Rent controls will not fix Britain’s housing crisis

For every complex problem, quipped the American satirist HL Mencken, there is an answer that is neat, plausible and wrong. There could be no better verdict on rent controls as a solution to the problems of Britain’s private rented sector.

Too bad, then, that Labour politicians are sending conflicting signals on the issue as the election nears. While the official Labour line is that rent controls are not party policy, shadow chancellor Rachel Reeves recently declared that she could see a case for controlling rents in local areas even though she did not favour a “blanket approach”.

Her comment came as the party attempted to distance itself from a commissioned report recommending that rent controls be pegged to the lower of local wage growth or the increase in the consumer price index. Meanwhile, Sadiq Khan, London’s Labour mayor, has in the past asked for powers to freeze rents in the UK capital.

Concern for those at the bottom of the housing market is understandable. In the 12 months to April, private rents in the UK increased by 8.9 per cent, way above consumer price inflation at 2.3 per cent. Financial support for those struggling with spiralling rents has been progressively eroded while shrinkage in social housing since the council house sell-off in the Thatcherite 1980s has not been reversed.

Yet the history of rent control, from its introduction during the first world war to its shelving in 1989, is an object lesson in the law of unintended consequences.

The combination of inflation and controlled rents after 1945 meant that residential landlords’ real income declined relentlessly. This removed their incentive to invest in lettable new housing or spend money on the upkeep of existing property. 

Tenants could not move for fear of forfeiting below-market rents and, potentially, security of tenure. This had adverse consequences for labour market mobility and led to a wasteful use of the housing stock as downsizing in old age incorporated a severe financial penalty.

The wreck of the private rented sector reached its apogee in the 1960s and 1970s with the great wave of gentrification in Britain’s inner cities. This was sometimes portrayed in the media as a benign process whereby enterprising young professionals moved into broken down neighbourhoods and turned them into salubrious, safer places.

In reality, gentrification was all about financial arbitrage. In an investigation published in The Times in 1973, I showed how two little-known property dealers with a private business empire of about 500 companies had bought up great swaths of Islington, Camden Town, Fulham and other parts of inner London. What they and other speculators were doing was exploiting the difference between the low market value of properties with protected sitting tenants and the much higher value of the properties with vacant possession. 

The speculators employed “winklers”, or front men, to induce tenants to vacate, by fair means or foul. This spread fear and distress among tenants while disrupting communities. The furore that followed these revelations prompted Richard Crossman, the Labour minister whose 1965 Rent Act sought to refine the rent control system, to declare that the act had failed to protect tenants.

By the time rents were deregulated in 1989, the private rented sector’s share of the housing stock had fallen to a tenth, down from nine-tenths in 1915.

The lesson here is that rent controls, with their perverse incentives, are a distraction from the reality that the housing affordability crisis stems chiefly from sky-high land prices. Oxford university’s John Muellbauer has found that more than 70 per cent of the value of homes lies in the value of the land.

The more fruitful avenue for Labour would thus be to address the current mish-mash of property taxes that strongly favour owner-occupation against renting. Cue the OECD’s recommendation, backed by Muellbauer, to shift from transaction taxes on property to annual taxes on land value, with appropriate deferral for cash-poor households.

As well as broadening the (currently stretched) tax base this has the potential to enhance labour mobility, reduce regional inequality, secure a bigger share of windfall planning gains for the public and curb property-based credit booms that crowd out more productive investments. It should be calibrated to encourage greening of the housing stock.  

Previous attempts to put land value tax on to the agenda have stalled in the face of vociferous opposition from landed interests. Still difficult, no doubt, for the Tories. But why should this scare resurgent Labour, with the wind in its sails? The prizes are many and rich.

john.plender@ft.com