Rent Controls: Explained
In the latest in our series of blogs, we ask “Would rent controls be a good, or a bad thing?”
If some opinions in the market are to be believed, landlords are raising rents beyond reasonable expectation, whenever they like - which is why Rent Controls appear to be a policy the Labour party may adopt into a future manifesto.
However, whilst the policy could appear to be in support of tenants, there is a growing view that it is a dangerous policy to pursue.
Therefore, we’ve examined subject of rising rents and rent controls.
How high are rents climbing?
According to the HomeLet Rental Index, rents in the UK are at an all-time high, with rents across the UK standing at £970 per month.
Unsurprisingly, properties in Greater London command the highest rent, at £1,689 per month; whilst average rents for everywhere except London average £802 per month.
But although rents are rising, over the last year:
- Rents in the UK grew 2.4%
- Rents in London grew 3.5%
- When London is excluded, rents in the rest of the UK grew by 2%
Meanwhile, the average rate of inflation has been hovering around 2% for the majority of 2019, which appears to indicate that that rents are rising largely in line with living costs.
How high can rents rise?
Unlike house prices, rental prices are limited to tenant affordability, usually linked to their household income. This is because most letting agents use a professional tenant referencing service, which have strict income to rent ratios.
Of course, there are times a tenant will pay the rent upfront whilst in other scenarios, they may be able to prove they have independent means in order to cover their rental payments. But the majority of tenancies are fairly typical – a tenant relies on their monthly income to pay their rent.
Contrast this with the sales market, where as many as 75% of home-movers are either cash-buyers; or are moving from one owned-home to another. In such cases a homeowner could have built-up tens or even hundreds of thousands of pounds worth of equity to offset the cost of their next property. This means household income becomes less relevant to the price a purchaser is prepared (or perhaps, able) to pay for a home.
Therefore, rental price rises are far more at the mercy of wage growth than house prices are; and with the current average wage increase standing at 3.9%, it could be concluded that market conditions are already controlling rental growth quite effectively.
What impact do the experts predict rent controls would achieve?
According to a report published in The Economist, rent controls may appear to benefit tenants initially, but over the longer-term they exacerbate issues and worsen housing shortages.
The article claimed: “Rent controls are a textbook example of a well-intentioned policy that does not work”.
Indeed, the article goes on to explain how capping rents reduces the landlord’s appetite to invest; whilst reduced rental income could mean that landlords are less likely to have sufficient profit within their portfolio to fund anything except basic repairs and maintenance.
Subsequently the benefit which tenants find particularly appealing about the private rented sector – the ability to move to a new home, cheaply and easily can diminish. Rent controls encourage tenants to stay in the property for longer than they possibly need; which only reduces supply within the rest of the market. Reduced supply against growing demand inevitably leads to increased prices.
Meanwhile, if a tenant has lived in a property which has been subject to rent controls for some time, they may find that the open-market on the outside isn’t so affordable – potentially leaving them continuing to live in what the article describes as “crumbling properties”, which no longer meet their needs, in a location which is no longer relevant to them.
So, far from keeping rents affordable, studies of the experiences of tenants across the world have concluded rent controls can drive down quality and lock newcomers out of the market; whilst simultaneously driving up rents through lack of supply.
Let the market dictate rents: Rental payments are largely limited to tenant affordability, and landlords simply don’t demand high rents if it results in increased void periods.