Rent control doesn’t do what basic economic theory predicts. Little does.

An article in Bloomberg claims:  “Yup, rent control does more harm than good:  Economists put the profession’s conventional wisdom to the test, only to discover that it’s correct.”   The reference to the conventional wisdom – “Economics 101” – refers to two basic precepts of economic theory.  If prices are restricted, it reduces supply and increases demand.   If prices are not set at a market level, it reduces the efficiency of the allocation, leaving people worse off than they might otherwise be.  On the face of the matter, that is what the paper seems to confirm.  I’m not currently able to access the paper, but what the abstract says is this:

“we find rent control increased renters’ probabilities of staying at their addresses by nearly 20%. Landlords treated by rent control reduced rental housing supply by 15%, causing a 5.1% city-wide rent increase.”

I’ve no reason to dispute that finding.  What I do dispute is the idea that this constitutes a general proof of the application of basic economic theory in this field.  San Francisco is one city, with one type of policy.  In most of Europe, the private rented sector is larger where there are rent controls: see R. Arnott, 1995, “Time for revisionism on rent control?”, Journal of Economic Perspectives 9(1) 99-120.  In the UK, the removal of controls in 1957 led to a radical reduction in supply, as landlords took the opportunity to shift to alternative investments.  The removal of controls in 1988 had very little immediate effect: leaving aside stock transfers from the public sector, much of the increase in private renting has taken place since 2007, reflecting low rates of return on alternative investments.  Putting it bluntly, we already know – or should know – that Economics 101 doesn’t reflect what is actually happening out there in the real world.

The central objection to applying basic economic theory in this context is simple enough: it’s much too basic.  It works on the idea that “other things are equal”, and they never are.  Rental markets are invariably complex.  Rent controls are not the only determinant of rents; they’re one factor of many, including the ability to pay and the existence of alternatives (such as low cost owner-occupation).  No less important, a landlord’s decision to rent is never, repeat never, determined by rental levels alone.  It has to balance that factor along with capital values (“rates of return” are a relationship between the two), alternative uses of capital, the implications of holding an illiquid asset, and the prospect of capital gain or loss. So the report that some landlords are converting rented flats into new condominiums is not a reflection on rents; it’s a reflection of a complex calculation, which may work out differently in different places at different times.

Is housebuilding “at record levels”?

I was puzzled to receive a note from Full Fact, the fact-checking organisation, that seemed to accept Theresa May’s claim that housebuilding was at “record” levels.  Her specific claim was that with a net gain of 217,000 units, more properties had been added to the English housing stock than at any other time in the last thirty years, apart from one year.  That may be true, but it’s a funny sort of “record”.  The second-best result during a period of deeply inadequate policy is hardly something to crow about – a bit like celebrating April’s higher rainfall in the Sahara.  August in the Sahara is wetter than April anyway, but it’s still a desert.

Housebuilding figures used to figure regularly in Social Trends; I’ve taken this figure, showing GB figures, from the 2000 edition.  Between 1950 and 1979, the average number of net additions to the housing stock in the UK were never less than 230,000, and at the highest point (1960-69) the average was 259,000.  This was at a time when both population and household numbers were significantly lower: the old measure, the number of units added per 1000 persons in the population, fell starkly after the 1970s.  It also makes a difference where the properties are – we long ago gave up moving work to where people actually lived.

The numbers matter.  If there are not enough houses, then people just have to live where they can, including property that is unfit or managing in someone else’s household.  Usually in a market the people who get left out in the competition for resources are the ones who are least able to pay, but housing doesn’t work as a pure market – people in prior occupation get to keep out people who don’t yet have what they need.   Ultimately, however, it’s a matter of maths: if there are more households than houses, someone, somewhere has got to be homeless.

The prospect of rent control

I was expecting Jeremy Corbyn’s call for rent control to be met with the usual litany of ideological nonsense, so it’s been refreshing to discover that there is actually a nuanced debate about it.  The nonsense comes mainly from the political right, who have pointed to the supposedly destructive effects of rent controls: cutting prices, they argue, must cut supply.  The assumption is supported by a long string of economists, many of whom have been told it’s true during their first year of study.  Empirical evidence on rent control shows just the opposite: the supply of rented housing is generally larger where rent control is in force.  (See R. Arnott, 1995, “Time for revisionism on rent control?”, Journal of Economic Perspectives 9(1) 99-120.) There’s a balanced review of evidence in a recent Parliamentary Briefing.

