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Local and mayoral elections do not tend to capture the same degree of interest as their national counterparts. However, Sadiq Khan’s re-election as London Mayor should be of keen interest to any landlord operating properties in the capital. Khan’s flagship housing policies include seeking to introduce an ‘overhaul of legal protections for renters and for London to have the powers to establish a system of private-sector rent control’.
What Are Rent Controls?
Rent controls are a series of government regulations which seek to limit the amount a landlord can let their property for. The policies themselves can come in several different forms. Regulations might include:
- Capping annual rental increases so that they do not increase beyond a given figure.
- Preventing landlords from increasing rent during a tenancy.
- Creating a rent ceiling or upper limit which specifies the maximum amount the certain properties can be let for.
Rent controls are not a new phenomenon. The private rental market in the UK was regulated for most of the 20th century, with the last regulations only being abolished in 1989. Abroad, Paris caps rents such that they cannot be 20% more than an areas average, whilst in 2019-20 Berlin introduced plans to freeze rents for five years.
The Berlin Experience
In February 2020, Berlin introduced a five-year rent cap for all apartments built prior to 2014. The first part of this scheme froze rents at their June 2019 level. The second element of the scheme obliged landlords to reduce rents which were 20% more than a centrally determined cap list. Additionally, tenants residing in properties built before 2014 could force landlords to reduce rents defined as ‘excessive’.
Rent controls are usually introduced with the best intentions. However, as has been the case with Berlin, they can come with unintended consequences. The Ifo Institute, an economic research group, highlight how Berlin’s rent control policies have split the market in two: a larger regulated one and a smaller unregulated one consisting of newer properties. Unsurprisingly, rents in the regulated market fell, whilst rents in the newer unregulated market skyrocketed. Equally, property prices for older apartments fell whilst their newer counterparts outperformed.
The most important finding by the Ifo Institute was the effect of rent controls on the supply of properties. The number of regulated properties listed to rent has more than halved since 2017. Those tenants benefiting from reduced rents are less inclined to move and, when they do, landlords have tended to sell the properties rather than re-let them. This has divided tenants into two groups; those that were fortunate enough to already reside in an older property and prospective tenants that are now forced to pay more to move into the limited supply of new apartments.
So why create two markets? Stringent rent controls discourage developers from building new properties. Restricted rent reduces the returns for landlords. If it is uneconomical to let properties, landlords are unlikely to buy them in the first place. This lowers the price of both old and new properties, which reduces the incentive of building additional new properties in the area.
In any case, Germany’s constitutional court overturned Berlin’s rental controls in April 2021. The court ruled that the city’s government did not have the authority to enact such laws.
Does London Need Rent Controls?
London is synonymous with high rents. Prior to the pandemic, private renters in London spent 42% of their net household income on rent. Average monthly rents in the capital rose 35% between 2011 and 2018. That being said, high rents tend to be a by-product of high property prices. A typical one-bedroom flat in London is more than the cost of the average three-bedroom home in the rest of England.
Interestingly, Khan’s argument for rent controls comes at a time of declining real rents in London. Analysis by the National Residential Landlords Association (NRLA) highlights that private rents have fallen nearly 10 percent in real terms since Khan took office. Accounting for inflation, rents have fallen throughout Khans first term in office.
This is before the question of Coronavirus. Pandemic-led shifts in people’s preference may lead to a long-term reduction in demand for inner-city properties. The increasing number of roles which can be fulfilled when working from home may reduce the need for so many people to congregate around London. Should these changes prove to persist into the long-term, they may provide a further point of resistance, preventing London’s rents from rising in line with inflation.
Should Landlords in London Worry?
Rental controls in the capital are unlikely to be implemented any time soon. Christine Whitehead, Professor in Housing Economics at the London School of Economics, states that the Greater London Authority does not have the powers to introduce new rent and security regulations. Such policy changes would require national legislation.
To introduce rental controls, Khan would require the support of the Commons. Support which is unlikely to be forthcoming while the Conservatives remain in power. At the moment, the Conservatives key concern is homeowners and increasing the number of them. Whilst they back the introduction of the Renters Reform Bill and plan to remove Section 21 Evictions, their focus is on building more new homes and providing the funds for people to purchase them.
For the moment at least, landlords in London can ease their concerns. For those who are bold of heart, London’s recent underperformance compared to the rest of the country may even prove to be a unique buying opportunity.
Sources
Dolls, M., Fuest, C., Neumeier, F. and Stöhlker, D., 2021. One Year of the Rent Cap: How Has the Berlin Real Estate Market Developed?. Ifo Institute for Economic Research, [Online]. 74, 26-32. Available at: https://www.ifo.de/en/publikationen/2021/article-journal/ein-jahr-mietendeckel
London School of Economics Blog. 2019. Rent controls in London? What is being suggested is not new – indeed it looks pretty mainstream. [ONLINE] Available at: https://blogs.lse.ac.uk/politicsandpolicy/rent-controls-in-london/.
National Residential Landlords Association (NRLA). 2021. Rent controls in London – follow the evidence. Please. [ONLINE] Available at: https://www.nrla.org.uk/research/deep-insight/rent-controls-London-2021.
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