Why Rent Control is Bad
(The text of a speech given to the University of York Freedom Society
in February 1986)
by Sean Gabb
If anyone should have the fortune to call at my estate agency in South East London, they will find stuck to the glass door the following letrasetted words: PLEASE NOTE ‑ WE DO NOT HAVE PROPERTIES TO RENT. Every so often, we take the card down and clean it or renew it. Sometimes, for variety, or to fill up a little blank in the display, we put a duplicate in the window. We give a lot of thought to that nine word message which is certainly more than the public ever seems to. I've never kept a tally, but we can t have people in less than half a dozen times a day ‑ students mostly, but also foreigners, migrant workers of all classes, the divorced or just married, and so on ‑ everyone asking the same: Have you anything to rents.
We usually try to help, giving out the names and numbers of the few places locally that do handle rented accommodation. We advise people not to hand over registration fees without knowing exactly what for, and wish them luck. And that s it. Disappointed, they say thank you and drift out again. Whether they do find somewhere or not I can never tell. No one comes back
There is a chronic shortage of residential property to rent. This is plain to anyone who looks. Its most apparent symptom is all those frustrated people touring the estate agencies. Their search costs, in terms of time and money, must be much higher than if they wanted to buy something freehold. A pity they mostly can't. This isn't the only or most serious effect. The shortage also restricts the mobility of labour and so does nothing for employment. No economy grows at a constant rate all over, but is always unpredictably changing. Two hundred Years ago, the economies of the north and midlands took off, sucking in labour from outside. The result was the big new cities there, grown up from villages. Today, these centres are in decline relative to the south. But, unlike in the past, there is no unhampered movement of workers from old to new industries. And chief among reasons for this is lack of accommodation. I know personally of an electrician from Bradford, who found work in London, but had not only to leave his family behind him, but also sleep rough for six days before a friend put him up. He couldn't take a mortgage down here as he couldn't know how the Job would work out. And there was nothing for him to rent. I doubt this is a unique instance. Everything I read or see about unemployment and homelessness confirms the opposite.
Even when someone finds work and doesn't have to move away from home, he has quite often to face increased travelling times. These represent both a personal loss of time and money and a general misallocation of resources.
There is a chronic shortage of property to rent. But who would risk putting any on the market? Not I. Nor for the most part anyone else but a fool, or an altruist, or someone with a shady reputation and a taste for large dogs and reflecting sunglasses. And the cause of this is rent control. It is those temporary measures begun in 1915, never wholly given up, and extended and culminating in the Rent Acts of 1965 and 1974 and the consolidating Act of 1977. These have established the legal right of tenants to Security of Tenure and a Fair Rent. The first of these needs little explanation. The tenant has a right of perpetual occupation that can be transmitted to others twice after his death. The landlord s right to repossession can only be enforced by a court order, to be granted in specific cases. Security of tenure is an absolute condition of a tenancy agreement. No contracting out provisions will be enforced by the courts.
The second of these is rather more complicated. The term fair rent is not defined in any of the relevant acts. It is, however, taken to be the rent that would prevail in a free market without scarcity. Since there can be no rent without scarcity ‑ or, indeed, any other price ‑ this proposed definition is a nonsense. But it is what various local tribunals must try to determine. One supposed means of doing so is to look up the freehold values of similar properties in owner‑occupation, assume a return of 6‑8%, then ask what rental income would be needed to generate it. For a number of reasons, the method is unlikely to set any equilibrium level of rents ‑ not least of these being the scarcity factor to be considered. Just how to be considered is again unstated. But it allows a rent tribunal to decide when freehold values represent not true equilibrium, but scarcity, and so to discount them by some proportion before calculating a fair rent. The rate of discount varies, of course, on local whim. In Aberdeen, for examples, four years ago, it was at 30%. Here, it is said, rental levels represented a nominal return on original investment of 2‑3%, unadJusted for tax or inflation. One could have earned three times this by putting money into a building society, and seven times by playing the stock markets
Who then would be a landlord? The answer still is hardly anyone by choice. In 1914, 89% of British households were located in privately rented accommodation. Today, the figure stands at 13% and is still falling. Probably, bearing in mind the general British preference for owner‑occupation, and a rising level of incomes that has made it increasingly possible, there would have been a shift in proportions even without rent control. But, though we can t say by how much, that control has restricted the supply of property to let is overwhelmingly likely.
