Silver bullets and buckshot

Every so often I get a call from an estate agent. They aren’t looking to sell my home, but let it out. London is a rentier economy, and so rent controls are bitterly resisted.

Rent control isn’t a silver bullet. In fact, there are no silver bullets in housing. There are only, in Jenny Jones’ memorable phrase, silver buckshot. You need lots of policies working together to bring down the beast.

Dave Hill, a well informed and generally fair-minded journalist, is very cautious about rent controls.  His latest musings on the subject do a very good job of summarising detailed and tentative research produced for the London Assembly’s Housing Committee by the Cambridge Centre for Housing and Planning Research.

The killer argument against rent controls, which Dave cites, is that they stop people building more homes. This matters, because the silver bullet most commonly reached for is “just build more homes”.

Of course, in a dysfunctional market this strategy alone is unlikely to work and will have serious environmental consequences. In a recent paper for the Green House think tank, I argued with co-authors Anne Chapman and Maya de Souza that high levels of inequality combined with a dysfunctional financial system are at least as significant as a lack of housebuilding.

But we do need to build more homes in the short term in places like London, where the population is growing fast.

Property investors, who are mostly buy-to-let landlords rather than the Russian oligarchs, help to build new homes. They’re willing to buy homes off-plan (before they are built) which helps the developer get a loan from the bank. Investors buy around 6 in 10 new homes built in London, so if you cut them out completely you’d find fewer homes being built.

But how big would this effect be?

The research by the Cambridge academics estimated that the private rental sector will grow in London by 480,000 homes in the next ten years.

They then modelled the impact of various rent control policies, ranging from modest measures such as capping annual increases to inflation, to the radical, cutting them by 20 per cent then capping increases thereafter. A 20 per cent cut, to put this into perspective, would take £270 per month off the average rent in London, bringing it down to £1,080 per month. That’s still unaffordable to the average London household!

They estimated that impact of these scenarios could be a reduction in the size of the private rented sector of between 0-62 per cent. The upper range sounds dramatic, but it’s not the same as a reduction in housebuilding.

Last year, according to City Hall figures, 23,986 new homes were built in London (plus more converted from offices, empty homes renovated, and so on). Of those, a third were affordable homes, and the rest provided by the private market. Of those provided by the market, City Hall estimates that around 6 in 10 are bought by investors, mostly buy-to-let landlords. So I have guessed that private landlords bought around 9,000 new homes last year.

Over the next decade the Mayor wants to increase housing supply including conversions and renovations to 42,000 homes per year. I’ve calculated that, with a rising supply and similar proportions of affordable/market homes and investors/owner occupiers in the market, we might expect an extra 113,000 homes to be built and let out for private rent in the next decade.

They would represent one quarter of the growth in private rented homes – the rest would come from landlords continuing to snap up existing properties. They would also represent just over one quarter of the new homes built in London, not to be sniffed at.

So what impact would rent controls have on housing supply? I’ve taken the Cambridge academics’ figures for the reduction in the overall growth of the private rented sector and assumed that reduction applies equally to them owning new build and existing properties. With that assumption, and my assumptions about the number of new build homes they currently buy, and the crucial assumption that these homes wouldn’t be built if landlords didn’t buy them, this table shows the reduction in the supply of new homes over a decade under each scenario:

Scenario Homes not built Change in  housebuilding
Cap rent increases to inflation 4,000 -0.9%
Three year rent freeze 1,600 -0.4%
20 per cent cut in rent 37,000 – 70,000 -8.8 to -16.6%

In other words, the modest policy that the Green Party has proposed in recent years – capping rent to inflation – could very marginally reduce the supply of new private rented homes in London.

At the other end of the scale, cutting rents by 20 per cent could see a fairly major reduction in the number of new homes being built if nobody else was willing and able to buy the homes the landlords lost interest in.

These extremely simplistic calculations ignore:

  • the possibility that owner occupiers might step into the breach, buying up new homes instead of being beaten to it by investors;
  • the potential for other policies to increase supply in other ways, such as building more social rented housing;
  • and the likelihood that a very large reduction in demand from investors could reduce land value inflation, so reducing the cost of building new homes and overall house prices, generally improving conditions for everyone.

Rent controls might also mean private landlords would buy between 5,000 and 225,000 fewer existing homes, leaving them to be bought by owner occupiers to live in.

Clearly, any form of rent control would need to be introduced as part of a package of policies. In our General Election manifesto, the Green Party also proposed a land value tax, quadrupling the social housing budget, and using public land and transparency rules to make the housebuilder market more competitive. If we advocated a deep cut in rents, I imagine we’d consider a budget to buy up the homes abandoned by private landlords where the tenants were too poor to buy them.

Uncertainty and complexity plagues housing policy. Placards and manifesto promises don’t allow for this, and so I expect the Green Party will continue to call for rent controls, while being mindful of the sorts of the details I’ve explored in this article.

This work commissioned by the London Assembly suggests that even quite a radical rent policy needn’t be a big problem, if fired off with buckshot rather than as a silver bullet.

One Comment

  1. Tim Lund said:

    You are clutching at straws hoping that owner occupiers might step into the breach, buying up new homes. At current prices, they can’t afford to, and would be ill-advised to do so. The price impact of both an increase in supply (desirable) and rent controls (undesirable) will be negative, which will deter would be owner occupiers for as long as property is seens as a financial asset as much as a normal consumer good.

    Apart from the basics – increasing well planned supply – housing policy needs to focus on how we adjust to ‘Peak Unaffordability’ – see

    Unwinding the Housing Crisis: Peak unaffordability and after

    21st October 2015

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