Thursday, 21 July 2016

The Unintended Consequences Of Trying To Help Tenants

New London mayor and arch-socialist Sadiq Khan is attempting to shore up his solutions to the London housing problem by re-loading his regulatory pistol. Part of his ammunition includes giving tenants in London properties a mandatory 6 months' notice law to protect them from expeditious landlords (it's currently 2 months, I believe), as well as bending the leader of the opposition's ear about favouring radical measures for rent controls, and even the possibility of legislating on who can buy property in London.

Regular readers will know my views on the latter two proposals, (if you're in even the slightest bit of doubt about them you can read my views in the 'Housing' tab to the right), but even the law that says landlords must give a six month notice period before evicting a tenant is not as obviously beneficial as it may first appear.

You may be under the impression that it sounds good because it protects tenants against unexpected short-term evictions. This is true, but on the other side it prohibits landlords from evicting problem tenants in quick time, so it's as broad as it is long.

But it's quite possible that the law makes both parties worse off. Suppose the law of six months' notice is equivalent to a £15 per month loss for landlords and a £7.50 per month cost for tenants (when prices have adjusted to reach their equilibrium). If a landlord has no preference as to whether he has to give six months' notice or pay a £15 per month surcharge on each apartment rented, the supply curve for flats shifts up by £15.

The extra guarantee is worth £7.50 to tenants, but a tenant generally has no preference for paying £450 per month for a flat without six months' security or £457.50 for one with additional guarantee. The demand curve will shift up by £7.50.

Consequently, then, changes in supply and demand curves mean the new price is higher than the old by more than £7.50 but less than £15. Given that this state-enforced guarantee increases landlords' costs more than it increases their rents, and since it increases the rent of the flat by more than it increases the value to the tenant, then both landlords and tenants are worse off.

It's true that there are additional varying factors in the landlord-tenant relationship that could be written about here, but the general point holds - that it is possible for a government interference implemented to protect one party to actually make both parties worse off.

In most cases a free contract between two mutually willing signatories is better than a state-enforced restriction that seeks to act on behalf of one party, because they often end up making both parties worse off. This is because, despite popular opinion, the real quintessence of business is to engender exchanges that maximise both parties' gains in the transaction.