Here’s why rent control might make the housing crisis worse

New York City, where rent control may have backfired. Image: Getty.

At Labour Conference last month, Jeremy Corbyn made one big announcement on the party’s plans for tackling the housing crisis in our cities – rent controls. However, while Labour argue that this would help to make living in high-demand cities like London and Oxford more affordable, these plans actually run the risk of deepening the housing crisis rather than solving it.

We don’t know yet exactly what form of rent controls Corbyn has in mind, but we can reasonably assume they will go further than Ed Miliband’s proposals in 2014, which capped rent increases to inflation within three-year tenancies but left them uncapped between renewals. In stating that “Rent controls exist in many cities across the world and I want our cities to have those powers too”, Corbyn may be seeking to emulate the recent reform in Berlin, through which all landlords are barred from increasing rents by more than 10 per cent of the local average.

But despite the stated aim of supporting people with lower incomes to live in high-demand, expensive cities, this policy may actually have the opposite effect. The root of the housing crisis in British cities is that we are not building enough homes, particularly in the most successful cities – and rent control could make this problem worse. Paradoxically, it would push some of the costs of housing up.

That’s because rent control would shut off the pipeline of private investment in rented housing. Some 55,000 homes in London have been or are in the process of being built through ‘Build to Rent’ schemes as well as hundreds in cities like Bristol, Reading, and Slough. These new homes would not exist with rent control, as it would make these investments unprofitable.

As a result, not only would the potential residents of such housing lose out from this construction disappearing; so would the rest of the city, as those residents are then forced to live or move into the existing housing stock, therefore crowding out and displacing other city-dwellers.

The location of ‘Build to Rent’ schemes hints at which cities would feel the impact of rent control the most. The UK’s high-productivity, high-housing demand cities such as Oxford, London, York, Brighton and Reading all have average house prices more than nine times the average income, and so also experience very high rents. Cities with weaker economies such as Blackburn and Hull may not feel the effects of rent control as sharply, but only because they have less demand for housing overall.

Undoubtedly, rent control will make some rented housing in these expensive cities cheaper, but with the unintended consequence of introducing new costs – financial and social – into the housing market. For example, for decades New York City has prioritised rent control over house building, with the result that it has failed to keep up with demand for new homes.

As such, rent controlled luxury apartments in elite neighbourhoods in Manhattan have been rented out for decades at less than £100 a month, but average one-bed apartments without rent control in working class parts of Brooklyn cost upwards of £1,300 a month. Rent control in Stockholm sees locals wait decades for new rent-controlled flats. And Berlin’s experience of rent control has not achieved their stated goal of stopping gentrification and has caused some rents to spike as landlords respond to the new incentives.

All the international evidence shows that rent controls divide renters into the privileged and the outsiders. Those already in rented flats when controls are introduced do well, but the city’s young people and migrants from the rest of the country and abroad are penalised as they need the new homes that are not being built. The shortage of housing then makes it harder for cities to attract the workers and firms they need to be successful.

Expensive cities like Cambridge have to manage the costs of growth by building more housing and using the new tax revenues to fund more infrastructure in the key locations that have lots of jobs and opportunities. Rent controls will make this more difficult and worsen the inequality of growth within successful cities.

Labour is also promising a big expansion of social housing, and it could be argued that this would balance out any negative effects of introducing rent control on the private housebuilding industry. This is unlikely. London needs roughly 50,000 homes a year, and is currently building 20,000, mostly privately. Even at the peak of municipal social housing in the 1960s London Boroughs were not building more than 30,000 a year.

The expansion of the social housing programme would have to surpass the historic peak London reached, and would put huge construction and maintenance burdens onto local government at a time when capacity within the sector is at its lowest point for more than a decade, just to keep prices stable. As such, Labour’s plans are not viable.

Ultimately, Labour’s enthusiasm for rent controls is misplaced, and its focus on replacing private rented housing with social housing should be a lower priority than simply building more homes. If Labour wants to make housing more affordable for the many not just the few, Corbyn should promise to commit to green belt reform that could unlock 1.4m homes within 25 minutes’ walk of existing train stations around our ten least affordable cities, all on just 5 per cent of the total green belt.

Fixing our broken planning system should be the priority for cities that want to help renters, not introducing new problems.

Anthony Breach is an economic analyst at the Centre for Cities, on whose blog this post first appeared. 


What's actually in the UK government’s bailout package for Transport for London?

Wood Green Underground station, north London. Image: Getty.

On 14 May, hours before London’s transport authority ran out of money, the British government agreed to a financial rescue package. Many details of that bailout – its size, the fact it was roughly two-thirds cash and one-third loan, many conditions attached – have been known about for weeks. 

But the information was filtered through spokespeople, because the exact terms of the deal had not been published. This was clearly a source of frustration for London’s mayor Sadiq Khan, who stood to take the political heat for some of the ensuing cuts (to free travel for the old or young, say), but had no way of backing up his contention that the British government made him do it.

That changed Tuesday when Transport for London published this month's board papers, which include a copy of the letter in which transport secretary Grant Shapps sets out the exact terms of the bailout deal. You can read the whole thing here, if you’re so minded, but here are the three big things revealed in the new disclosure.

Firstly, there’s some flexibility in the size of the deal. The bailout was reported to be worth £1.6 billion, significantly less than the £1.9 billion that TfL wanted. In his letter, Shapps spells it out: “To the extent that the actual funding shortfall is greater or lesser than £1.6bn then the amount of Extraordinary Grant and TfL borrowing will increase pro rata, up to a maximum of £1.9bn in aggregate or reduce pro rata accordingly”. 

To put that in English, London’s transport network will not be grinding to a halt because the government didn’t believe TfL about how much money it would need. Up to a point, the money will be available without further negotiations.

The second big takeaway from these board papers is that negotiations will be going on anyway. This bail out is meant to keep TfL rolling until 17 October; but because the agency gets around three-quarters of its revenues from fares, and because the pandemic means fares are likely to be depressed for the foreseeable future, it’s not clear what is meant to happen after that. Social distancing, the board papers note, means that the network will only be able to handle 13 to 20% of normal passenger numbers, even when every service is running.

Shapps’ letter doesn’t answer this question, but it does at least give a sense of when an answer may be forthcoming. It promises “an immediate and broad ranging government-led review of TfL’s future financial position and future financial structure”, which will publish detailed recommendations by the end of August. That will take in fares, operating efficiencies, capital expenditure, “the current fiscal devolution arrangements” – basically, everything. 

The third thing we leaned from that letter is that, to the first approximation, every change to London’s transport policy that is now being rushed through was an explicit condition of this deal. Segregated cycle lanes, pavement extensions and road closures? All in there. So are the suspension of free travel for people under 18, or free peak-hours travel for those over 60. So are increases in the level of the congestion charge.

Many of these changes may be unpopular, but we now know they are not being embraced by London’s mayor entirely on their own merit: They’re being pushed by the Department of Transport as a condition of receiving the bailout. No wonder Khan was miffed that the latter hadn’t been published.

Jonn Elledge was founding editor of CityMetric. He is on Twitter as @jonnelledge and on Facebook as JonnElledgeWrites.