Thursday, 15 September 2016

I'll be pleasantly surprised if this gets past the City AM moderators.

Kristian Nimitz wheeled out his Faux Lib nonsense for the umpteenth time.

Shooting the messenger: Rent controls have always and everywhere ended in failure

Quite clearly, in the real world they haven't, sometimes yes, usually no, depends on other factors.

My actual comment:

Badly wrong on at least two counts.

The UK had rent controls for most of the 20th century, but that did not mean that housing supply disappeared. All that happened was that landlords left the market - meaning there were more homes for owner-occupiers to buy, who also acquired all new supply.

(In European countries, rent controls coupled with yet another "government interference" i.e. minimum building standards have also led to favourable outcomes.)

This is a large part of the reason why owner-occupation rates doubled in the decades after 1945 and the number of private tenants halved.

Another major reason was that mortgage loans were capped at low income multiples, which set a natural cap on house prices.

His other glaring error is that granting even more planning permission will make no difference, it is pushing a piece of string. Land bankers/home builder have a profit maximising level of output of about 150,000 a year. If more permissions are granted, these are simply banked, which is why the largest home builders are sitting on land banks with planning sufficient for ten years' supply.

If Mr Nimitz left his ivory tower for a few minutes and took the trouble to read the accounts of Barrats, Persimmon et al, this would be obvious to him.

I imagine that the third mechanism adopted by UK governments to put a natural cap on rents and hence house prices will be completely unpalatable to Mr Nimitz. That was the easy availability of low rent social housing, which enabled millions to opt out of the land price Ponzi scheme altogether.

UPDATE, re Anti's comment.

The more complete list of policies which the UK had in one form or another for most of the 20th century until the Home-Owner-Ist era is as follows:

- rent controls (came in hard after each war, were then gradually whittled away)
- tenants were protected from eviction, as long as up to date with rent (until 1996 or so)
- as a result, neither banks nor building societies would lend to buy-to-let landlords (until 1997 or so)
- higher taxes on landlords' rental income
- private landlords not subsidised by Housing Benefit (until 1990).
- Domestic Rates (until 1990)/Schedule A tax (until 1964), which together were more like LVT than like Council Tax.
- little or no bank lending on land/mortgages.
- building societies had stricter criteria on minimum deposits and maximum loans-to-income multiples. If you can't borrow more than twice your joint income, that caps house prices at just above twice your joint income.
- there was the opt out from the whole Ponzi scheme i.e. social housing (peaked at 30% of all households in the 1970s).
- lower house prices meant that builders increased profits by increasing volume/quality; not by restricting supply to prop up prices, so little or no land banking.
- general political assumption that owner-occupation is the best form of tenure
- general cultural assumption that landlords were a bit sleazy, barely a step up from brothel owners or benefit claimants.

The inevitable result was low rents, low house prices, small and resilient banks and building societies…

… and rapidly increasing owner-occupation levels, which is where this Georgism-lite contained the seeds of its own demise and tipped over into Home-Owner-Ism again. The country is run by politicians who want to buy votes as cheaply as possible, so from the 1960s onwards, there was a political advantage in allowing house prices to increase year on year - a notional profit for a majority of voters and an invisible cost for future generations, all requiring zero tax increases.

Fast forward to last year, the scales were tipping the other way, more people were losing out from Home-Owner-Ism than were gaining, so the then Conservative chancellor started withdrawing tax breaks from buy-to-let landlords, ostensibly to shift the balance from landlords back to would-be owner-occupiers. If the shift from Home-Owner-Ism back to Georgism-lite takes as long as the other way, we will have Georgism-lite again by the middle of this century.


H said...

Inexpensive housing is a pre-requisite for a civilised society - it allows people to get on and do something more interesting than worrying about having a roof over their heads. Harold Macmillan understood this (or at least behaved as if he did). What's wrong with everybody??

Antisthenes said...

Most of your ideas on housing are pretty good. I have bought into LVT for instance but only because economists of the Austrian school agree with the principle of it. However I feel the same economists would baulk at your current assertions that rent controls are not all bad. They I believe would accuse you of not understanding basic economic theory on supply and demand. I suspect that if you are correct that home ownership increased whilst rent controls were in place it was not that which caused it but other factors entirely.

Mark Wadsworth said...

H exactly.