Many writers still accept the questionable argument that ‘first-generation’ rent control in the UK made the sector shrink.  In fact, rent control in the UK slowed the decline of a sector whose best-paying tenants were becoming owner occupiers or council tenants, leaving a poor residual population of tenants.  When rent controls were lifted in 1957, the movement out of the sector became a waterfall.  It happened partly because rent is not the main determinant of investment decisions, and partly because “rent control” is not just about rent; it’s about the protection of tenants, security and regulation.  Cutting those protections is likely to reduce the supply of housing, as  landlords sell up.   The recent revival of the private sector reflects not the slow expansion after the deregulation of 1988, but a much more rapid expansation after 2001, reflecting a favourable combination of capital values and interest rates.   That has been reinforced by the balance since 2008; as and when interest rates increase again, capital values will suffer and other investments will be more attractive.

Shelter’s position on rent control has attempted to look at a range of different policies which come under the general banner of rent control: some, they suggest, would be harmful, some would be beneficial, and some would make very little difference.   While there’s obviously a need for tenant protection, the fundamental problem with the housing market is not about rents as such; it’s about access to housing, and that depends on supply.   As long as there aren’t enough houses, and those that there are are in the wrong places, some people are going to be left out.  Some people will be squeezed – high rents, poor conditions – and others will be left out altogether.  Britain has millions more people than it used to have, and it needs millions more houses.


“Fixing our broken housing market”

The Housing White Paper for England, Fixing our broken housing market, has generally been seen as a damp squib.   It’s not immune from ideological claptrap – for example, the assertion that “housing associations belong in the private sector” (p 51).  It must be welcome, though, that this is the first document in many years to recognise the fundamental problem: there are not enough houses.  Most documents on housing policy since the 1970s have been obsessed with the issue of tenure, which is a question of how the housing is distributed after it’s built, or affordable housing, which is about relative costs.  There has not been enough building for more than forty years, and by now Britain needs a couple of million more houses. The crude numbers matter, because wherever there is a shortage, people get left out.  If there are not enough houses, then some people will have nowhere to go, some will be excluded, and others will be forced to live in housing that is unfit.  Because it’s a market system, the people who this is most likely to happen to are those with the lowest command over resources – that is, the poorest.

The policies suggested in the White Paper – it’s more of a Green Paper, with some scope for consultation – are not going to fill the gaping hole in housing supply.  While the proposal to build 275,000 a year will help, there will have to be several years of continuous growth before the benefits are clearly felt. One of the problems is the reluctance of many of the main stakeholders – builders, local communities and banks – to do anything which might jeopardise house prices.  I was intrigued, then, at a suggestion from an unlikely source: the deeply Conservative Michael Portillo, speaking from the couch on the satirical programme This Week.  Portillo suggested that the building had to be done by the public sector, and then went further.  The sale of council housing had shown, he argued, that it was possible to feed council housing back into the private sector as the occasion demanded: so it would be possible to create a bank of public housing now, and slowly to release it for owner-occupation so as not to unsettle the private sector.  I doubt we would ever be able to do this with the fine degree of control that would be needed to manage the market, but the idea has a lot of merit.  In particular, that it could do something for the people who are excluded now.  Let’s build half a million new council houses right away, and then we can talk about what happens next.

Ending homelessness, or not

Crisis has published a manifesto to end homelesslessness in Scotland.  There are five main proposals:

  • Adopt a new cross-departmental strategy for tackling homelessness
  • Commit to investing in a more proactive approach to prevention
  • Increase support for homeless people with complex needs
  • Time limit Temporary Accommodation
  • Commit to using devolved powers on social security to prevent homelessness

While there’s nothing here to dislike – this will help people –  none of this could end homelessness.  It is not sure even to reduce it.  The problem of homelessness is not in the first instance a problem of people with complex needs; it’s all about maths.  If there are more households than units of accommodation, then however you cut it, some people will end up with nowhere to live.  The people who are left out are those who are least able to compete for scarce resources – usually the poorest, sometimes people with complex needs, sometimes people who are excluded.   They are whoever comes last.  They will have to live wherever they can – with friends, with relatives, surfing sofas, in unfit housing, and so on.  But if there aren’t enough places to live, someone is going to wind up with no home.

