Labour wants to introduce the one policy guaranteed to make the housing crisis worse
30 April 2014 10:00pm
The UK's housing crisis is no secret, and political solutions are offered two a penny.
Unfortunately, Ed Miliband's plan to limit rents is perhaps the one thing that can be relied upon to make the situation worse for Britain's renters.
At the launch of Labour's election campaign in Redbridge, Miliband is expected to say that "the next Labour government will legislate to make three year tenancies the standard in the British private rented sector".
These tenancies, Miliband is set to say, "will limit the amount that rents can rise by each year too - so landlords know what they can expect each year and tenants can’t be surprised by rents that go through the roof."
Like any price ceiling, Labour's pledge will reduce available supply, if rents are capped below their market level. Economists call such policies rent controls, and they are a rare area of consensus among academics.
A 2012 poll of influential economists found that 95 per cent believed they had a negative impact where applied locally, agreeing that they failed to have a "positive impact over the past three decades on the amount and quality of broadly affordable rental housing" in cities like New York and San Francisco.
Miliband is proposing to roll out that failure at the national level.
Sam Bowman, research director at the Adam Smith Institute, says that "rent control is a stunningly bad idea that could devastate Britain’s cities and clobber renters. To paraphrase the socialist economist Assar Lindbeck: the only thing worse for cities than rent control is bombing them."
Put an artifically low ceiling on the price of a good, and you'll see shortages. If not in numbers of homes, then in investment in them. Where rent controls have been implemented apartments fall into disrepair as landlords have no incentive to maintain them.
In New York, a study conducted by Gyourko and Linneman found that the effect of rent control on apartment quality "has been quite substantial". In Manhattan, properties that are rent controlled are nine per cent more likely to be in unsound condition.
Rent controls also imperil those looking to get on the housing ladder. With housing in short supply, finding a rent controlled property can be a nightmare, as those already in homes have trouble finding somewhere else to go.
Housing supply is strangled too. If the returns you'll get from new construction are capped below market value, and you could get more putting your money elsewhere, why build additional homes at all?
Research by Aida Caldera Sanchez and Asa Johansson has found that in the UK, the responsiveness of new supply to a change in price is well below the OECD standard. The UK's housing sector ranks as just the 14th most responsive out of 21 developed economies to increasing prices.
There is an easy way to escape high prices - by building many more homes. Yet the issuance of construction permits has fallen to a 50 year low as the country faces a chronic shortage of housing. If Labour wants to liberate renters, then it needs to look towards liberating a system than binds up builders.
The UK can build itself up, out, and away from scandalously high house prices. But rent controls will leave us with even fewer options.