Direct indicating evidence for this can be found in the survey by Duncan Maclennon of the effects of the 1974 Rent Act on student lettings in Glasgow. Relatively uncontrolled till then, furnished accommodation began disappearing from the market before the Act became Law. All the usual effects of rent control followed. Occupancy per unit rose from the 1968 level of 1.5 to 3.19 in 1975. Average one way travelling times rose from 14 to 19.2 minutes. People no longer rented only during term time, but began also to retain property during vacations. Costs of search for new entrants to the market rose substantially ‑ to the estimated equal of one term s rent in university accommodation.
Thus, while nominally controlled, the real cost of finding somewhere to live increased for everyone not already accommodated. Particularly disadvantaged groups included those from far away and on low incomes. Whether blacks, homosexuals, married couples and political activists also suffered isn't stated. I'm willing to guess they were, though. Landlords can t let one property to every single prospective tenant. In the absence of rationing by price, who can blame them for adopting some other criterion?
And, linked to restriction of supply, there's the fact of widespread dilapidation in the private sector. In 1976, for example, 5% of properties in owner‑occupation lacked one or more basic amenities. For those owned by landlords, the figure was 26%. People whine about greedy Shylocks who won t Carry out repairs or improvements. But the real cause is less greed than the absurdly low rates of return allowed on this kind of investment.
Rent controls are a mess. They harm tenants. They harm landlords. They produce slums wherever put on. They load various costs on all of us through their indirect consequences. Hardly anyone who knows property will dispute this. The only room for disagreement is over what direction reform should take. Now my own preference is for decontrol. None of the other schemes, of nationalisation or tinkering with the present system, seems either useful or desirable. It’s no good attending to particular effects when it's the root cause that needs attacking.
But, this much said, one important qualification. In calling for a return to a free market, I must stress that I only mean this with regard to new lettings. Those already existing might benefit from a few reforms, but ought otherwise to be left very much alone. Two reasons for this, first being my doubt ‑ despite what said above ‑ whether any case exists for removing old controls.
I certainly don t accept that present landlords are unjustly deprived of income by them. It is true that anyone is robbed who lets property at one rent and then has another imposed by authority, or is denied any gains from inflation or natural growth. But this is robbery of just one owner ‑ whoever has the property at the time of control being put on. In all sales of it subsequent to this, the capital value will have adjusted to compensate the buyer for any limitation of income. Since there are very few modern lettings in the regulated sector, and most older ones have changed hands any number of times, I would say that nearly every present landlord has consented in some way to rent controls. He has been compensated for them in advance through the reduced purchase price of the property. I would also say that a very large number of rented properties are now owned not for the value of their incomes, but purely in the hopes of future vacant possession. So to leave existing things alone wouldn't be a vast injustice to landlords. Removing them, on the other hand, would be unjust to tenants, who, rightly or wrongly, have come to expect continued protection from market forces.
Which brings me to my second reason, one of political expediency. I don't know how far below open market levels most rents now are, but I would imagine it s often a very long way. I do know that, given the option, the majority of landlords would go for vacant possession. Why, after all, stay in the letting market and risk a labour government or a tory change of mind? I also know that a great number of landlords have either Jewish names or brown faces. The first time one of them took advantage of decontrol and evicted a disabled war widow, there would be an outcry as big as anything in twenty years. It would put a whole programme of decontrol in jeopardy.
But decontrol of all new lettings would hurt no one. Those currently enjoying fair rents would be unaffected, or at least no worse off. Leave out the inconsiderable fraction of prospective tenants who may find good accommodation at a fair rent, and ask who would suffer from making the lettings market wholly free after a certain date. Hotel owners and providers of bed & breakfast ? A lot of their steady custom would vanish into proper lodgings. Bad landlords? When people have somewhere else to go, it gets harder to treat them like dirt. Perhaps, bearing in mind the natural caution of property owners, it's too much to expect an instant end to the housing shortage. It might take several years unbroken freedom to persuade them onto the lettings market. But, now or later, removal of controls would be one of the greatest benefits Mrs Thatcher's government could give us. It would easily eclipse the policy of selling off council houses, and be comparable only with the taming of the unions.
The sign stuck on our glass door is looking tatty once more. It would be nice to think we didn't have to renew it.