Rent controls are “snake oil” and should be rejected, says Economist

The weekly economic and financial research magazine The Economist has made a scathing attack on rent controls.

The publication says rent controls are in fashion across the western world but cites two American cities as examples of how controls do not work in the interests of tenants, landlords or the wider society.

“In the mid-1990s Cambridge, Massachusetts, scrapped its rent controls, while San Francisco made its regime even stricter. In Cambridge apartments freed from rent control saw a spurt of property improvements. San Francisco experienced its own residential investment boom, but one that was aimed at getting round the rules, for example by converting rental properties so that they could be sold. The subsequent 15 per cent reduction in supply by affected landlords pushed up rents across the city by more than five per cent.”

The magazine - in an article which is behind the paywall - goes on to set out the arguments that many professionals in the British private rental sector have expressed in recent months as support for rent controls, particularly from the Labour Party, has gained currency in this country.

The Economist says: “They deter the supply of good-quality rental housing. With rents capped, building new homes becomes less profitable. Even maintaining existing properties is discouraged because landlords see no return for their investment. Renters stay put in crumbling properties because controls often reset when tenants change. Who occupies housing ends up bearing little relation to who can make best use of it (ie, workers well-suited to local job opportunities). The mismatch reduces economy-wide productivity.”

The publication accepts that reform is needed and believes that housing shortages generally - it cites London as a particular case in point - “have helped suck wealth away from young renters, fuelling tension between the generations.”

And it says a rethink of housing policy is overdue.

“Many of the new ideas are welcome, for example more building and recognition of the harm wrought by nimbyism (the attitude of homeowners campaigning against nearby developments). Britain has improved the regulation of rental contracts, a vital component of a functional housing market. Unfortunately, at the same time an old and rotten idea is being resurrected—rent controls. If these proliferate, they will, just like rules that stymie building, skewer property-market outsiders and protect favoured residents.”

It saves its most damning comment for its conclusion: “Falling home-ownership rates in countries like Britain and America mean that it is more important than ever for the rental market to function well. Yet rent controls will only make it worse. As a solution to housing shortages, they are snake oil. Voters and politicians everywhere should reject them.”