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Rent controls hurt tenants by drying up the supply of homes to rent

Rent controls are not good for the lettings market and could have a serious impact on terms of reducing the supply of homes to rent, it is suggested.

An analysis of existing research by the Residential Landlords Association (RLA) on the impact of rent controls around the world reveals the harm they can cause.

Examples include controls in Los Angeles and San Francisco in the United States where a paper for the California Budget and Policy Centre has reported that renters are ‘substantially more likely to struggle with housing affordability than home owners’.

It goes on to note that more than half of renter households paid over 30% of income toward housing in 2017, and more than a quarter were severely cost burdened, paying more than half of household income toward housing costs.

A further paper for the National Bureau of Economic Research has found that in San Francisco, landlords affected by rent control reduced rental housing supply by 15%.

While research for the National Multi Housing Council in the United States warns that rent control and rent stabilisation laws lead to a reduction in the available supply of rental housing in a community, particularly through the conversion to ownership of controlled buildings.

A document prepared for the European Commission has warned that rent controls appear to have a significant destabilizing impact on the aggregate housing market, increasing the volatility of house prices when confronted with different shocks.

It goes on to note that ‘the drawbacks of rent controls in terms of unintended consequences for housing market stability and negative effects on labour mobility would advise against their use for redistribution purpose’.

In 2015, a rent control mechanism was introduced across Germany. The research cites evidence showing that between 2015 and 2017 rents in central Berlin increased by almost 10%. Before the introduction of the control they had been rising by just 1% to 2% each year.

Indeed, research by the German Institute for Economic Research has concluded that ‘Contrary to the expectations of the policy makers, the rental brake has, at best, no impact in the short run. At worst, it even accelerates rent increases both in municipalities subject to the rental brake and in neighbouring areas’.

In Italy, a paper for the Centre for the Analysis of Public Policies notes that the private supply of rental homes fell dramatically after a law regulating rent levels was introduced in 1978. A further paper has found that in Italy between 1998 and 2008, market rents increased by 57% compared to a growth in household income of 31%.

In Sweden, a report by the International Monetary Fund this year concluded that tackling Sweden’s dysfunctional housing market requires reforms of rent controls, tax policies, and construction regulation. In addition to fully liberalising rents of newly constructed apartments, it added that there is a need to phase out existing controls, such as by applying market rents when there is a change in tenant.

The latest research comes shortly after a senior academic warned the Greater London Assembly that the Mayor’s proposals for rent controls would have ‘really dramatic unintended consequences’.

Addressing the Assembly’s Budget and Performance committee, Kath Scanlon, assistant professorial research fellow at the London School of Economic, said; ‘Landlords would simply decide they were no longer going to rent their properties’.

The Centre for Cities warned earlier this year that rather than helping make London open to everyone, strict rent control would close off London to new residents and divide the city’s renters into winners and losers.

According to David Smith, RLA policy director, it is clear that rent controls are not a panacea for tenants. ‘Far from making renting cheaper, experience around the world shows it can make it more expensive and more difficult for those looking for a home to rent,’ he pointed out.

‘Rather than resorting to simplistic and populist ideas which have shown themselves to fail, the Mayor should instead work with the vast majority of private landlords doing a good job to see what is needed to stimulate the delivery of more homes to rent. Increasing supply is by far the most effective way of keeping rents down,’ he added.