A, I have repeated the full list of policies.

ThomasBHall said...

It did get through moderation- I just went and posted there myself

Lola said...

Excellent. These interventions (a thing I generally abhor) all work as they are part of the need to control rents. Or rather to stop landlords extracting all the profits from production. Land being in finite supply and with no cost of production is a monopoly. Such actions actually encourage capital formation, or more accurately wealth creation. And as a true capitalist I applaud that. Rent seekers are not capitalists.

Lola said...

Update. However rent controls are generally held to be the reason for the decimation of many apartment blocks in New York that were simply abandoned by landowners.

I am sure that that is not the whole story, but I lack time pro tem to investigate.

Antisthenes said...

Lola has managed to make a case both for and against rent controls. The latter I believe to be the more compelling. However her remark "Rent seekers are not capitalists" is an interesting one as it is based on land being finite but I would say that all resources are finite and it is free market capitalism that makes them available to us in the quantities we need through price control determined by demand. The housing market is a special case because an over abundance of human intervention (generally government but other vested interests are involved) means it does not react properly to supply and demand. Any market that has external interference applied to it suffers from the same problem. A strong case against government and vested interests being allowed to influence anything. When the people make democratic decisions with their wallet and feet the world works perfectly well. When so called experts and so called good causes get involved it goes badly wrong.

Lola said...

A. Before I even read your comment I was thinking of adding another one. Is their a market in land? Or can their ever be a 'market' in land?

Lola said...

SA Also, 'resources' are not finite. Only land is finite. Resources are created every day. Oil was a nuisance until Benz got the Otto cycle working reliably.

Antisthenes said...

Lola Land is bought and sold every day so clearly there is a market in land. If resources are not finite because of new discoveries then land is not finite. The Dutch have created usable land from unusable so have farmers. In future as our technology improves we can reclaim more land for use. We can build cities under the sea now if we wish. In theory nothing is finite as we are told there are an infinite number of universes so therefore infinite resources but in practice that is not possible at this time so for now everything is finite. So we have to be careful how we use them. Up to now we have found that free market capitalism does that best. Other ways we have tried like socialism have failed miserably and it's off shoot social democracy does nothing to improve use. In fact it encourages waste and inefficiency.

You may note that we expend most of our energy in correcting failure because of intervention and then demand more intervention to correct the problem. Instead of addressing the root cause which is government and vested interests.

Lola said...

A. Last para. Yep.

Dinero said...

At the part where the author recommended "relaxing height restrictions" - Manhattan came to mind !

5amarl said...

(offtopic) A, I believe Lola is male?

Antisthenes said...


Ralph Musgrave said...

Mark claims there is a "profit maximising level of output of about 150,000 a year" for house builders. That doesn't accord with the ideas set out in introductory economics text books, which I think are correct in this instance.

According to the text books, monopolies, cartels and the like certainly have a profit maximising level of output which will bring a return on capital above the standard return. But assumes relevant parties can make the cartel / monopoly stick.

Strikes me that's extremely doubtful in the house building industry: I mean do the ten largest house builders all sureptitiously meet somewhere on a regular basis to rig the market, joined by ten thousand smaller builders and "build your own home" enthusiasts? I doubt it.

I suspect we have a genuine free market here, in which increased supply (of land) would cause a drop in price.

Ben Jamin' said...


what do you make of this?

Ben Jamin' said...

Niemitz is right, insofar as that unless people pay full market rent for their right to occupy a valuable location, then the market cannot allocate land/immovable property efficiently.

So what applies to rent controls must apply to owner occupiers to.

Therefore, by his own logic, building more houses in order to lower house prices will come with a cost of adding to existing inefficiencies.

As economists should primarily be concerned with solutions that improve efficiency, then surely the conclusion that someone who thinks rents controls are a bad idea, is that a 100% Land Value Tax is the best solution for the housing market. As only then can supply be matched with demand?

Odd he never wants to take that step. I want to know why.

Ben Jamin' said...

@ MW

We keep getting his name wrong its Niemietz. I think a Nimitz is a class of US aircraft carrier named after the WW2 admiral Chester Nimitz.

Mike W said...

'Free market' Definition: I can decline your offer of goods and services at the price you demand. I can in theory decline all goods and services in that market and make no transaction. No price discovery, no value, no sales, or purchase, etc. Thats the 'free' bit.


