Rent Control Part 2 – a failed policy or a lifeline for the current PRS?

This is the second part of our two-part series looking into rent control whether if it could be successful in the current private rented sector.

In the first part (which can be found here) we discussed the history of rent controls in the UK as well as the current calls for rent control.

In this post, we discuss why rent control often causes more problems than solutions for tenants as well as looking at alternative options instead of rent control which might improve the current housing crisis.

Why rent control creates problems within the PRS

Many people may assume that rent control is binary in who it affects: capping rent benefits tenants and harms landlords bottom line. This is an oversimplification and impacts may better be classified into three groups:

• Current tenants
• Future tenants, and
• Landlords

Current tenants

Firstly, current tenants are the group that will be most positively affected by rent controls. Data published by the ONS shows that tenants in London on average spend around 38% of their income on rent. By controlling rent, this would inevitably save tenants more money. In addition, tenants who are on a lower income will be able to afford to rent also giving more people access to the rental market.

Future tenants

However, future tenants will not see these benefits and this is largely due to the impacts that landlords will face.

Landlords

Naturally, with a restriction on rent, landlords income will be reduced. This will lead to significant knock-on effects, which include:

• With the income that a rented property can earn being reduced, a property’s value will also subsequently decrease. This may benefit soon-to-be property owners who are renting, but will harm current landlords.
• As the income of a rented property goes down, it also restricts the repairs that landlords can do or may encourage landlords to cut corners in making repairs. This is coupled with the fact that many landlords will not see a return in investing to make improvements or adding more onto the property, as they will not be able to charge more rent anyway. These coupled together could lead to a decline in housing standards.
• Due to the fact that being a landlord will no longer provide the same income as it once did, many landlords will vacate the private rented market and sell their properties altogether, which will cause a drop in housing stock.

An interesting case study to understand the potential negative effects of rent control can be seen in Berlin’s 2020 rent policy.

Berlin’s rent control policy

In February 2020, as a way to curb high rental prices, Berlin introduced rent controls. These rent control policies included:

• Introducing a five-year rent cap for all apartments built prior to 2014, freezing them at their July 2019 level.
• the scheme obliged landlords to reduce rents which were 20% more than a centrally determined cap list. Additionally, tenants residing in properties built before 2014 could force landlords to reduce rents defined as ‘excessive’.

Unfortunately, this brought about many unforeseen negative consequences for the Berlin rental market.

The IFO, an economic research group highlighted that this effectively spilt the market into two: newer properties which were unregulated which stayed at the market value of rent and then older regulated properties with a reduced rent. The property value of newer properties skyrocketed due to the fact they were unregulated and could charge tenants the market value of the rent whereas the older properties value fell significantly.

In addition to this, the supply of properties also significantly dropped. The IFO noted that The number of regulated properties listed to rent had more than halved since 2017. The tenants who benefit from the policy tend to stay in the property for longer and when they do leave landlords tended to sell the properties rather than re let them.

The whole process did not have a positive effect on tenants as well. While rent in the capital did drop by 7.8%, this was the only positive taken from the policy. Due to the lack of supply, more people were applying to each property vacancy. Immoscout24, which is a Berlin based rental company, reported that an average of 214 people answered each rental advert in January 2021, compared to 128 in the same month last year.

In a similar way to the housing market, the tenants themselves were divided: those who were lucky enough to have an older property at a low rent that hadn’t been sold yet, and tenants who were paying significantly more living in new properties. This rent control naturally restricted the returns for landlords. If it is uneconomical to let properties, landlords are unlikely to buy them in the first place. This lowers the price of both old and new properties, which reduces the incentive of building additional new properties in the area.

Eventually, in April 2021, the courts ruled that Berlin’s rent control should cease as the city’s government did not have the authority to enact these laws. While the policy was stopped during the process, it can be argued that this experiment was a failure and only placed greater pressure on the housing crisis in Berlin rather than alleviate it.

So what alternatives are there to rent control?

With rent control causing so many problems, it is understandable why landlords are hesitant to see this policy return to England. However, there are alternatives which are ways to control rent rather than just placing a blanket cap onto areas of high demand:

• Greater amount of social or affordable housing. London’s Deputy Mayor for Housing said that 80% of the new homes built in London are only affordable to 8% of the city’s population. Ultimately, rent will continue to grow when the demand is higher than the supply. If more affordable and social housing is built in London, then this will firstly create properties themselves which are cheaper in rent but also will have a knock-on effect of reducing the rent within the PRS as the demand is no longer as high.
• the deregulation of the mortgage sector, and the expansion of bank credit available to buy homes, has increased the amount of money which can be used to buy houses. Alongside a relatively fixed supply of housing, the expansion of new flows of credit for property has pushed up house prices dramatically since the 1980s. Reforms within these sectors may push down housing and rental prices in high demand locations.

In addition to these two, we should also discuss the affordable rent industry. Affordable rent is social housing that is purposefully let out at around 80% of market rent. This allows lower income tenants to be able to afford to rent in properties they would otherwise be unable to afford. The National Planning Policy Framework states that in major developments of housing, at least 10% of the housing provided should be for affordable home ownership, subject to some exceptions.

However, with that being said, private developers can often completely remove or reduce the number of affordable homes they are required to build with a viability assessment to show that building the homes could reduce the profits to below 20 per cent. This is unfortunately only one of the numerous ways in which developers can avoid building affordable properties. New stricter regulations would ensure that developers cannot get out of this loophole.

There is also a systemic problem with affordable housing in that it is still unattainable for lower-income families in high demand areas.

Social rent v. ‘affordable’ rent

Social rent is genuinely affordable for everyone and the model is sustainable as the rent will broadly cover the cost of building and maintaining the property. Affordable housing on the other hand is reduced from market rent but is still more expensive than social rent.

The Joseph Rowntree Foundation in 2018 compared social and affordable rent within different regions of the United Kingdom. The report found that in other areas of high demand, such as south east England and in particular London, the difference between social and affordable rent caused many ‘affordable’ properties to be too expensive for low-income households.

For example, in London, the difference between a two-bedroom property at social rent compared to market rent is £3,350 per year. This increase rules out many in social housing being able to afford these properties.

A brilliant article was written which highlights the problems of affordable housing by Ben Reeve Lewis on this blog which can be found here.

Summary

In summary of both posts, rent control as a policy can provide lower rents for tenants and is useful in capping affordability in areas of high demand. These are the two major benefits in controlling rent and why some politicians and political parties are advocates for the policy.

However, the short term benefits gained from rent control do not justify the long term negative impacts the policy causes throughout the private rental market.

Rent control significantly decreases the benefits of investing in property as it curbs potential income and property value. This decreases housing stock in two ways:

• landlords already in the industry see their profits reduced and will sell up
• it reduces external investments within the industry as the returns are no longer as attractive.

This dries up housing stock, as shown by the UK between 1950-80s as well as Berlin which paradoxically means that more tenants are unable to find properties that they can afford to rent.

Rent control as a policy may be viable if it is part of a larger package of reforms to the sector. In the UK especially, it is the role of a depleted social housing sector and policies surrounding that, which is a significant root of the problem of affordability.

Social housing stock has become depleted due to a lack of Government funding as well as the ‘right to buy’ policy. The number of social rented homes in England fell by 120,000 between 2012 and 2016, taking the total number of social rented homes to below 4 million.

Social housing stock drying up means that a greater demand and pressure is put on the private rented sector to accommodate more people. This demand inevitably, driven by market forces, rises to a point of unaffordability for many.

Investing and building social housing stock will be a significant Government investment, will identify the root of the rent ‘crisis’ and will remedy the situation at source.