‘Rent control appears to be the most efficient technique presently known to destroy a city — except for bombing,’ declared Swedish economist Assar Lindbeck in 1971. Lindbeck may have belonged to the political left but he understood basic economic principles. He knew that far from lowering prices, rent controls only lead to disaster.
If only his wisdom was shared by the Labour party, which has commissioned an independent report which calls for rents to be capped for millions of people struggling to pay their bills. The report’s author, Stephen Cowan, is calling for a ‘double lock’ to cap rent increases at either consumer price inflation or local wage growth, whichever is lower. The report also lends its support to the Conservative government’s attempt to prevent landlords raising rents more than once per year and banning ‘rent review’ clauses, which give landlords the ability to hike rents mid-contract.
The review does reject a broad-based rent freeze. But make no mistake, the measures it puts forward are simply the diet version of the full-fat catastrophe that rent controls inevitably cause.
The key flaw in rent control proposals is always the same, regardless of how far they go. The problem is that they artificially constrain the price system. Prices are not artificial constructs we can just play around with on a whim without consequence; they convey information about real-world constraints. Prices are the product of millions of spontaneous decisions, which reflect innumerable data points about the supply, demand, and coordination of resources. The information contained in a price at any given time is, and will always be, far beyond the understanding of any central planner.
This isn’t some niche economic theory. It plays out whenever politicians have the hubris to believe they can just wave a magic wand and make high rents disappear. The consummate case study is Stockholm, where policymakers control rents to keep them at an ‘average level’. In 2022, the average waiting time for an apartment was nine years – and more than 11 years if you’re after a short-term lease. The number of people waiting for a rental property was 775,000.
Sure, if you already have a rental agreement, rent controls artificially supress the amount you pay each month. But that cushy gig for incumbents comes at the direct expense of those who aren’t so lucky.
In a functioning market, high rents and house prices incentivise developers to build more homes and homeowners to make more houses available for rent. Capping the prices reduces those incentives, leading to a shortage of capacity.
That’s not all. Rent controls can actually increase rents. When the Scottish government capped rent increases at an arbitrary 3 per cent in April 2023, private rents rose by 6 per cent, the largest increase on record. This is because landlords will hike rents for new tenants in order to maintain their margins over the course of a contract. This will likely happen if the once-a-year limit on rent increases is imposed.
High rents are causing misery for people across the country, particularly in economic hotspots like London and the south-east. But they are a symptom of the problem, not the cause.
High prices should signal to developers and prospective landlords that there is money to be made by building more housing. The problem is that the UK’s burdensome planning system doesn’t allow this to happen. At this point, the evidence is overwhelming that the UK’s exceedingly high house prices and rents are the product of government-imposed constraints on building new supply.
Knowing that new stock is unlikely to come onto the market any time soon, there is no competitive pressure on landlords to cut rents or improve standards. And at a time when interest rates and red tape are already forcing landlords out of the market, the case against rent controls is even stronger.
Solving this issue isn’t exactly rocket science, but it takes far more political courage than simply scapegoating landlords or pretending that prices don’t exist.
While the UK seems destined to double down on its state-imposed housing nightmare, we do have some recent examples which show a better way forward. When an economic crisis combined with rent controls brought the country to the point where developers were building homes they were unable to sell, Finland abolished its rent controls between 1993 and 1995. Combined with a house building boom that started in 1996, Finland’s rental market became so competitive that landlords began offering loyalty schemes to their tenants.
In Argentina, a 2020 law mandated three-year-long tenancy agreements and capped rent growth to track consumer prices and wages. The law was a disaster before it even came into force, with landlords selling off properties en masse. Those that remained hiked prices significantly or turned to AirBnB-style short-term letting. Rents rose by over 60 per cent in Buenos Aires as housing supply cratered and inflation worsened. In 2023 President Javier Milei abolished the law. Since then the supply of housing in the capital has doubled, and rents are reported to have already fallen by between 20 and 30 per cent.
As the overwhelming evidence from around the world shows, governments should remove barriers in the housing market to tackle the cause of high rents. If it actually wants to tackle high rents, Labour would be very unwise to heed this report’s proposals.
