The IEA recently published a piece of work arguing that although the UK has high rents, rent controls will only make things worse. Illustrating the point regarding high rents, they link to a piece in the Telegraph showing a table comparing average rents across Europe. As the IEA points out “To be precise, British tenants are paying the highest rents in Europe, both in absolute terms and as a proportion of their incomes. Average rents in the UK are between 40-50% higher than average rents in the Netherlands, Belgium, Germany and France. They also exceed those of Luxembourg and Switzerland, two countries that are vastly richer than Britain. In most of Europe, rent payments account for between a fifth and a third of tenants’ incomes; in the UK, they account for around 40%.”
Only there are a few problems with this analysis.
Firstly rents are affected not only by wages, but by taxes and other major spending, like healthcare provision. So any measurement needs to be as a ratio of discretionary income.
Secondly, average rents will be affected by social housing and rent controls on one hand, and housing benefits on the other.
Thirdly, if unemployment is high, average wages might be high, but average rents will be lower.
Fourthly, London is by some margin the largest city in Europe accounting for 22% of UK GDP. It therefore pulls in demand for housing from around the globe. Over half of people in the capital rent, many of them in high pay jobs, or just very wealthy. This will completely distort the UK “average” rent compared to other countries.
Fifthly, if all things are equal and UK rents are higher than those in Europe, it is axiomatic that discretionary incomes must be lower. If this was the case, we would have expected to see an exodus of people leaving the UK to work in France, Germany and indeed Poland. But the opposite is true isn’t? So, all things cannot be equal.
Rents are set by disposable incomes at the margin. While they may well be expensive in London, distorting UK averages, this will have little to do with the supply of housing. We can build loads of homes in the UK, but as we discussed recently, this will just move the margin of production, as more people will continue to migrate towards London/SE. Good perhaps for London landowners (as they will capture the rise in London GDP), not so good for everyone else.
It might therefore be better if the IEA were to tell us where they think David Ricardo went wrong with his Law of Rent. Then we can all move on.
8 comments:
Well, we are living in The Paradox Age.
Spot on.
You have to try and compare like with like.
a. So London is incomparable with anywhere else. Better to compare Birmingham/West Mids conurbation with Paris or Berlin (3 million or so). Or Leeds with Marseille (about one million). Even then it is difficult drawing the line exactly how big a city is, you have to include commutable areas as well.
b. Many of the comparison countries have implicit or explicit rent controls. "Rent controls reduce rents" is hardly earth shattering new, is it?
As you say, once you have done all these adjustments, we find that net disposable income after housing costs/rent is much the same all over (Western) Europe. it is true to within a few hundred pounds within the UK.
Not all tenants pay their own rent. Rent is cheaper in Spain, however I know Spanish people who rent in the UK but get their rent paid for by the taxpayer.
LF, yes, Housing Benefit pushes up average rents. The post says that. Housing Benefit is like negative Land Value Tax so is obviously the worst kind of subsidy.
Rent controls are a crude tool - they do run the risk of making the squalor worse but we already have terrible conditions in the PRS. But the end effect is to allow higher income people to escape the rental sector as it makes buying cheaper. This reduces the average wage that landlords can tuck into. MW I think you found a nice paper that concluded that that rent controls drove a massive increase in owner occupation.
There is a less crude, less distorting tool of course...
"But the end effect is to allow higher income people to escape the rental sector as it makes buying cheaper."
Not in my experience it doesn't. Back in the mid '80s I bought my first house, mainly because there was so little property available for rent. Prices were going up at the time - I think the previous owner had had the house for two years and doubled his money on it. I know that now every tenant is a frustrated homeowner, but even as recently as the '80s there were homeowners who were frustrated tenants.
IMHO, the only place for rent controls is in homes where the tenant is receiving housing benefit, when the rent should be tied to the local rent for a council house.
B, you keep coming back to your personal examples.
The broader sweep of history tells us that in the second half of the 20th century in the UK when we had rent controls, mortgage caps and quasi-LVT-lite, owner-occupation rates increased rapidly. My own life story exactly supports that, although in isolation is no more relevant than your own example which you claim disproves it.
Of course there was "little property available for rent", because landlords had been squeezed out! By definition that means more owner-occupiers, which most would agree is A Good Thing - Georgists and Home-Owner-Ists alike.
For sure, there might be a few "frustrated tenants" who are cruelly forced into becoming owner-occupiers*; the benefit to the far larger number of people who actually prefer owning to renting trumps that many times over.
* Far better to offer those people the option of secure, low rent council housing, say I.
"Of course there was "little property available for rent", because landlords had been squeezed out! By definition that means more owner-occupiers, which most would agree is A Good Thing - Georgists and Home-Owner-Ists alike."
Not entirely, there was also a lot more empty property. By the 80's, MIRAS had pretty well made renting the lesser option, house prices had not been inflated by low interest rates but were definitely on the way up, so it made sense for ex-landlords to keep their properties empty.
Lack of availability of houses to rent is a not a Good Thing if you are a student whose parents can't afford to buy you a house for three years, i.e. most students, or anyone else who is only living in a place for a short time.
OTOH, the postwar rent acts were not a good example of rent controls as they pushed the balance of power too far in the direction of the tenant, so as well as unscrupulous landlords exploiting tenants you also had unscrupulous tenants exploiting landlords, i.e. the worst of both worlds.
"Far better to offer those people the option of secure, low rent council housing, say I."
Agreed, and that would probably be as effective, if not more, in keeping rents down than rent controls.
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