I cannot so decline water, food and somewhere to live (some bit of 'land' to stand or sleep on). In the end I have to take a price. In short, I can be coerced. So not a 'free market' then. No amount of waffle will change that.

This is Libertarian Econ 101. Christ, even I get it. How come some of you Neo-Libs don't understand your own basics?

Mark Wadsworth said...

L, ta and agreed.

A, land in the physical sense is plentiful, in a UK context there is no need to fantasise about draining the sea. Even the best farmland is tuppence ha'penny if you wanted to buy enough to build a home on.

Reclaiming the sea bed only makes sense in Hong Kong (airport), or when extending Rotterdam, the Palm Tree resort etc.

It is "land rent" which is a fixed total, being total GDP minus basic living costs x population i.e. the surplus value created by the real economy.

And the land rental value of a home in the middle of some farmland will remain tuppence ha'penny. No shops, no jobs, no schools or hospitals, no utilities, no pub etc. That is more developed land but the total rental value pot is unchanged.

This total can go up or down, going up over time usually. But at any point in time, it is still a fixed total and is still created by society as a whole.

For sure, the govt can build new roads and new towns and so on, but this merely shifts the total pot from one set of landowners to another. Whoever's hands it ends up in, it is still rent.

RM, i refer you to the link BJ provided.

f course it is not a flat 150,000, but since the 1970s (as far back as the chart goes), home builders collectively, whether by collusion or not, have restricted new supply to one new home for every nine existing homes bought and sold.

Even if you go back further, in the 50s and 60s when 300,000 or 400,000 new homes were being built, more than half were council houses, the private sector doggedly stuck to 160,000 on average.

And you might want to take a look at the home builders' recent accounts to see how their land banks have built up over the past few years to ten years' supply.

You can;t just say "I don't believe you the textbooks say otherwise" and imagine that you have won the argument, try looking at hard facts instead of denying them flat out on the basis of no evidence.

May I also refer you to my new guidelines on civilised discussion.

BJ, thanks saved me the bother.

Mark Wadsworth said...

BJ, well he'll have to change his name then, not my problem.

MW, indeedy, but we can draw a difference between food (farmers have to do hard work and invest money to produce it, people have to transport it, process it, stack it and sell it) you can't expect them to do all that for no payment. Ultiamtely it is exchanging labour, and can work in a car factory and spend some money on food, the farmer works on a farm, sells food and buys himself a car. We could swap places and we would still be exchanging labour.

Land rent on the other hand is pure ransom payment and we have to pay it even though the landowner himself does nothing apart from hold the title. The physical land does the work for no payment.

So if your daughter is kidnapped and you pay me (brave resourceful warrior that I am) money to rescue her, that is not ransom on my part. I put in an effort and risk my life on your behalf, we negotiate the price, I am competing with other rescuers and you can decline our services.

If you give in and pay the kidnappers, that is ransom.

Bayard said...

"The UK had rent controls for most of the 20th century, but that did not mean that housing supply disappeared."

Well the supply of rented housing almost did.

"All that happened was that landlords left the market - meaning there were more homes for owner-occupiers to buy, who also acquired all new supply."

This is not necessarily a good thing. Most thinking on land and housing these days is set against almost constantly rising land price. Land, therefore is a superb financial investment and not just a place on which to have your home. So owner occupiers get all the convenience of being able to do what they want with their homes, plus their land makes more money than they do, if they are lucky, win-win. Renting is for desperate losers.

Now suppose the value of land is static or declining, as it was for most of our history until the C20th. Now the convenience of owning your own home comes at a price and renting, which has other benefits - no worries about maintenance, easier to move - becomes more popular. However, thanks to the rent controls, there is nowhere to rent. People who are already renting are staying put no-one wants to rent anywhere new out, because they can't make a decent return on the cost of buying the place.

Mark Wadsworth said...

B, no need to guess what happened. Lack of supply of rentals, sure, so they built loads of council houses.

As a package, it 'worked' but was a distant second best to LVT.

Bayard said...

"As a package, it 'worked' but was a distant second best to LVT."

Well, it only really worked if you were lucky enough either to be in social housing, a "protected" tenancy or in a position to buy. Otherwise it didn't.

