“Landlords,” noted Adam Smith, “love to reap where they never sowed.” The father of economics was talking about agricultural landowners, but Labour thinks this parasitic behaviour can now be found among those who let out their bricks and mortar.
The party is proposing to make it harder for landlords to increase tenants’ rents. Critics have responded that residential rents are not, in fact, rising and that party leader Ed Miliband’s plan would merely end up making life more difficult for renters.
Who’s right? Let’s deal with the first criticism first. What do the data say? According to the Office for National Statistics, average rents in England have risen by 9.6 per cent since January 2005 (which is when the agency’s experimental series begins). Yet rents have lagged inflation. The Consumer Price Index has increased by around 30 per cent over that period.
Relative to average wages the race has been closer lately. Wages are up 7.4 per cent since January 2010, while rents were 4.2 per cent higher. But the fact remains that, over the past decade, rents have become relatively more affordable, not less. There may well be price gouging by landlords in some areas – the ultra-tight London market is an example – but it doesn’t appear to be a national problem.
However, this isn’t the end of the story. Kevin Daly of Goldman Sachs calculates that the ratio of rental prices to average earnings is above its long-term average.
This is important because if rents were flat in historic terms it would lend support to those who regard the housing market as dangerously overvalued. Rising house prices relative to earnings in the absence of rising rents would point to a speculative bubble. On the other hand, rising rents and rising house prices, as Mr Daly notes, suggests broader supply constraints in the supply of housing.
It is true that rents have not been increasing at the same rate as house prices, as the chart below makes clear. Yet this discrepancy is a consequence of the secular decline in interest rates over the past three decades as once-rampant inflation has been tamed. Lower interest rates have helped to boost house prices and have reduced the rental return required by landlords. This is hardly a cause for celebration though. If supply had matched demand and house prices had not risen we would have expected to see rents falling in line with interest rates, rather than creeping up.
What about the idea that placing constraints on the ability of landlords to increase rents, as Labour proposes, would make life more difficult for renters? Economic theory does tell us that such controls are a bad idea. Landlords will, quite naturally, seek to maximise the return on their asset. So if those returns are artificially constrained, landlords, as a group, will bring fewer rental properties on to the market.
Meanwhile, the demand for rental properties from tenants will not change. The result will be more frustrated renters and investors with no incentive to be good landlords. The empirical evidence from American cities where rent controls have been imposed is that this does indeed happen.
However, the size of the negative effect depends on the scale of the intervention. And those who portray any official interference in markets as a slippery slope to Stalinism advertise their own ideology rather than making a useful contribution to the debate.
If Labour’s complementary plans to give tenants greater security of tenure help to make long-term renting an attractive alternative to buying (as is the case on much of the Continent) the economic benefits of the intervention might outweigh the costs.
The best criticism of Labour’s package is not that it threatens to distort the rental market but that it addresses the symptoms of the problem rather than its cause. The fact is that the British housing market, for a variety of reasons, is already broken. That manifests itself in a chronic dearth of supply. This is what lies behind expensive prices, elevated household indebtedness and a host of other economic ills, such as workers’ restricted mobility and the fragility of our banking system.
Britain needs to build 250,000 new residencies each year merely to meet demand, as the population rises and more people live separately. Housing starts are running at around half of that level and the claims of ministers that the Coalition’s planning reforms and mortgage subsidies will help to bring supply and demand back into balance are unconvincing.
The most effective way for politicians to help insecure and cash-strapped renters would be to increase the supply of newly built houses. This means allowing councils to construct social housing again, truly radical planning liberalisation and, best of all, a land value tax. This would assist prospective buyers and help to rebalance our entire economy into the bargain. Politicians need to focus on building: anything else is a distraction.