Saturday, 10 January 2015

Merryn Somerset-Webb only gets it half right

In her blog, Merryn Somerset-Webb makes the case against rent controls.

Anyone who can remember the rented sector under the Rent Act can see that she's right about this. However, she muddles high rents with the nonsense that is housing benefit:

On the surface, it might look as though there is a case for this. Ten years ago, a mere 10% of Britons lived in privately rented accommodation. Today, 18% do. The prices they pay take up, on average, some 40% of their incomes.

That not only inhibits their consumption and their ability to save, but it also means a whopping housing benefit bill for the taxpayer. In 2003-04, 722,000 households in the private sector claimed housing benefit. Now some 1.7 million do (that’s 6.5% of all UK households) and the total bill is around £9.5bn.

Housing benefit is what causes high rents at the bottom end of the rented sector, it is not something that can be made worse by high rents elsewhere. The place for a cap is housing benefit, not rents, a point she fails to make.

That said, it is clear that the UK does have something of a problem in the form of rising demand for rental properties.

If this is what is causing rents to rise, then why are rents falling outside London and the south-east of England? Anyway, she goes on to contradict herself by saying that the high house prices are caused by all the new housing being snapped up by buy-to-let landlords. She then goes on to suggest a raft of Killer Policies for Reducing House Prices, Not, while avoiding mention of two things that would work, LVT and raising interest rates. As the icing on the cake, she finishes with the old chestnut that council housing is subsidised by the taxpayer.

3/10 Ms Webb, could do better.


Dinero said...

Are you sure HB raises rents at the bottom end. What is the process that makes the Housing officer pay more than they have to.

Bayard said...

Ricardo's theory of rent says that rents are based on what the potential tenant can afford to pay. Housing benefit is based on what average rents are in the area. What tenants can afford to pay is based on the level of housing benefit they get. Positive feedback.
If you don't believe that, Mark has done an exercise in the past showing how rents for "no DHSS" houses are lower than rents for houses where the landlord will accept tenants on HB, despite the former nearly always being smarter and more spacious.

Mark Wadsworth said...

Agreed, she's messed up badly on this.

Dinero said...

> Bayard
In that case you are not saying HB rent payments drive up private rent payments, you only saying that HB rent payments are more than private rent payments.

James Higham said...

Housing benefit is what causes high rents at the bottom end of the rented sector

Not around this way. Council informs all that benefit is to be cut, landlords can like it or lump it.

Ben Jamin' said...

The only problem with rent caps are that if people are not paying the market price, this will cause a deadweight loss.

So, we'll get an over consumption of housing services.

This is true of all price caps, because they act as a subsidy.

It's optimal therefore to use tax or auctions as the instrument for de-capitalising any monopoly rent.

So, price caps for the water industry, and aviation cause environmental problems, and should be replaced.

Derek said...

Agreed. This is not one of Merryn's better articles. Here in Alberta we don't have rent controls or housing benefit and we still have a homeless problem. Mostly because jobs are relatively abundant so rents are high enough that the lowest paid can't afford the rents even though they're in full-time employment. They're basically victims of Ricardo's Law of Rent.

So the problem really is a housing shortage. The only solution that would work to bring down rents would be large-scale introduction of council housing but that won't happen in the current political climate. Either in the UK or in Alberta.

Dinero said...

OK, you can say HB maintains a floor on the bottom end because there are many different bottom ends occuring at different locations, and at the lowest bottom end HB could prevent some people from renting.

Bayard said...

Dinero, yes, I was less than clear on this, HB only drives up rents in the "renting to people on HB" sector, which should be the bottom end of the rental market, but isn't, due to the inflationary nature of HB.

JH, hurrah, someone has seen sense.

Ben Jamin' said...

@ Din & B

HB doesn't increase the overall rental value of land though.

In fact, because it is paid out of taxes on income, it lowers it.

Bayard said...

BJ, interesting point, but I disagree. For it to be true, there would need to be a connection between taxation and government expenditure, which doesn't exist.
Taxation is always the maximum that can be got away with without offending the powerful, alienating the vote base or causing riots. Expenditure is the minimum acceptable on "essentials" like law'n'order or schools'n'hospitals and the maximum they can get away with on "luxuries" like rewarding their mates and keeping powerful vested interests happy. If the tax take exceeds expenditure, they run a surplus, if not they borrow money.

Ben Jamin' said...

@ Bayard

Just to clarify my point. All HB is doing is taking money out of one groups pockets and putting it into another.

All things being equal, this doesn't affect aggregate land rents. But, it is not as simple as that.

1. On one hand, you could say that by reducing the number of owner occupiers, we get a more efficient allocation of property.

2. But, you could also say that HB allows poorer people to live in Rolls Royce locations. So, that's a GDP shrinker.

3. Professional landlords are passive parasites. Another deadweight loss perhaps.

4. But, undoubtedly, if HB is paid out of taxed income, this causes deadweight losses.

So, 1 might increase aggregate land rents, 2-5 reduces them.

All HB really is, at the end of the day, is a subsidy to landlords so poorer people can live in nicer locations.

It's probably mildly inefficient(economically), but in terms of income and welfare distribution, totally unfair.