This week, Britain’s Conservative government announced that it will consult on the abolition of Section 21 of the Housing Act, which allows landlords to evict tenants without cause. The idea is that this will provide more security for tenants and has been welcomed by tenant organisations across the land.
But while it is indeed true that the most common trigger for homelessness in the UK is losing a privately rented home, not everyone agrees that tightening the law is a good move. Landlord associations are predictably not in favour of losing the right to repossess their properties, they warn of investment in rental property being undermined – a legitimate concern, as it is evidently true that restricting the rights of landlords makes it a less attractive investment. Other likely unintended consequences include much more scrutiny of tenants before they are let a property and higher rents, to compensate for the lost right to eviction.
But of course, as Ludwig von Mises argued, government intervention begets further government intervention. And canning Section 21 is indeed a symbolic move unless it is accompanied by rent control: if landlords can just hike rents, then they can effectively evict their tenants by stealth. So, what about rent control? Is that a good idea?
It has been talked about for years. The Mayor of London, Sadiq Khan, has undertaken to set out a blueprint for controlling private rents as he seeks to “help” the 2.4 million renters in the capital. Under current UK law the Mayor does not have the power to do so, but should the hard-left Jeremy Corbyn move into 10 Downing Street he has already signalled his intent to give cities the right to regulate rents. And it is a popular policy: according to a YouGov poll of Londoners, 68% are in favour of rent controls while only 16% are opposed. The campaign group Generation Rent “applauded” the move, and Shelter, the charity, said it “looked forward to working with Mr Khan”.
Rent control typically come either in the form of a cap on the rent a landlord can charge for a property or a cap on permissible rent increase while the tenant is living in the property. The former is the most cumbersome, as it relies on bureaucrats to evaluate each property and determine the rent.
Many countries, and a few US states, have highly regulated property rental markets. In Denmark, where rent is determined based on the value and cost of maintaining of a property, large parts of the private rental market have disappeared, which has forced the government into all manner of additional regulation. That is because Denmark experienced on of the most obvious unintended consequences of property market regulation: a collapse in supply. Not only did the regulation discourage investment into privately rented properties, it also encouraged the selling of existing rental properties to private homeowners. As a result, and as Mises predicted, politicians have spent decades fighting a dwindling supply of rental homes with new laws and regulations. Sweden also has a huge housing shortage as a consequence of their highly regulated rental market, with decades-long waiting lists for rental properties. In Germany tenants can’t be evicted either, nor rents hiked. The result: properties are left in need of repair while the owner literally waits for tenant to pass away so new tenants can be found at a price which justifies a modernisation of the property. These are the universal unintended consequences of rent controls everywhere: a collapse in the supply and standard of rental properties. And none of this is controversial, economists of various persuasions are broadly in agreement that rent controls are counterproductive.
Rent controls also removes from the market the information of an unimpeded price signal, making allocation of land between its many potential uses less effective. The function of prices is to allocate scarce resources effectively, and, especially in big cities, space is very scarce – hence the high price. Rent control stops the property market from adapting to change.
It is true that the UK suffers from a housing crisis and that property prices have stripped many of the opportunity to buy. But regulating the rental market will just make it harder to rent as well. What the government should do is scrap section 21 along with the entire Housing Act and let a truly free market in properties develop. Combined with an abolition of planning laws, to address the massive shortage in supply of new homes, this could finally solve the UK’s crippling housing crises. But predictably, instead the government has chosen to restrict the free market with yet another economically illiterate policy. For leftist politicians, the immediate benefits of rent control – reduced living costs for, often poor, renters – outweighs the long-term damage to markets which they don’t believe in anyway. It may prove popular with equally economically illiterate voters, but it is a counterproductive policy laced with potential for unintended consequences.