The mayor of London, Sadiq Khan, has claimed that the London mayoral election in May should be viewed as a referendum on rent controls. Khan argued that the case for rent controls is “undeniable” and has pledged to introduce them if he is re-elected.
Khan’s concerns for renters is admirable. There is a housing crisis in London, with many people spending a significant proportion of their income on rent. Moreover, the properties they rent are often squalid and unsafe, with tenants finding themselves at the mercy of slum landlords.
Unfortunately, however well-meaning Khan’s policy proposals, they will not fix the housing crisis. In fact, they may even exacerbate the problem.
Rent controls have been tried in many different cities around the world and the evidence is pretty clear: they do not work. If you’re currently enjoying the re-run of Friends on Netflix (or if like me you’re old enough to remember watching it when it first came out), you might have found yourself wondering how the main characters (young and mainly on low incomes) can afford to live in such nice apartments in a nice area of New York City. Rent control is the reason why. A policy dating back to the 1940s which allows certain properties to be rented at low prices, passing the rent control to future generations.
Now, this might be good news for Joey and Chandler, but not so good for the vast majority of people living in the city (or who want to live there). It has led to a shortage in the supply of housing in New York and resulted in many dwellings falling into disrepair.
It also helps to entrench inequality. In Friends, Monica reveals that she inherited her apartment from her grandmother and so was entitled to pay a reduced rent due to the controls. We know from the series that Monica is from a wealthy family, and so she gets to enjoy a nice apartment at a low rent at the expense of people from less wealthy backgrounds. As such, rent controls hamper social mobility.
Take Stockholm as another example. There is a twenty-year wait for an apartment thanks to rent controls. Other cities where rent controls have been tried have shown that it leads to landlords simply leaving the market, meaning there are fewer homes available to rent. What’s more, many properties are not properly taken care of as landlords have fewer resources or incentives to make repairs or upgrades.
Add to that, it’s extremely difficult to get economists to agree on anything, yet rent controls are an exception to this. The vast majority of economists from both the left and the right agree that rent controls do not work. The impact of rent controls was probably best summarised by left-wing economist Assar Lindbeck, who stated: “In many cases rent control appears to be the most efficient technique presently known to destroy a city – except for bombing.”
The reason for this consensus – and the reason why rent controls do not work – is because they are a form of price control, and price controls always make things worse. Prices work by acting as signals about the availability of goods and services in markets – this ensures that they are most effectively distributed. Price controls distort these signals. With rent controls, landlords withdraw from the market and developers build fewer homes. As a result, there are not enough homes for everyone who wants them.
So, what should Sadiq Khan or the other mayoral candidates do to help renters and fix the housing crisis? The solution is simple: we need to increase supply.
The most effective way to do this would be to liberalise the planning system. There are too many regulations on things such as the size of rooms and the number of windows. These regulations need to go – while ensuring that health and safety regulations are protected – so that more homes can be built.
There are also rules about where homes can be built, such as on the green belt. Given that much of the land designated as green belt is of no agricultural or environmental benefit, it is wrong that homes cannot be built on it. An audit of the green belt should take place so that genuinely green spaces are protected while more homes can be built.
We also need to scrap stamp duty, arguably the most damaging tax on the books. Not only is it a lousy way to raise revenue, but it also gums up the housing market. It means that older people are trapped in homes they’d like to sell, while young families are unable to move into bigger homes. It needs to go.
Sadiq Khan is right to prioritise renters in London. There is a housing crisis which is making living in the city unaffordable for a lot of people. However, focusing on introducing rent controls will do nothing to solve the housing crisis. Instead, he should charge forwards and increase the housing supply by liberalising the planning system and scrapping stamp duty.