Rent controls will make things worse

First published in the Sunday Business Post 23 August 2015

Peter McVerry is wrong. Rent controls are not the answer to Ireland’s homelessness crisis.

McVerry called for new legislation to freeze rents on RTÉ’s Morning Ireland last Wednesday. The situation was “beyond crisis” he said, noting that the number of families in emergency accommodation had risen from 410 in January to 659 in July. Threshold, Focus Ireland and Simon Community have also made the clarion call for rent caps.

You’d have to be a hard bastard not to empathise with mothers staying up all night keeping watch over her children as they slept under a tree in the Phoenix Park. But tragic stories allow emotional rhetoric to cloud rational policy making. So why is McVerry wrong?

A prominent UK housing and homeless charity has rowed back on its demands for rent caps. Shelter reversed its initial position and now believe that the implementation of such a measure would actually make things much worse.

In a 2015 report commissioned by the charity, University of Cambridge researchers found that rent controls would serve only to stop landlords renting out properties. Of those surveyed for the report, 31 per cent of landlords claimed they would sell all or some of their properties immediately if rents were frozen.

“In practice, hard rent controls tend to create a two tier system in which some homes are subject to rent caps, while a formal or informal unregulated sector emerges that houses those in most need who do not benefit from the caps,” the report said, in quotes published by the Guardian.

What are the unintended consequences of rent controls?

Landlords would have no financial incentive to invest in their properties. Homes would be of poorer quality. The market for private rented accommodation would diminish significantly as supply would constrict. A black market of sub-standard accommodation not subject to rent regulation would dominate. Shelter now campaign for longer-term standard tenancies and rent rises linked to inflation instead of rent caps.

But what would a report authored by grammar school posh swots know about the reality of renting? So goes the emotive response to dispassionate, impartial hard research which does not quite fit the narrative of segregating landlords into a category of evil money grabbing property owners.

The UK does not need a University of Cambridge report to tell them the obvious. It has the practical experience of a mistake implemented one hundred years ago.

The Increase of Rent and Mortgage Interest (War Restrictions) Act 1915 introduced rent control as a way of preventing landlords from profiteering during the war years when demand for housing exceeded supply. The temporary measure rent control continued to be applied to some rental agreements until January 1989.

It was a disaster.

The private rented sector which had made up nine-tenths of the housing stock in 1915 declined to one-tenth by 1991.

The House of Commons published a research paper in 2013 which demythologised the magic bullet of rent control. Titled “The historical context of rent control in the private rented sector,” the paper identified rent control as a significant factor of the decline in the private rented sector “because of its effect of reducing possible rent returns: thus reducing investment.” Private landlords stopped investing in the private rental sector.

The word “Rachmanism” entered the Oxford English Dictionary as a synonym for the exploitation of tenants in the 1950s and 1960s. Peter Rachman, a famously unscrupulous landlord who gained notoriety during the Profumo Affair, manipulated loopholes in the rent control legislation. The long-term consequences of Rachmanism were sub-standard housing and the creation of deeply entrenched social problems in West London.

The UK government spent decades trying to undo the permanent damage created by the unintended consequence of rent control introduced in 1915.

The 1965 and 1967 Rent Acts, introduced by the Wilson Labour government, significantly relaxed rent controls while the 1988 Housing Act ended the practice by deregulating rents on new lettings.

But Paris and Germany have recently introduced rent controls? If Ireland is to implement the same answer as other jurisdictions, this is to assume that the problem is the same. Lets take Germany. The structure of the property market is incomparable to Ireland.

According to 2011 Census, 18.5 per cent of Irish households are tenants in the private rented sector. In Germany, 47 per cent of the population are tenants according to Eurostat.

The “Mietpreisbremse” or rental price brake came into effect in certain German cities last June. However, it was not introduced as a magic bullet solution but a complementary response to existing measures, such as rental contracts which have security of tenure.

Germany does not have the same volatility in the cost of buying a house because it does not have the same rent-to-buy culture as Ireland. Institutions rather than individuals are the landlord class in Germany. Pension funds rather than individuals ending up as accidental landlords are the norm.

Rent controls in Ireland are the equivalent of forking out money for more ambulances to attend accidents on dangerous roads instead of fixing the dangerous road.

This populist shortsightedness measure is how Irish policymaking answers hard questions. For example, the emergency homeless summit last December made us all feel good because it got people off the streets for Christmas Day. The worthy initiative had an emotional short-term impact but provided zero long-term solutions. It did nothing more than to confirm Ireland’s crisis-led approach to legislation where knee-jerk reactions occur because something-must-be-done-now.

Ireland needs hard bastards. Decision makers who subscribe to evidence based decisions which have a long-term impact. People who focus on the cause not the symptom.

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