Saturday, 17 September 2016

Rent controls have always and everywhere ended in failure

Or so argues Kristian Niemietz at the IEA blog. He writes,
No doubt, the issue of escalating rents is real. UK rents are the highest in Europe, both in absolute terms and relative to incomes. On average, private tenants in the UK pay between 40 and 50 per cent more than their counterparts in the Netherlands, Belgium, Germany and France. It is only when we include Monaco in the rent level rankings that the UK is pushed into second place, and even then, Inner London is in the same league as that playground of the rich and famous.

So clearly, there is a problem here, and this is not just a problem for tenants. It is a problem for taxpayers, employees, employers and consumers as well.

High rent levels beget high levels of spending on housing benefit, which costs the taxpayer £24.3bn every year – that is £870 per household. Then, since the problem is worst in those parts of the country which have the best jobs and earnings prospects, high rents reduce labour mobility, and thus economic productivity. Further, the problem is not limited to residential property, but affects commercial property no less, adding to the cost of doing business. This is the main reason why grocery prices in the UK are about a fifth higher than in comparable countries. The list goes on.

Rent controls, however, are not the solution. In a market economy, prices, including rents, are just messengers of scarcity. Rents are high in the UK because rental properties are in high demand and in short supply. Controlling rents, then, is like shooting the messenger – just far worse. It is more like hijacking the messenger and forcing him to tell a comforting lie. A controlled rent is a messenger who tells us, at gunpoint, that there are plenty of rental properties to go round.
This is just Econ 101. If you force the price of housing below the market equilibrium - and there is no point in rent controls if they aren't below equilibrium - then the quantity demanded goes up and the quantity supplied goes down, relative to equilibrium, and thus the excess demand gets even larger. An excess demand that there is no incentive for people to remove because prices can not adjust.

A simple question to ask is, What would happen if rent controls were introduced?
On the supply side, London, in particular, is full of what we could call “reluctant landlords”. These are people who did not purchase a property with the express intention of becoming landlords. They became landlords when they realised that, in London, every underused room represents foregone income. This is why London has so many basement flats and converted studio flats.

If rents were capped at a level noticeably below market rates, a lot of these reluctant landlords would be among the first to take their properties off the market, and simply use them for themselves and their families. On the demand side, a lot of people who live in shared accommodation would look for a place of their own. More people would chase fewer properties, making the gap between supply and demand even wider.
The basic takeaway on rent controls is
Rent controls have a terrible track record. They have always and everywhere ended in failure, which is why over nine out of 10 economists oppose them.
Swedish economist Assar Lindbeck's famous quip should not be ignored.
next to bombing, rent control seems in many cases to be the most efficient technique so far known for destroying cities

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