The main problem with rent controls is that scarce resources need to be rationed and if they are not rationed by price, they are rationed by something else, in this case by "waiting list", "first come first served" or "who you know".

Mark Wadsworth said...

B: "it only really worked if you were lucky enough either to be in social housing, a "protected" tenancy or in a position to buy."

So it only worked well for about 95% of the population? Damn and blast what an epic policy fail!.

As opposed to Home-Owner-Ism that only benefits a tiny fraction of the population, i..e those who own more homes than they have children. And bankers etc.

Lola said...

Nw. Sorry. Didn't quite hear that. Did you say 'Bankers'?

Lola said...
This comment has been removed by the author.
Lola said...

Apropos of all this. Went to a BID presentation yesterday. They proudly announced that new speculative office building had been carried out in the area where business rates had been scrapped as an incentive to tenants. Couldn't make it up really.

Bayard said...

"So it only worked well for about 95% of the population? Damn and blast what an epic policy fail!."

If it only worked for 95% of the population, that's pretty bad. That means 5% of the population were effectively homeless, i.e. looking for somewhere to live and not being able to find anywhere, that's over three million people.

"As opposed to Home-Owner-Ism that only benefits a tiny fraction of the population"

It's not a binary choice, there are other alternatives to the mess that were the Rent Acts. The point that you are, somewhat glibly, failing to grasp is that not being able to find anywhere to live is a lot worse than having somewhere to live and paying more than what certain pundits (but not Mr Ricardo) consider a "fair rent", or a "fair price".

DBC Reed said...

Has anybody read Martin Wolf's "Monetary Policy in a low rate world" in FT? He is talking about government investment as an alternative to central bank inaction and does not diss Helicopter Money.A far cry from all the neo lib/ neo romanticism on here. Capitalism isn't working , you know.

Lola said...

DBCR. Nope.

We don't have capitalism (at least as far as capitalism is defined by those that oppose 'it' - and hence not what it actually is). We have a sort of crony corporatist managerial finacialised regulationism, with increasingly insecure property rights and the replacement of the Rule of Law with rule by the arbitrary decisions of capricious and largely ignorant bureaucrats.

And this is not what 'capitalism' always trends to. It's what happens when you get layer upon layer of arbitrary interventions by those same capricious bureaucrats. And bad money. Obviously.

No wonder it's failing.

Mike W said...

MarkW above,

Thanks Mark, as ever, you remind us to be clearer in our points.

Land: Agreed no problem

Water: I mean something more than Michael Hudson's, classic example of a land owner putting a chain across 'his/her' river and charging a rent. The 'toll booth economy'. I mean somebody like a Saudi nomad on a trade route. Charging you whatever he wishes to drink from 'his/her waterhole. If you are about to die of thirst, that is everything you have.You cannot decline. I think this 'Arab method' was alluded to in Lawrence of Arabia and Kingdom of Heaven.

Agricutural produce, I agree with your example: I am thinking of classical economist like Malthus. So this is more of a question to help me clarify my own thinking. As you have shown in the past, the distortion of a monopoly can be shown in a supply demand diagram and you can discuss the monopoly aspect of a firms profit.

Here I am thinking of subsistance. Surely the amount of food below subsistance cannot be declined. So is there not an element of rent in this first portion? And only thereafter, a 'proper' free market that we agree upon?

DBC Reed said...

I was rather hoping you might read and comment on Martin Wolf rather than myself.(There is a more a recent piece where he expands on the scope of government decision making at Hinkley and on housing which can be found by Googling 'Hinkley decision').

Lola said...

DBCR. I don't have a subscription to the FT. I have already had a go at the B of E local agent ( a bit half heartedly I admit). Trouble is I have to run a busy business and I don't always get the time to do a well researched post.

mombers said...

@B, there were not 3 million homeless people when there were rent controls, and there have never been anywhere close to that. A very slim sliver of people who didn't get a council home and couldn't get a deposit together in a few years.
Rent controls did make rentals poorer quality, but it shrank the sector enormously, much like letting a poor value industry like car manufacturing in the 70s/80s shrink. Whatever we are doing with the rental market in the UK at present clearly isn't working because

'You can get better, but you can't pay more®'

in any other major country in the world

Steven_L said...

