Newton Emerson: Rent control unlikely to defy laws of economics

There will be interest around the world, certainly from policymakers and economists, in the Government’s planned new rent-control law.

On Monday, Belfast City Council unanimously backed a Green Party motion calling on Stormont to introduce similar measures. A Sinn Féin minister is bringing a housing Bill through the Assembly to which rent control could be added – something all parties in Northern Ireland now apparently support.

Rent control is famously said to be the only thing economists agree on, with all agreeing it does not work.

Swedish economist Assar Linbeck is often quoted: "In many cases rent control appears to be the most efficient technique presently known to destroy a city, except for bombing."

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Economists once had an equally simple consensus against the minimum wage, until experience showed a more complex picture

His hyperbole is excusable. Sweden has had nationwide rent control since 1947, with disastrous results. Waiting lists for a regulated tenancy are between 10 and 20 years, creating a thriving black market in 'buying' tenancies at up to a fifth of the property's purchase price. Anyone seeking accommodation outside the system faces chronic shortages and exorbitant rents. Reform has become as politically impossible as tackling owner-occupiers would be in the UK and Ireland. Nobody benefiting from the system wants to concede any of its privileges.

The theory of rent control failure is that constraining rents drives private landlords out of the sector, cutting supply and pushing market rents up.

This has been observed all over the world. The longer controls remain in place, the more they divide society into winners and losers – tenants inside and outside the system. The divide eventually becomes generational as ageing tenants cling on to cheap family-sized properties, while the young struggle to find anywhere.

That has ominous long-term implications for the Coalition as it faces a generational housing crisis.

Of course, economists once had an equally simple consensus against the minimum wage, until experience showed a more complex picture.

Housebuilding

Much of the economic and political understanding of rent control comes from studying the coastal cities of the United States, due to their outsized cultural influence in the English-speaking world. Ireland should be closely watched for the same reason. Yet nearly all these cities – New York, Boston, San Francisco – are highly constricted by geography and planning laws. A minority of economists believe if rent control is accompanied by continuous large-scale housebuilding, its negative effects can be kept at bay.

British experience bears this out. The UK had rent control for most of the 20th century, during which the private rental sector became a byword for slums and finally all but vanished. This was so successfully offset by public and private housebuilding that the memory of it has healed and the lessons have been forgotten. The Green Party had to remind Belfast councillors there was rent control in Northern Ireland as recently as 1989.

The original rent pressure zone policy of 4 per cent annual increases appears to have struck a sustainable balance, at least during a time of effectively zero inflation

The Coalition says it wants to dramatically increase all kinds of housebuilding, although there is no sign of it making the necessary planning reforms. Squeamishness in the Republic about tall apartment blocks, foreign investors and build-to-rent schemes are further bad omens.

As with the minimum wage, the extent and detail of policies is crucial.

A 2015 Cambridge University survey asked private landlords how many would exit the market under various controls. Two-thirds said they would leave if rents were capped, falling to a third if only rent increases were capped. But half said they would leave if rent increases were also capped between tenancies, as Minister for Housing Darragh O’Brien reportedly intends.

If half of Ireland’s landlords sold up it could put 200,000 properties on the market, driving prices down. However, close to half a million tenants would need somewhere else to live.

Lifetime tenancies

O'Brien reportedly wants to introduce lifetime tenancies, another policy known to strongly deter all types of landlords, from the small-scale individual to the corporate investor. In Britain, even Jeremy Corbyn's Labour Party only proposed secure tenancies of five years.

The most decisive detail must be the level of the cap. The original rent pressure zone policy of 4 per cent annual increases appears to have struck a sustainable balance, at least during a time of effectively zero inflation.

An attempt to factor inflation into this in July has had to be abandoned as retail prices take off. The new law will set a 2 per cent cap, just as inflation heads towards 4 per cent.

O’Brien says he wants his legislation to be “a permanent change” that gives certainty to landlords and tenants. It is hard to see how eroding the real value of rents would not bring on the US and Swedish scenarios, and in enough time the UK 20th-century scenario of wiping out the private sector almost completely.

Strict controls might be able to break the laws of economics in a limited and specific way if they are a temporary measure, matched by a crash programme of housebuilding and planning deregulation. Unfortunately, it looks like the Government is devising its own version of Stockholm syndrome.