What are rent controls, and who do they benefit?

A housing protest in London, 2015. Image: Getty.

New York, San Francisco and Stockholm have them. And now some Londoners are calling for them to curb rising rents. But what are rent controls and how do they work?

Rent controls can come in many flavours but they are all a form of price ceiling to cap the level of rent that landlords can charge. Generally, price ceilings lead to underproduction and black markets. Producers, where possible, switch their efforts to alternative goods that fetch better prices. Shortages and illegal trading of the regulated goods often follow.

Housing is a durable good, however, and most renters do not live in new homes. So it is tempting to think of the rental stock as rather fixed and therefore largely immune to the normal pernicious effects that price controls have on supply.

To some extent, this is true – in the short run. But over the long run, it is generally not. Shortages in quantity and quality will eventually occur, though their manner and degree depends very much on the particulars of the rent control policy. The particulars also determine who wins and who loses.

Different types

Rent controls must grant renters greater security over their tenancy and also regulate the rents that they pay. Both are necessary, as otherwise landlords could force tenants to leave in spite of any security by raising their rents prohibitively.

Typically, the rents are controlled by a local rent board which decides on an annual basis how much a tenant’s rent may permissibly be increased. Almost always, these increases are lower than the growth rate of unregulated, market rents in the area. This keeps rents, for existing tenants at least, “affordable”.

It would be arduous (and boring) to create a taxonomy of all rent controls. But rent control is one of the few policies in economics where there is little disagreement over their unintended consequences – the effects are readily observable in the many markets where rent control has been enacted.

A key issue is whether rents are regulated for existing tenants only – or for new tenants as well. In San Francisco, rents are unregulated for new tenants, but incumbents have the right to renew at a regulated increase in rents. In New York City or Stockholm, apartments themselves are regulated; rents are more or less determined by a board and are (more or less) independent of the length of current tenancy.

This difference in approach is reflected in the market. In San Francisco, rents for new tenants are very high, in part because landlords know that they may not be able to increase them later. In NYC and Stockholm, rents for regulated apartments are quite low. And in NYC only a fraction of the rental stock falls under rent control. Many rentals are completely unregulated.

Finders keepers

Both approaches heavily disincentivise renters from relocating. In San Francisco, for example, a tenant who has been living in their apartment for years would likely have to pay a substantially higher rent should they move to a different apartment and begin a new lease.

In Stockholm and New York City, rent controls have had unintended knock-on effects on the market as a whole. For different reasons, in both cities there is a shortage of rent controlled apartments. In Stockholm, apartments are rationed by the government. Waiting lists for apartments are long. In New York, landlords have greater autonomy over who they rent a controlled apartment to: it is “finders-keepers”, and the finding is very tough.

Disrepair

Shortages are not always immediately apparent. Suppose a city, London, were to impose controls on all rentals. At first, there wouldn’t be much of a change in the rental stock; perhaps a slight reduction in the number of buy-to-lets.

Over time, though, the rental stock would decrease. From the beginning, regulated rentals will be under-maintained. Because landlords are poorly compensated for any improvements under rent control, they lack the incentive to upgrade or even perhaps make repairs. In fact, disrepair may help them get rid of an incumbent tenant – an attractive option under San Francisco-style controls.

There are also knock-on effects for the owner-occupied housing market, which is not regulated. If rent is capped, the buy-to-let market would likely cool down. Owner-occupiers, because of the value they get from living in their home, would be willing to pay more than prospective landlords. Rental homes, where and when possible, would be sold into owner-occupancy as a result.

NYC has long rent control waiting lists. Image: Scott Davies/Flickr/creative commons.

In NYC and Stockholm, where much of the regulated rental stock is in multi-storey buildings owned by a single legal entity, conversion to owner-occupancy is relatively rare. In London, however, where much of the rental stock is individually owned, homes would move rather easily into the owner-occupied sector. This may be good for renters who are willing and able to buy a similar home, as house prices will generally be lower. But it will be much tougher for those not ready to buy.


Fewer options

The consequences of rent control are not as simple as, “Renters win, landlords lose”. This is sort of true, initially. But would-be landlords – investors who have not yet bought – lose nothing. They can move their money to alternative investments if the return on being a landlord is not high enough.

Meanwhile, future renters lose. Investors have many choices over assets to invest in, but renters have fewer options; they either rent or own. For many renters, switching to owning is not possible or would be financially difficult. And so they will end up bearing the costs of the price ceiling.

Of course, rent control need not lead to scarcity if the government is willing to step in and subsidise construction. But then it becomes the public purse that bears the costs of rent regulation.

