“Why can’t the government just cap rents?” is a question often asked by those at the sharp end of Britain’s housing crisis. The answer may come as a surprise – they already do (for some tenants). The British government limits rent increases for social housing tenants to CPI plus 1% and intends to cap this at 7% from April 2023. In Scotland, ministers in Holyrood implemented a six-month rent freeze for all current renters in September 2022 – capping the increase at 3% thereafter. The real question therefore is should such schemes be applied to all renters across the country?
The Way Forward?
The possible advantages of rent control are easy to see. Existing tenants can enjoy lower rental costs helping them to better afford housing and freeing up a chunk of their income to be spent or saved elsewhere. Rent controls also – in theory – help to prevent renters from being priced out of their homes should their neighbourhood become more sought after. Renters are also incentivised to be good long-term tenants, helping to provide landlords with a stable income. The Treasury, meanwhile, could save c.£900 million due to a falling number of welfare claimants. It sounds like a win-win, but a number of problems make rent controls better in the abstract than in reality.
From a landlord’s perspective, a direct consequence of rent control is a lower rental income. This acts as a disincentive to carrying out much needed repairs – if rental income is capped anyway, then what is the point of enhancing the property? With rent controls reducing landlord earnings and tough economic conditions following interest rate rises and changes to tax relief from 2015, many would look to leave the market. This will have the impact of reducing the already meagre supply of rented accommodation. It is estimated that the number of buy-to-let properties has decreased by 116,000 (c.3%) in 2022 alone. There is also a high risk of a decline in property values – particularly in the buy-to-let sector – with adverse effects for developers building such properties due to potentially lower demand, thereby disincentivising further housebuilding.
All of these would burden the already struggling local authorities with soaring demand for social housing and a disastrous increase in homelessness. The effect of rent controls on housing associations offering social housing could be as great as £1.3 billion due to the loss of rental income without reimbursement. The consequences would be a large financing gap for maintenance, housing construction, and Net Zero retrofitting.
Lessons From Berlin
Whilst it is too soon to draw conclusions about the Scottish Government scheme, the German capital offers a recent lesson on the effects of rent controls in practice. Berlin implemented the Mietendeckel (rental cap) policy in February 2020. This followed the Mietpreisbremse (rental price brake) law which the German Bundestag passed in 2015 to prevent rent from exceeding 10% of the official rates for older properties-built pre-October 2014 and allow tenants to demand rent decreases. A report indicated limited impacts of Mietpreisbremse as c.95% of new property listings exceeded the permitted amount while another noted a 6.7% rental cost increase between 2014 and 2016.
Berlin’s Mietendeckel policy involved a five-year rental ceiling for every property built pre-2014 (to encourage housebuilding) and maintaining rental prices at their July 2019 rate until December 2021. Thereafter, yearly increases were limited to 1.3%. Tenants of an estimated 1.5 million rental properties could force a cut on their rent. Landlords were also required to decrease rental prices if they were more than 20% higher than the government cap for a similar property. Fines of €500k could be levied on those who didn’t comply.
The result was a fall in the number of rental properties on the Berlin market. Properties built pre-2014 were impacted by the rent control scheme and thus saw their value decreasing as tenants paid lower rents. In turn, some current landlords withdrew their properties from the market to sell or wait for a reversal of the regulations. Potential landlords were reluctant to buy the older properties from existing owners, thereby lowering the supply of rental properties. Conversely, properties built post-2014 were unaffected by the cap and saw their values increase as tenants paid higher rents. The shrinking pool of houses meanwhile left renters struggling to find property.
This policy was reversed when the German courts ruled in April 2021 that the Berlin city authorities had acted beyond the scope of their powers. Consequently, renters were forced to repay any savings they had made from the Mietendeckel policy back to their landlords.
If Not Rent Controls, Then What?
Rent controls create more problems than they solve. However, there is a very real underlying issue which has driven their support – soaring rents and spiralling property prices.
So, what can we do instead? A start would be to build more affordable homes to grant access to home ownership for Britain’s struggling renters. The resultant fall in demand for rental properties would cut rents for those still in the sector. In order to facilitate more house building, there is a need to review and reconsider some of the current planning regulations besides boosting funding. House building needs to take local circumstances into account including providing more local amenities such as schools and hospitals to complement the new homes.
It will take time to liberalise planning laws and build more homes. In the meantime, we can strengthen renters’ rights and better enforce existing protections for tenants. There are regular examples of landlords taking advantage of the rental crisis, for example by charging their tenants six-month advanced rent payment. Others have broken the law by demanding a deposit of in excess of 5 weeks rent, not protecting tenants’ deposit and setting up “ghost tenancies”. Another is the collection of agency fees under the “zero deposit scheme”. Accompanying a crackdown on these egregious offences should be a public register of landlords with reviews from tenants. We also need to change the existing laws that protect tenants. There is an ongoing campaign for the Renters Reform Bill to be passed by Parliament. The bill calls for banning no fault evictions and limiting rent rises to once per annum with two months’ notice which will enhance tenants’ rights.
The housing crisis is one of the largest problems facing Britain and renters are feeling it the most. We urgently need solutions but rent control in practice will bring more problems than it resolves. Only with housebuilding (and planning reforms), stronger tenants’ rights and better law enforcement will we ease the burden on this country’s renters!