I made an argument last summer for a substantial expansion of the building programme.   We can’t respond adequately to  homelessness without it. Because extra houses go first to people with more resources – second homes, people in household breakups, the children of better off parents – the numbers needed will be more than the crude housing shortage suggests. We have to build now, build accessibly, and build in large numbers.

How many ‘affordable’ homes do we need?

At the SURF conference yesterday (that’s the Scottish Urban Regeneration Forum), I took a punt at guessing how many ‘affordable homes’ we need to build.  It’s a dreadful piece of jargon, which doesn’t mean a great deal by itself.  All housing should be ‘affordable’ for someone; what we really mean is housing that’s accessible to people on relatively low incomes.  The Scottish Government is currently aiming to build 6000 a year.  One paper for Audit Scotland was based on a 2005 estimate of 8000 a year.  An earlier  paper by Ken Gibb and Chris Leishman refers to margins between 4,700 and 11,350.

These estimates are based on the demand for housing, and I can’t see that any estimate which doesn’t take a broader view than that is ever going to be adequate.  From the Scottish Housing Statistics there are about 2.4 million households in Scotland, and 2.5 million housing units.  Let’s assume that we need about a third of all housing to be ‘affordable’.  That figure is admittedly arbitrary – it would make as much sense to argue for a quarter or 40%.  That means, though, that we should be talking in terms of a total stock of affordable homes, assuming a constant population, of 800,000 houses.   Houses wear out.  If we build 6,000 houses a year, the average life of an affordable house has to be 133 years.  So we need to build 12,000 more a year, additional to any housing to meet fresh demand, just to replace the housing that is wearing out over a standard 60-year life.  If we accept the existing figures, that gets us to 18-20,000 a year.

Then we need to account for a few other shortfalls.  Audit Scotland noted a current deficit of 14,000 houses.  Further replacement is needed for about 40,000 low income units that have been demolished – generally prematurely, in the sense that they have had to be demolished before their projected life has been reached, or the associated financial liabilities  have been settled.  With increasing numbers of single-person households, we need to consider whether we have sufficient numbers of units to accommodate household fission.  And we need to allow for locational shifts – the kind of thing which has left surplus houses in some places and shortages in others.  And so, if we’re planning for the next 10-15 years, even for a static population (a big assumption), we get from the current level of 6,000 a year to a need to build something that looks closer to 25-30,000 affordable homes – four to five times more than we’ve planned for.

The sale of housing association property: the Conservatives' answer to the threat of sausage rolls

While a UKIP candidate is being questioned for the ancient offence of “treating” potential voters, in this case with sausage rolls (a report here), the Conservatives have unveiled their retaliation.  They are proposing to give away £20 billion of housing association property – a madcap commitment which, of course, is rather more expensive than giving away sausage rolls but is not subject to the same legal limitations.    They hope to replicate the success of the Thatcher government in persuading tenants with aspirations to vote for them.

The sale of council houses now has a long track history, so we don’t have to guess what the effects of such a policy might be over time.  They include:

  • the residualisation of social housing: the better housing is sold, the worst remains
  • severely reduced access to housing for people on low incomes
  • restricted takeup, because tenants tended to be on low or inseucre incomes – that was why the strategy to close down council housing shifted from sale to stock transfer
  • gradual transfers of the rented stock into private hands, and
  • massive public expense, not just through sale but because of increased costs for government in the form of housing benefits.

There are however three key obstacles to the sale of housing association property, which did not apply to council housing.  The first is  that the current system of social housing finance depends heavily on the ability of housing associations to raise development capital on the basis of  the security of their income, and the sale will disrupt that system.  Second, most housing associations have an overriding charitable function, and governments have limited powers to tamper with  them – which is why the Thatcher government was defeated in the Lords when it tried to do this in  1980.   The third, however, is fundamental and crucial.  Housing Associations are independent corporate organisations. The government doesn’t own these houses.  It has no more authority over them than it does over the assets of any private citizen.    I will be intrigued to see how the government proposes to frame legislation in terms that might apply to housing associations but would not apply equally to the tenants of private corporate landlords.