Rent controls have been riding high on the UK political agenda as market forces have resulted in many tenants in the UK paying more than a third of their take-home pay in rent, and sometimes a lot more.
To give it added profile, the Berlin government recently said it wants to freeze rents for five years so the German city ‘doesn’t end up like London’, prompting much media attention in the UK.
But do rent controls achieve what housing campaigners claim they do, and what do both letting agents and landlords think of them? Before attempting to find out, it’s important to understand what the term ‘rent control’ encapsulates.
A rent ‘ceiling’ is set by a local authority, preventing rents from rising over a set price. This is then reviewed from time to time and rents are free to rise and fall below it.
These set a cap or limit to how much landlords can increase their rent each year, for example inflation ‘plus 1%’.
Rents are allowed to rise, but only from time to time, for example in between tenancies but not during them. The aim of rent stabilisation is to balance keeping rents affordable for tenants, but allowing landlords to earn ‘reasonable’ returns.
Berlin is the most famous and recent example of this. It wants to freeze all rents for existing Private Rented Sector (PRS) properties until 2025 following steep rises in rents over the past decade. These rises have seen rents double is some areas of the city.
Tenants’ advocates and housing campaigners argue that rents are rising too fast in many cities in the UK. For example, in the East Midlands rents increased by 3.7% over the past 12 months on average, far more than inflation, which is rising at 2.0%.
A rent ceiling or cap is therefore the most popular choice, stopping rents from rising any further for a set period and preventing further inflation. But another measure of rent affordability, the rent-to-earnings ratio, taken from our data, shows that rents have remained stable over the past decade, hovering at between 28% and 32% of people’s earnings on average. There are significant regional variations; for example, in London the ratio of rent to earnings is 39%.
There is also strong evidence from our Rental Affordability report that rents primarily go up and down with earnings, instead of being moved by other factors.
The downsides of rent controls are mainly for landlords, who may experience static revenues from rent, but increasing costs, while rent controls are in force. This persuades many to either quit the PRS or invest less in their properties, reducing the number of homes available to rent as well as housing stock quality, it is argued.
Scotland is the only nation within the UK to have embraced rent controls and operates a ‘light touch’ system where rents are controlled via a rent cap for rises within designated urban ‘rental pressure zones’. These are areas where demand is proven to be outstripping supply and causing problems for tenants.
In England and Wales Rent Act 1977 enables tenants renting via long-term tenancies who feel they are being asked to pay an unreasonable rent increase to have their home registered, rent assessed for fairness and a maximum rent then set for the property above which the landlord cannot charge without asking for a re-appraisal. Similar regulations are in place for Northern Ireland.
“Controls on rent increases are having their time in the sun at the moment, partly spurred on by the Government’s recent announcement that it plans to repeal Section 21 evictions.
Policymakers have realised that any move to give tenants indefinite housing tenure may be undermined by landlords’ ability to increase rents to make the property unaffordable to the sitting tenant.
Whether that is a plausible fear or not, I am not so sure, as there are already many restrictions on a landlord’s ability to increase the rent.”
“Capping rents is not the way to fix a rental market that is currently overheating, and is akin to applying a plaster to a broken leg.
It may look as if you’ve done something, but the reality is the issue is rooted far deeper.
Drastic growth in the population and a severe lack of rental stock is the driving force behind escalating rental costs and limiting the profitability of the sector will only see more landlords retreat, bringing their properties with them.”
“I think the Private Rented Sector has an argument to win around rent stability and why that might work, as opposed to rent control which definitely won’t.
From the point of view of your average landlord, they might be better off with a ‘rent stable’ model which for example has the rent going up every year by an amount that’s more than inflation, so they know what their rental income is going to be in the future.
And I think mortgage companies would prefer that too.
The real problem here is that the government is blaming landlords for the nation’s failure to build enough houses to rent. If we were building enough across all tenures, then there would be an effective market where tenants would have a choice.
All the things we’re talking about are a bad response to a damaged market because there is a supply and demand imbalance, which you can’t easily fix.”
The rental market in England is under pressure from an imbalance of supply and demand. But rather than imposing a plethora of rent controls, a mixture of more rental homes being built and ‘lite’ controls on excessive rent increases in some in the areas that warrant it, plus letting the natural relationship between earnings and the rental market play its course, could improve the renters’ lot and ensure that landlords don’t lose out in turn.