Friday, 2 May 2014

Rent Control: The Continuing Shambles of Labour

Goodness gracious, how much more of this Labour Party soap box oration are we going to have to endure before the election next year? First Labour MP David Lammy in The New Statesman did it, and yesterday the socialist demagogue Ed Miliband did it too - I'm talking about promising people that a future Labour government will cap rent increases with secondary generation rent controls (SGRCs). Don't be fooled by the anodyne expressionism - this is basically the wolves of the disastrous 1970s Labour party in the sheep's clothing of Miliband's New-Old-Labour.

Of course, it's not quite like the 1970s - Miliband's New-Old-Labour have put on their sheep costumes and have signposted rents towards market value, whilst making any subsequent increases difficult - but it's all based on the same irritating misapprehension that politicians do a better job allocating resources in the free market than the people making those voluntary exchanges themselves.

In a time when people from UKIP ('you kippers' as I like to call them) rightly get castigated for making comments about 'bongo bongo land' and Lenny Henry 'emigrating to a black country', it seems that the Labour Party keeps getting away with minimal reproach for what are similarly counterfactual and contemptible views (albeit of a different kind). If 'you kippers' deserve our repudiation for their shameful views, then Labour politicians deserve our repudiation for what is becoming an irritating succession of outmoded, popularity-mongering claptrap.

Here’s what wrong with the proposal. Rent controls artificially lower the price of renting an apartment to below the market rate. That’s a terribly bad idea. The consequences of this economic short-sightedness is a housing shortage. Heck, even some of the non-human primates (chimps, gorillas) know that the less you charge for something the more demand you create and the shorter the supply. When the government makes rent artificially cheaper it means landlords want to rent out fewer units than they otherwise would.

Alas, the long term vision of having more affordable housing for people will also be compromised with artificial rent controls. Suppose you’re a property developer looking to spend millions of pounds building a huge apartment complex in a major city – and let’s say you’re thinking of either London or Auckland. Suppose London has a rent control policy and Auckland doesn’t, and all other factors are equal – you’d head straight off to Auckland to avoid developing apartments in a place that makes you charge below the market rate to rent them out. This also knocks-on to affect economic growth too, as businessmen will be reluctant to locate to a country that artificially induces goods and services to be below the market level.

Here’s another way rent controls create shortages – they disincentivise already available rooms from being rented out. Suppose you live in Lambeth or Pimlico and you have a room to rent. If the State-induced rent control places the room at 60% of the value you place on it, you may well decide to leave the room unoccupied and use it for storage or an office instead. Every time a decision like that is made the government effectively eliminates hundreds of units from the rental market.

Furthermore, rent controls lower living standards too. If landlords have to artificially lower their profits they will be tempted to lower their own standards in order to cut costs and make up for their losses. They will be disincentivised to maintain properties in the way that they would if they were being paid what their rooms are worth. The consequent effect is that re-wiring isn’t done as frequently; general repairs are scarcer; utilities don’t get replaced when they begin to show faults, and the neighbourhoods (from gardens to graffiti) are cared for less. You may think that cutting corners to engender shoddier living standards won’t be tolerated by clients, but that won’t be a problem for landlords. With artificially low prices they will be able to fill their shoddy rooms twenty times over.

I have quite a few general maxims in life. Here’s one of them:

Lazy thinking gets us only as far as the conspicuous benefits of a proposal. Creative intelligence, however, takes into account not just the conspicuous benefits of a proposal, but also the inconspicuous costs - from which a full analysis of costs and benefits, conspicuous and inconspicuous, brings forth proper clarity of argument.

What we see far too much of is politicians stating only the conspicuous benefits of a proposal, and acting as though they’ve got the argument sewn up. It just won’t pass muster. Everyone agrees there is a housing shortage. In response to this housing shortage, politicians either need to have the courage of their convictions and build more social housing, or they need to be honest and say they can’t justify the cost. This rabble-rousing price-fixing popularity contest from Ed Miliband just won’t do – it’s lazy thinking of the worst kind, and it’s little more than genuflection towards the few people left in the UK from whom his party has the slightest chance of winning (as opposed to obtaining) any votes.

* For more on this, see my Blog post Rent Prices & Social Care; Too Much Restriction?

** Photos courtesy of the BBC