Could rent controls bring down homelessness in London?

Everyone knows that rents in London are far too high. According to the Office for National Statistics, private renters in London spend 41.6% of their income on rent, a higher proportion than in any other part of the country.

We also know that unaffordable rental costs are a significant contributor to homelessness. As rents keep going up and up faster than incomes, more people are struggling to make ends meet and risk losing their homes. Almost nobody would argue with this, but there is some disagreement around what can be done about it.

What are rent controls, and why are they controversial?

One suggestion is more policies around rent controls – laws that limit how much can be charged in rent, or how much rent can be increased. The basic argument for them is fairly straightforward – to stop rents shooting up at an uncontrolled pace, we should establish limits that make housing more affordable.

Polling of the UK public suggests that the vast majority of the population supports rent controls, and even landlords are split fairly evenly on the topic. However, in the realm of public policy they are often seen as controversial.

One reason for this is that many economists oppose rent controls. This fits in with a general opposition to price controls, which can be summed up by Harold Demsetz’s analogy of the ‘smashed thermometer’: just like smashing a thermometer doesn’t change the temperature, legally controlling prices doesn’t actually make things more affordable.

Applying this to housing, think tanks like the Institute of Economic Affairs, Adam Smith Institute and Centre for Policy Studies will often argue that, though intended to help them, rent controls actually hurt private renters by reducing the availability and quality of housing. Their argument is that rent controls disincentivise house-building and maintenance, and make people who own housing less likely to offer them up for rent.

Usually, people with this perspective believe that the only way to really help renters and fix the housing crisis is by significantly expanding the supply of housing by making house-building much easier.

A historical view on rent controls 

In Britain, rent controls are not just a theoretical idea, but were present in one form or another for most of the 20th century. They were first introduced in 1915, after women in Glasgow led 25,000 tenants on a ‘rent strike’ in objection to rent increases.

The controls introduced then were initially intended to be a temporary war-time measure, but after World War One ended, a majority of both tenants and landlords believed they should continue, and several parliamentary acts were introduced extending and modifying them. After being relaxed in the 1920s and 30s, they were reintroduced in full with the onset of World War Two.

In the decades following the war, rent controls remained a consistent feature of the UK housing market in varying forms (some stronger or weaker than others). From the 1960s, the ‘fair rent’ system was in place – a strong form of rent controls in which independent Rent Officers could decide a maximum that could be charged in rent for a particular property. This meant that, as late as 1980, private renters spent an average of just 10% of their income on rent nationally, and 14% in London.

Various reforms in the 1980s led to rent levels increasing, but the most important change came with the 1988 Housing Act. Intended to boost the size of the private rented sector, the Act introduced new tenancies which offered much less protection from eviction and were not subject to the fair rent system.

As we mentioned in a previous blog about Section 21, the Act was very successful in boosting the private rented sector, which has grown significantly over the last few decades. In this time, private rents have been almost entirely un-controlled.

The case for rent controls in London today

Since rent controls were removed, private rents have greatly increased – now taking up roughly three times as much of the average Londoner’s wage as they did four or five decades ago. Homelessness of all kinds is now at the highest levels on record, and it is most concentrated in London, where rents are also the highest.

The Mayor of London has supported rent controls for at least the last six years (although he does not currently have the power to introduce them), and if rents and homelessness continue to rise, it is likely that more people will be convinced of their necessity.

Arguments that rent controls cannot be introduced because they will reduce how many houses are built may not have much force, since rates of building are much lower now than they were in the period when rent controls were in place. House-building in the UK peaked in 1968, at a point when rent controls were at their most stringent.

Another factor that has to be considered is housing benefits. Governments have had some success bringing down homelessness in recent decades when they were willing to boost spending on housing benefits. But, as rents have continued to rise and the cost of housing benefits with it, there has been a tendency towards reducing how much rent can be covered by housing benefits, and freezing benefit rates so that they do not keep up with rental costs.

If this trend continues, the argument for rent controls will likely become stronger, since advocates will say that if the government is not going to take the steps necessary to help people afford high rents, it should do something to stop rents being so high.

Rent controls are certainly not the only tool available to a government that wants to bring down homelessness over the long-term; expanding the supply of social housing is another, for example.

But what is clear is that some kind of drastic action to improve the affordability of housing is necessary, and if its opponents do not come up with a compelling alternative plan, then rent controls will only get more appealing.