We're run by a combination of ruthless rentiers and well meaning useful cretins who believe that rents and land prices going up isn't 'inflation' but represents 'growth' and economic success. On the other side of the same coin as soon as rents and land prices begin to fall they start squealing about 'deflationary spiral' and how we'll all go to hell in a hardcart because of it.

It's at best intellectually dishonest and more likely just a convenient stitch up.

Bayard said...

"there were not 3 million homeless people when there were rent controls"

I dare say there weren't, I was using Mark's figures to make the point that a 95% success rate may look good, but isn't in this context.

"A very slim sliver of people who didn't get a council home and couldn't get a deposit together in a few years."

As a matter of interest, were you around in the late 70's? My recollection was that it was more than just "a very slim sliver" and it was damn nigh impossible to find anywhere to rent, except on the grey market, where rents were well above the "fair rents" that the rent tribunals set, and even that wasn't easy. It's easy to suppose, almost forty years later, that things were like today and every tenant was a frustrated homeowner, but that definitely wasn't the case. Many people rented out of choice. Most people, even then, really only thought of buying a home when they "settled down" and got married.

Land wasn't a bubble then. Again it's difficult to think like a person in the 70's. You hadn't had 30 years of stories of people whose houses had earned more than they had. People didn't look on houses as an investment, but a liability. People wanted to rent and the lack of anywhere to rent was definitely a problem, a problem caused by the rent controls then in place. That's not to say that rent control is bad, but that it's not beyond the wit of government to make it so.

Mark Wadsworth said...

B, M has already replied, not much to add, except to say that

1. Of course there weren't 3 million homeless then, just as there aren't now. You should't make up facts out of thin air to prove a point. I'm saying the system suited (nearly all) people very well, of course there were council tenants who wished they were owner-ocupiers but couldn't afford it, well that is not a housing problem that is an income problem etc.

2. I did grow up with a 70s mindset. Everybody was happy to rent somewhere grotty for a couple of years before either a) buying your own place or b) getting a council house.

3. People didn't look at houses as an investment? Well no, that was the long-term - and more "respectable" - alternative to being a council tenant.

4. Your imaginary silent army of people who neither wanted to be council tenants nor owner-ocupiers but could not find anywhere to rent privately - and were somehow homeless - does not really exist. Even at the lowest ebb, about 10% of people were private renters which is quite enough.

Bayard said...

"Of course there weren't 3 million homeless then, just as there aren't now. You should't make up facts out of thin air to prove a point."

You might actually read what I wrote before ticking me off. The point I was making was that not that there were three million homeless, but that if "it only worked well for about 95% of the population" (your words, not mine) then those for whom it was not working well, by definition those who didn't fall into the groups I had highlighted, were 3 million strong and hence your little bit of sarcasm at my expense was unjustified.

Really, you shouldn't make up facts out of thin air to prove a point.

"about 10% of people were private renters which is quite enough."

Quite enough for what? To keep M. Wadsworth happy? to limit the evil parasite squared landlord class? What are the wonderful advantages of being a owner-occupier, aside from the appreciation of the land that your home sits on. You yourself have pointed out on this blog that people's enthusiasm for being a home-owner dwindles considerably if all they own is the home and not the land it sits on.

Mark Wadsworth said...

B, yes there must have been some people for whom the old system was not ideal (on a waiting list for a council house for months, couldn't find somewhere 'nice; to rent for a couple of years etc).

But that is far fewer than the number of people for whom the current system (on a waiting list for a council house for decades; plenty of places to rent but only for sky-high rents, simply can;t scrape a deposit together etc). You can;t have 100% winners, but the fewer losers the better, is my motto.

"What are the wonderful advantages of being a owner-occupier, aside from the appreciation of the land that your home sits on"

Hang about here. You yourself said "suppose the value of land is static or declining, as it was for most of our history until the C20th…"

We know from the facts that over the 20th C, the number of owner-occupiers went up from 10% to 70% of the population. Land price gains was not their main motivation - that is a fairly modern invention.

We also know that medium term, renting and owning costs the same in cash terms. But it is just nice being able to decorate as you please, having security of tenure, not having some busy body landlord or letting agent coming round to do spot checks, knowing that one day you will have paid off the mortgage and can then stay there for "free" for the rest of your life etc.

I think that way and I am sure that most people think that way. Or maybe it's just my petty bourgeois aspirational 1970s mindset..?