Friday, 24 April 2015

Housing: 'managed sprawl' rather than rent controls and public subsidy

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For decades the UK had rent controls. Mostly we didn't call it fixing rents, we called it 'council housing' and we subsidised those rents. Some councils deliberately - for specific and ideological reasons - ran a low rent policy building up huge gaps between the rents that council tenants were paying and the level of market rents (in a dwindling stock of private rented property). As with all price fixing the result of this was a distorted market - local councils couldn't afford to build new homes because the rental income wasn't sufficient to justify borrowing, there was no private rented sector worth mentioning and home ownership was seen as the gold standard.

With right-to-buy the council housing business changed overnight. Tenants who were in work took the discounts and bought their homes. And largely carried on living in those homes. Capital constraints on councils and tight housing revenue accounts meant that new council houses became ever more like hen's teeth especially given central government's preference for housing associations and other 'third sector' housing providers. The result was that council housing - more correctly called 'social housing' by this time - was ever more residualised, increasingly filled with the least well-off and those most reliant on benefits.

By 1997 the seeds for our housing 'crisis' were in place as house building (specifically in places with economic, job and population growth) had slowed as a result of a sclerotic planning system, a rented sector that didn't generate surplus for reinvestment and a development sector wedded to levering high land values rather than efficient construction. The result of this was the explosion in house values - between 1997 and 2010 these values nearly tripled - and these homes became less affordable. Without access to social housing, workers began to rent - between 2001 and 2011 the number of people renting in the private sector nearly doubled as the market met the housing need of people who couldn't afford to buy and failed to qualify for social housing.

We now have the situation where, particularly in London, the scale of the private rental sector is such that regulatory intervention - a re-tightening of the regulations liberalised in the 1980s - is being discussed. Much of the debate relates to quality and to preventing the abuse of vulnerable tenants by unscrupulous landlords. There's a secondary part of the debate that asks whether the type of tenancy (the private sector is dominated by short-term tenancies) merits reform to give people renting a little more security. These are pretty sensible debates with arguments on both sides but where there's a real desire to improve standards within an important housing sector.

But there's a growing call for government - local or national - to intervene in the setting of rents, to implement rent controls:

We need to start getting serious about how to address the housing crisis in London, because it’s not just those on minimum wage or housing benefit that are struggling to afford to live here. Teachers, civil servants, retailers and service workers essential to the running of our city are all threatened by the crisis. Though not a silver bullet that will singlehandedly solve the crisis, we should think about how rent controls – done sensibly – can be part of a comprehensive plan to ensure that all Londoners can afford a home in our city.

And such proposals, especially wrapped in Harvard-educated management-speak as David Lammy does here, are something of a temptation. It seems so simple. Yet when we step away from the moderate, reasonable argument the truth remains - limiting rents must always mean limiting the market income which will always mean that there is less supply. And London has enough of a supply problem resulting from decades of indecision on housing and the continued - and wonderful - success of the city as a driver of economic growth.

To help us understand this, we need only look at the USA where big cities like New York, Los Angeles, Washington DC and San Francisco have a long history of rent controls as a housing policy tool:

But rent control mainly makes housing expensive by taking units off the market via high occupancy rates and low turnover. Tenants who don’t want to lose their good deal stay in their apartments. This means that newcomers—or anyone not lucky enough to have a rent-controlled unit (including prospective homebuyers)—must compete for a more limited stock of market-rate units. If New York City abolished rent regulations today, it would double the number of available market-rate units, meaning housing costs would be shared more equitably across the population. As things stand now, many people pay more, because so many others pay less.

The evidence is that, far from rent controls acting to reduce housing costs, the effect is to make the housing market even more static than it was already. In New York - and we'll be familiar with this approach in the UK - the preferred tool now is to require that developers of (overpriced because of rent-controls elsewhere in the market) new homes make a proportion of those homes 'affordable'. The problem is that, even without enforced affordable provision, the regulatory cost of building in the city - and London isn't so very different - is verging on prohibitive.

The affordability problem remains a challenge -  as the American Planning Association  discussed recently in Seattle:

The shortfall of affordable housing arguably would take 50 years to fill at the current rate of production in San Francisco—the very frustration expressed by Rahaim. It might take 25 years in New York City. But betting it all on increasing supply is fraught, too. It’s expensive to build in the city, and costlier still to build increased height and density without considering the needed infrastructure to support those kinds of environments.

But the answer does lie in making land available linked to good transport links. It won't make London's housing as cheap as housing in Barnsley but there is a need to open up the possibility of what we might term 'managed sprawl' - allowing the expansion of cities so as to release some of the pressure on the inner boroughs.

In a broader view, a more regional approach, with polycentric, high-density centers supported by transit, has the advantage of breaking out of the borders of the super-hot markets.

Right now our housing debate lacks balance - too much stress is given to managing price within a sclerotic, dysfunctional housing market rather than on reduced the things that slow down that market, add cost and prevent affordable development.

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3 comments:

Dan said...

One unexpected side effect of rent controls is that after they have been in place for a while, they make the accumulation of huge property fortunes relatively easy, but only if the person doing so takes a view untroubled by morals and fellow feeling of his fellow man.

The mechanism at work here is simple: acquire properties full of sitting tenants paying well below the market rate, but who by virtue of whatever twisted logic have the right to stay on at these good rates virtually forever. This makes the property virtually unsaleable at any price, as it will soon turn into an albatross instead of a profit centre.

Once acquired, do everything in your power to make the tenants move out, whether this is legal or not. Once out, terminate their tenancies. Once you've got rid of all of them, renovate and re-let the properties at market rates.

Profit!

A certain character with the soubriquet of "Nasty Nick" has made a fortune doing this, entirely on the back of rent controlled properties; many people would be much happier were the preconditions for such fortunes not set up.

Anonymous said...

What worries me is that Milliband knows this. He's not a stupid person, has a masters in economics and is quite aware of the disaster that rent/price controls would be. Yet he's still willing to implement a dangerous policy because it's popular with those on the left.

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The mechanism at work here is simple: acquire properties full of sitting tenants paying well below the market rate, but who by virtue of whatever twisted logic have the right to stay on at these good rates virtually forever.......

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