Sadiq Khan has recently expressed a desire to freeze rents in London for two years. He has stated that this will alleviate burdens on households to the tune of £3000.
A truly hefty sum amidst our current cost of living crisis. However, such thinking not only lacks logic but there isn’t even a mere slither of evidence to support it. Rent controls have been shown to reduce affordability, greatly diminish housing quality, and harm those they intend to help most. It is imperative that Sadiq Khan’s dangerous thinking is rejected before true damage is done.
Strikingly, there is near unanimous opposition to rent controls from economists. As President Reagan famously quipped, economists rarely agree on anything, stating ‘if trivial pursuit were designed by economists, it would have 100 questions and 3,000 answers’. It is therefore highly indicative of the inefficacy of this policy that 98 per cent of economists agree that rent controls lead to a collapse in both the quantity and quality of housing.
This ranges across diverse thinking, from conservative economist Thomas Sowell who observed ‘the goals of rent control and its actual consequences are at opposite poles’, to progressive titan Paul Krugman who penned an extensive lament against their use. These two men to be in accordance is a sign we should pay great attention to what they’re saying.
The greatest danger posed by rent controls are the implications for the wider housing market. As the earning potential of landlords will be capped, many are incentivised to seek more speculative investments and so the supply of rental housing is choked-off. This can be seen by comparing the vacancy rate of American cities with rent controls against those who do not.
New York has the longest standing rent controls of all US cities, with their housing vacancy rate failing to exceed 7 per cent since the end of World War II (the time rent controls were introduced). In contrast, many cities without rent controls – such as Dallas, Houston and Phoenix – commonly have a vacancy rate in excess of 15 per cent.
Likewise, other cities with rent controls are San Francisco, which has a vacancy rate which has been previously placed around 2 per cent, Los Angeles at around 4 per cent, and Santa Monica at just 2.8 per cent. This complements a Stanford University study that found that rent controls lead to landlords reducing the available supply of rental housing by upwards of 15 per cent.
This constriction in supply has a simple outcome – higher prices. Investigations into San Francisco’s experience with rent controls have found individuals moving to the area with, at minimum, 18 per cent higher average income. The ripple effect of rent controls sends a tsunami downstream, with new tenants – particularly those who are young – being subjected to extortionate rental costs. This will simply exacerbate the already greatly unaffordable housing market, with, in some areas, upwards of 40 per cent of people requiring state help in meeting rent payments.
A further reality of rent control is the significantly diminished quality of housing they give rise to. Landlords, eager to try recuperate the losses of rent controls, have been shown to have a propensity to allow properties to fall into disrepair. A study of rental units in Manhattan from the height of rent controls (pre-1947) has found that such abodes are 10 per cent more likely to be ‘not sound’ than their equivalent uncontrolled counterparts. This is comparable to a further study which concluded that an average 3 per cent benefit in rent through controls is offset by an average 2 per cent penalty in reduced maintenance.
To learn how best to deal with this conundrum, one must turn to biology. Science would suggest that homeostasis works best when it is natural and organic. Instead of Sadiq Khan pledging to manipulate market forces through rent controls, he should place trust in the laws of supply and demand to meet society’s wishes and provide direct help to those in need through welfare. This can be achieved through implementing a negative income tax based system.
In this, government support will slowly withers away the less of a proportion of income a household expends on rent, without distorting market forces. Such a system would involve the government subsiding people, not property. It would also be largely cost neutral, with the promoted development of housing, and increased tax revenue this brings recouping much of the expenditure.
Sadiq Khan is persistent that rent controls will only be introduced as a temporary measure. But he should heed the advice of Milton Friedman, that ‘nothing is so permanent as a temporary government program’. Let’s reject the feckless notion of rent controls once and for all.
This article was written for 1828.org, please find it here: https://www.1828.org.uk/2022/03/17/we-must-reject-sadiq-khans-rent-control-madness-before-true-damage-is-done/