted in IPPR’s recent report, while median rent for a new tenancy fell in the months immediately following the rent brake introduction, they quickly climbed to the previous level and even exceeded it:

“Contrary to expections, in only one of the cities studied – Munich – had rents at the bottom end of the market fallen.

The system hit the headlines again recently as a court ruled the rent control law unconstitutional.

The NLA’s European partners, UIPI, have also looked at the negative impact of Danish rent control regulation on the growth and development of Danish society, as well as the effect on the economy and society that the Austrian rent control system has had.

According to the Institute of Economic Affairs, “[o]ne of the most consistent findings in economic research is that rent controls cause more problems than they solve.”

The NLA would therefore again urge that Labour back away from this economically illiterate policy.

If Labour does want to reduce rising rents, they should perhaps instead join our calls to reverse the damaging removal of finance cost relief for private landlords introduced by George Osborne.

Fit for Human Habitation

In his speech to Conference, the Labour Leader also pledged to ensure that every home is fit for human habitation:

“We will insist that every home is fit for human habitation, a proposal this Tory government voted down.”

Labour MP Karen Buck has this year reintroduced her Homes (Fitness for Human Habitation) Bill as a Private Member’s Bill, after it was previously defeated in 2015.

The NLA is happy to support Ms Buck’s Bill, assuming it sets out to achieve the same goals as her previous attempt. We look forward to seeing the text of the Bill published in full in due course.

 

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