There are times and places where rent control may nevertheless be good policy. It may be warranted in war time, particularly if other parts of the economy, such as housing construction, are being simultaneously regulated. In fact, both NYC and London had rent controls during World War II. But this may lead to those renters that enjoy the controls during the war becoming a vocal constituency for maintaining the policy, with the long-term unintended consequences this brings.

The Conversation

Jonathan Halket, Lecturer in Economics, University of Essex.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

 
 
 
 

Cycling on London’s Euston Road is still a terrifying experience

Cyclists on the Euston Road. Image: Jonn Elledge.

The New Road, which skirted the northern boundaries of London’s built up area, first opened in the 1750s. Originally, it was intended to link up outlying villages and provide a route to drive sheep and cows to the meat market at Smithfield without having to pass through the congested city centre. 

As with bypasses and ring roads the world over, however, it increasingly became congested in its own right. Today, you won’t often find livestock on the route, which is now Marylebone, Euston and City roads. But you will find up to six lanes of often stationary buses, cabs, and private vehicles. In a city whose centre is largely free of multi-lane highways, London’s northern ring road has long been the sort of abomination that you avoid at all costs.

But now, somewhat surprisingly, the road is seeing yet another new use. Earlier this week, the first phase of a temporary cycle lane opened on the Euston Road, the middle section of the route which runs for roughly a mile. As London rethinks roads throughout the city, this addition to the cycling map falls solidly into the category of streets that didn't seem like candidates for cycling before the pandemic.

It is, to be clear, temporary. That’s true of many of the Covid-led interventions that Transport for London is currently making, though those in the know will often quietly admit to hoping they end up being permanent. In this case, however, the agency genuinely seems to mean it: TfL emphasized in its press release that the road space is already being allocated for construction starting late next year and that "TfL will work with local boroughs to develop alternate routes along side streets" when the cycle lane is removed.

At lunchtime on Friday, I decided to try the lane for myself to understand what an unlikely, temporary cycle lane can accomplish. In this case it's clear that the presence of a lane only accomplishes so much. A few key things will still leave riders wanting:

It’s one way only. To be specific, eastbound. I found this out the hard way, after attempting to cycle the Euston Road westbound, under the naive impression that there was now a lane for me in which to do this. Neither I nor the traffic I unexpectedly found myself sharing space with enjoyed the experience. To be fair, London’s cycling commissioner Will Norman had shared this information on Twitter, but cyclists might find themselves inadvertently mixing with multiple lanes of much, much bigger vehicles.

It radically changes in width. At times the westbound route, which is separated from the motor traffic by upright posts, is perhaps a metre and a half wide. At others, such as immediately outside Euston station, it’s shared with buses and is suddenly four or five times that. This is slightly vexing.

It’s extremely short. The publicity for the new lane said it would connect up with other cycle routes on Hampstead Road and Judd Street (where Cycleway 6, the main north-south crosstown route, meets Euston Road). That’s a distance of roughly 925m. It actually runs from Gower Street to Ossulton Street, a distance of barely 670m. Not only does the reduced length mean it doesn’t quite connect to the rest of the network, it also means that the segregated space suddenly stops:

The junction between Euston Road and Ousslston Street, where the segregated lane suddenly, unexpectedly stops. Image: Jonn Elledge.

 

It’s for these reasons, perhaps, that the new lane is not yet seeing many users. Each time I cycled the length of it I saw only a handful of other cyclists (although that did include a man cycling with a child on a seat behind him – not something one would have expected on the Euston Road of the past).


Though I hesitate to mention this because it feeds into the car lobby’s agenda, it was also striking that the westbound traffic – the side of the road which had lost a lane to bikes – was significantly more congested than the eastbound. If the lane is extended, it could, counterintuitively, help, by removing the unexpected pinch points at which three lanes of cars suddenly have to squeeze into two.

There’s a distinctly unfinished air to the project – though, to be fair, it’s early days. The eastbound lane needs to be created from scratch; the westbound extended. At that point, it would hopefully be something TfL would be keen enough to talk about that cyclists start using it in greater numbers – and drivers get the message they should avoid the Euston Road.

The obvious explanation for why TfL is going to all this trouble is that TfL is in charge of the Euston Road, and so can do what it likes there. Building cycle lanes on side nearby roads means working with the boroughs, and that’s inevitably more difficult and time consuming.

But if the long-term plan is to push cyclists via side roads anyway, it’s questionable whether all this disruption is worth it. A segregated cycle lane that stops without warning and leaves you fighting for space with three lanes of buses, lorries, and cabs is a cycle lane that’s of no use at all.

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