Labour’s rent control plans may have unintended consequences

Priced out? Yui Mok/PA Wire

Ed Miliband has pledged that Labour would introduce three-year tenancy agreements for private renters under which their rent increases would be capped at the rate of inflation. The Conservatives quickly rounded on the idea of re-introducing rent controls, with London mayor Boris Johnson writing in The Daily Telegraph that it was “an idiotic way to tackle the problem of high rents”.

The history of rent control in the UK has been problematic. Designed to maintain affordability, limits to rent rises introduced in the Increase of Rent and Mortgage Interest (War Restrictions) Act 1915. This was designed to be short term but was kept in force after World War I in some form until 1989. It reduced the investment attractiveness of the private rented sector leading not only to its decline but also creating a significant drop in the quality of private rented accommodation.

Since the abolition of rent control in the 1980s, the private rented sector in Britain has increased in size. The period between 2003 and 2008 saw a boom in the sector with investors taking advantage of buy-to-let mortgages and households choosing private renting as the cost of owner-occupation rose sharply and there were fewer opportunities to enter social renting.

However, rents in the private sector have also increased and in some locations have become unaffordable for large sections of the population. The latest data from of the Office of National Statistics found that private rents increased by 2.1% between March 2014 and March 2015 It would therefore seem attractive – as Labour is suggesting – to limit rent increases to be in line with inflation.

Knock-on effects

Rent prices will reflect the housing demand and supply balance in any market. Given the rise in population, particularly acute in London where there is little change to housing supply, it would not be surprising to see large rent increases if nothing is done.

In this case, Labour’s proposed inflation-only cap on rent rises could have a quick impact. First, above inflation rent rises technically remove excess demand at certain rent brackets, because people are priced out of areas or types of housing. If levels of rent are kept lower through rent controls, demand at that level could keep building up. Second, there may be an impact on supply with fewer investors wanting to lease properties to tenants due to poorer returns on their investments.

Ahead of its introduction, investors in the private rental sector could decide to sell their houses, and remove sitting tenants, who currently have limited rights to security of tenure. But this could also add to the supply in the owner-occupied market and reducing price increases in this sector. This might be a good outcome since there is a shortage of homes for sale in many locations. Any new source of supply might also reduce speculators buying in the hope of making a quick profit.

Supply still critical

This remains a key issue – that there is still a lack of supply of housing of every tenure type, particularly in areas of acute demand. Labour’s proposed policy to limit rent increases in line with inflation over three years does not address this issue.

Not building fast enough. Yui Mok/PA Archive

Another option could be to address the issues on the supply side: increasing the construction of new homes should lead to lower rates of house price appreciation. It could also reduce upward pressure on rents, and potentially reduce or limit increases in the cost of housing benefit where tenants are in receipt of this benefit.

These tenants in receipt of housing benefit will probably still concentrate in what remains of social housing. But the overall housing shortage could mean any policy that limits rental increases in the private sector would have spill over effects across the housing market.

Given that the private rented sector is made up overwhelmingly of small investors with limited numbers of rental properties, consideration also needs to be given to the cost of enforcement and compliance with such a rent control policy. Some landlords may ignore the new regulations or find ways around them while better landlords might decide to leave the sector – another unfortunate unintended consequence.