Tuesday, December 1, 2020
Home News Ryan Bourne: Miliband's rent cap proposals will ultimately lead to increases

Ryan Bourne: Miliband’s rent cap proposals will ultimately lead to increases

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Ed Miliband stole the headlines last night with a re-heat of his proposals for ‘rent controls’. First mooted a year or so ago, Miliband confirmed a new detail – under his plan three-year tenancies would become standard, with the rents charged only able to rise by CPI inflation within those tenancies. This, Miliband said, was his commitment to ‘Generation Rent’ (though whether he meant the young generation who find themselves increasingly unable to own their own homes, or the left-wing campaign group of the same name, is anyone’s guess).

It’s tempting for Conservatives to react to this in an hysterical way. Soon after the announcement, the Secretary of State for Communities and Local Government Eric Pickles, for example, echoed the famous quotation of Swedish economist Assar Lindbeck in claiming rent control was the surest way to destroy a city bar bombing.

But this misses a crucial detail. Miliband’s proposals aren’t like the crude nominal rent caps of the past, thankfully. These saw the collapse of the private rented sector through the 20th century through discouraging investment and hence supply. Post The Rent Act 1965, rent officers had to assess ‘fair rents’ based on the characteristics of the property – and had to explicitly ignore the quality and quantity of comparable accommodation nearby. In areas of shortages then, where rents under a market would be higher, the controls bit harder and exacerbated these shortages.

They also destroyed any incentives to keep much of the stock in good repair, while encouraging landlords – like the infamous Rachman and others – to use non-economic methods of intimidation and bad treatment of tenants to encourage tenants to leave so landlords could find alternative uses for the property. There’s such a consensus on how disastrous these controls were, even a Labour party ideologically attracted to price controls gets it.

The key difference with Labour’s new proposals then is that rents are only capped within tenancies and not forever. This means that rents adjust to reflect market conditions between each three-year tenancy. Therefore we wouldn’t expect to see the ever-worsening state of the market of the crude ‘first generation’ kind. But that doesn’t mean the new policy wouldn’t be damaging or have a range of unintended consequences – not least if they are a precursor for further market regulation. I examined this type of policy in detail in Chapter 5 of the recent IEA book ‘Flaws and Ceilings’.

Think about it logically. At the moment the CPI inflation rate is effectively 0. The aggregate price index is stable. Let’s suppose we expect that to be the case for the next three years (just for the sake of argument). This would lead to several different effects on the rents charged. Firstly, a rational landlord would anticipate the inflation outlook, and if he expected that market rents would rise within a tenancy more quickly than inflation he or she would increase the initial rent at the start of the tenancy to reflect his expectation. Thus, tenants would face higher initial rents than in a free market.

Second, if there were unexpected increases in market rents within a tenancy, then we would see larger jumps in the actual rents charged than you would see under a free market when these tenancies end. This would make tenants more at risk of economic eviction between tenancies, though more secure within them. Finally, we’d expect the overall policy slightly to increase market rents for everybody by structurally raising them, because landlords would be bearing more risk in the management of problem tenants and, coupled with the risk of further regulation in future, there is likely to be less investment in the sector.

Indeed, this is the crucial point. The main reason that many people lament the state of the rental market is because ‘the rent is too damn high’. Yet Miliband’s proposals do nothing to improve affordability. By definition, they can only ever potentially provide sub-market rents for a limited period before they adjust. As people realise this, and become disappointed they don’t deliver all that is promised of them, there will no doubt be demand for even tighter controls. Then we really will be at risk of repeating the mistakes of the past.

The problem in our housing and rental markets are pretty simple. We don’t build enough. We don’t build enough because of our planning laws, which make supply unresponsive to demand. This is particularly in successful areas of the country, many of which we have drawn arbitrary ‘green belts’ around where we expressly forbid building. If politicians seriously want more affordable rents, this is the only policy area they should be looking at. These ‘rent controls’, whilst not as damaging as those seen in the past, won’t deliver what people are being promised.

You can see why they are appealing to Miliband though. They provide a readily observable policy to show that politicians are acting on ‘concerns’, and most of the population are not well-versed in economics. For this reason, policies such as this tend to be popular. The results will not be.

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Ryan Bourne
Head of Public Policy at the Institute of Economic Affairs

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