There is no denying that London faces a housing crisis.
Similarly, there is no denying that many people feel that their rents take too high a proportion of their income.
If you are Sadiq Khan, the solution is obvious: if people object to high rents, the state should cap them — problem solved. It is an appealing enough proposition, especially for a politician heading into an election. But is it really that simple?
Modern politicians often lack the courage to admit that even the most well-intentioned policies have unforeseen consequences. As economist Friedrich Hayek said, there will always be gaps in our knowledge when making policy. This is why we should always consider the possible consequences of any decision — both intended and unintended.
Khan need not look far for his own examples. A freeze on some travel fares makes for a good headline and a popular election pledge, but in practice it meant less money for investment in London’s public transport system.
So what could the unintended consequences of rent controls be?
Quite simply, high rents indicate that supply is not meeting demand. Imposing rent controls may make the mayor feel better, and arguably improve life for some renters in the short term, but it doesn’t solve the lack of supply. In fact, it may make it worse.
Rent controls will force so-called marginal landlords, who will decide that the lower income is not worth the hassle of renting out rooms in their home, to leave the market and reduce supply. They could also encourage marginal tenants — those who do not necessarily need to rent (those happy to continue living with parents for example) — to move into the rented sector and further drive down supply.
Khan wants to take a leaf out of Sweden’s book, but seems less keen to learn lessons from the Swedes’ experience.
Research from the Swedish think tank Timbro revealed that rent controls in Stockholm led to an increase in the subletting market, with sub-letters paying rents twice as high as the official tenants, and in the illegal rental market, with one in five young tenants admitting to having paid illegally for a rental contract.
Swedish controls have also led to a misallocation of housing (resulting in long commutes for families with children), corruption, and even a crime wave linked to the complex system for allocating housing. Some of this illegal activity and misallocation may already happen in London, but rent controls will only make the problem worse.
The solution to the housing crisis is, quite evidently, to increase the supply of housing. It cannot be overstated. More homes of every kind — for renting and owning, flats and houses, social housing and private — will drive down prices for everyone.
Developers who want to build constantly vent their frustration at the bureaucracy of the planning process, the lack of experienced planning officers, and the inability of local authorities to make quick decisions with clear and consistent guidelines.
If any current or future mayor really wants to reduce rents in London, they could do two things: bang the heads of local authority planning departments together to encourage more planning permission, and lobby Westminster to allow local authorities to receive more of the income from development. A land value tax, for example, would mean any increase in land value when planning permission is issued would be retained locally, incentivising the issue of more permits.
The mayor of London has a unique national and international platform. Khan could serve Londoners — and the rest of the country — better by pushing for a housing revolution, not fighting for failed economic policies that entrench the problem.
Main image credit: Getty