Friday, 2 May 2014

Allister Heath's disappearing homes conundrum

From City AM:

[The Labour Party] knows that landlords are hated – and blamed for pushing up house prices – just like bankers and energy suppliers, so its proposals [to try and cap rent increases] will be popular, even though they will merely exacerbate the problem.

Anything that cuts the returns to providing rented accommodation, or increases the inherent risks (by making contracts harder to end) will make marginal producers less viable and reduce supply.

Given that the buy to let bubble will probably burst when rates go up, this policy will reduce the supply of rentable properties, push up rents and may increase homelessness.


He's playing the "disappearing homes" card, just like he always does when somebody suggests any policy or tax change which might harm the Home-Owner-Ist cartel (landlords and bankers).

If landlords exit the market because rents are low, there'll be more homes for people to buy. So house prices will go down.

If rents go up as a result of rents being reduced (I'm not kidding - he actually says this) then landlords will come back into the market etc.

Any tenant who can afford to pay rent will never end up homeless, he'll continue renting or he will buy one of the homes which landlords might sell, the price of which will settle down at something which the tenant can afford to buy with a mortgage and/or something which gives a reasonable "return on capital".

Rent controls are clearly a second-best policy, but they "work". That is because houses sell for the capitalised value of the rents, so cap the rents and you cap house prices. As long as that capitalised value is more than the construction costs, it is no disincentive to build more houses.

The "return on capital", i.e. rental income expressed as a percentage of the selling price of a house, stays constant anyway. A £100,000 house with a rental value of £5,000 is just as good an investment as a £1,000,000 house with a rental value of £50,000. So if the rent for the latter house is capped at £5,000 and its selling price falls to £100,000, it is just as good an investment as it was before.

The idiot refers to the 1930s as an example of good housing policy, when we were building three times as many houses as now. As a Faux Lib, he glosses over the fact that at the time we had rent controls, Domestic Rates (quasi-LVT) and sensible lending rules, all of which he would dismiss as "dangerous government intervention".

I tell you, what he doesn't know about economics is well worth knowing.


Lola said...

Any tenant who can afford to pay rent will never end up homeless, he'll continue renting or he will buy one of the homes which landlords might sell. Only if he can get a mortgage, which following the MMR is even more problematic

Kj said...

Re rents go up because they go down; depends on type of rent control. If you have NY style rent increase caps on each lease, that might happen. What you need is a capon actual rents. If one can find some way to avoid too much brown envelopes, why not.

Bayard said...

"[The Labour Party] knows that landlords are hated – and blamed for pushing up house prices"

This is the problem with rent controls in the UK: they are always brought in by the landlord-bashers who believe all landlord are stinking rich capitalists and all tenants are saintly poor workers. Thus they shift the balance of power from landlord to tenant (at least this is what they did last time) , with the result that, instead of unscrupulous landlords exploiting tenants, you get unscrupulous tenants exploiting landlords, at which point the landlords simply give up being landlords and sell up. Hooray, say the landlord haters, fewer of the scum. Boo say the tenants, we can't find anywhere to rent. They may be homeless, but at least they are not being exploited, and that's the main thing.

Mark Wadsworth said...

L, I have emailed.

Kj, AH is doing typical Homey tactic of making two equal and opposite claims, both of which are supposed to lead to "bad" outcomes. Surely, if one is "bad" then the other is good"?

I agree that a cap on the annual increases is pointless. If you are going to do the job properly, then have an absolute fixed cap on rents, e.g. 10% or 20% of average incomes in the area, adjusted for size of home.

Mark Wadsworth said...

B, British 20th century history teaches us that tenants don't become homeless - they become owner-occupiers.

These rent controls are a large part of the explanation for the rapid rise in owner-occupation levels between WW1 and 1970s.

"Homelessness" has got to do with other personal or social issues, like girlfriend kicking you out, unemployment, drugs, alcohol, being from a foster home, being ex-army and so on, it has bugger all to do with rents or house prices.

Bayard said...

I do remember, back in the '80s, when I was a student and then working, that it was hard to find somewhere to rent. It wasn't a case of the rents being too expensive, there simply wasn't anywhere vacant. So yes, I wasn't sleeping on the street, but I didn't have a home - I was staying with a succession of my parents' friends and relations as a lodger. In the end I bought somewhere, slightly out of desperation.

Mark Wadsworth said...

B, that is an extreme example of what I keep saying - if the government caps rents, it becomes harder to rent but much easier and cheaper to buy.