Beyond corona: the pros and cons of rent controls

(Image courtesy: The All-Nite Images)

As corona hits people’s incomes, tenants in high-rent areas are among the first to suffer – and, in some countries, the last to receive support. But the virus has only brought to light a long-standing problem: Pablo Jiménez Arandia asks whether rent controls can provide the answer

As incomes collapse in the nations hit by coronavirus, governments are scrambling to respond – spending billions to prop up economies that have been brought to a sudden halt. But in some countries, ministers have been criticised for appearing to prioritise protecting businesses and property owners over freelancers and renters.

In the UK, for example, chancellor Rishi Sunak this week announced that homeowners would receive a three-month mortgage holiday, while businesses can claim 80% of their staff’s salaries up to a maximum of £2500 (US$2870) per month. But the self-employed must make do with a strengthened sickness benefit capped at about £400 (US$470) per month, while support for renters ends at a block on new evictions – despite the fact that their landlords can access the mortgage payments holiday.

This discrepancy is no surprise to the self-employed or renters – for while both groups have expanded rapidly over recent years, most UK departments have been slow to adjust policymaking or service delivery around their needs. And over recent years, the inability of policy to keep pace with economic changes has started to take a toll.

Spiralling house prices, for example, have pushed ever more people into private rented accommodation – where they enrich landlords rather than buying their own property, exacerbating inequality. And as rents rise, pushing relatively low-paid public sector staff out of city centres, public bodies struggle to recruit. The inner city weightings paid to many public servants working in high-rent areas represent a huge indirect transfer of public funds to buy-to-led landlords and the transport sector.

The arrival of corona represents a major test of housing affordability: in areas of high rental values, millions of people are now building up vast arrears. But it is simply bringing to light a problem that has been growing for some time. And while the UK has been slow to react, in recent years other governments have tested many ways to keep a lid on rising rents – trying to ensure that keyworkers and the low-paid can find decent housing along with professionals and high-earners.

The newly-elected Spanish Government, for example, is preparing a benchmark index so that the city councils of cities such as the Spanish capital and Barcelona, ​​where rents have uninterruptedly raised in recent years, can use it to apply price restrictions in areas where pressure on the rental market is higher. Other countries have introduced frameworks that, for example, encourage a negotiation between tenant and landlord; limit price increases to a certain level above a previously-defined value; or directly freeze prices in areas of high inflationary pressure.

The effects of these interventions are, the evidence shows, very variable. Here we examine a few of them – exploring what has worked, what hasn’t, and what can be learned from those experiences.

Berlin: coping with newfound popularity

German capital Berlin, where eight out of ten inhabitants rent their home, was until recently one of the most affordable European cities for tenants. But following reunification and the city centre’s reconstruction, rents spiked – doubling over a decade.

From the 1970s to the 2000s, Germany’s voluntary system of indexed prices (Mietspiegel) kept rents affordable, explains Santiago Nasarre Aznar, director of the UNESCO Housing Chair at Spanish university Rovira i Virgili. This model gave tenants and landlords a reliable and precise way to progressively update rents while avoiding abusive price increases.

However, as new money and residents flocked to the capital, the voluntary system broke down. In 2015, the federal government moved to cap rent increases – introducing a price indexing system that calculated average rents for particular kinds of properties in local areas, and limiting like-for-like rents to 10% above those figures.

This new regulation – which includes several exceptions that can be claimed by owners – has proven effective in the neighbourhoods where rents have risen by 4% and above in previous years, according to a report commissioned by the government from the German Institute of Economic Research (DIW). However, prices in other cities and in some areas of the German capital have continued to rise. Recently, Berlin’s local authority has begun freezing the prices of apartments in buildings built before 2014 for the next five years.

Combating speculative investors

Aznar, who has worked as the housing advisor for several governments, is not a fan of the Berlin approach. “Everything mandatory in housing matters usually fails,” he says. “We are in a free market system in which the parties [tenant and owner] have to agree on the conditions”. Rigid systems like Berlin’s, he argues, encourage landlords to try to evade controls – creating rental black markets in which the most vulnerable tenants are unprotected.

However, Max Gigling, consultant in applied social research and the author of several reports on innovative housing policies, ​​argues that Germany’s 2015 law has managed to curb speculative, short-term investments. By slowing the rise in rents, he says, it has taken some of the heat out of the housing market, discouraging would-be buyers more interested in realising a capital gain than in providing housing over the long term. Gigling adds that policymakers should be careful in designing ‘exception’ systems that give landlords opportunities to game the system: Germany’s system, for example, allows big rent increases after an apartment is renovated – incentivising landlords to upgrade their properties, and thus whittling away the affordable end of the market.

Economist Claus Michelsen, one of the authors of the DIW study, suggests that an intermediate solution may lie in cutting the permitted 10% above-average rental figure to 7%, or in applying the caps only to areas with more significant price increases.

San Francisco: toughening up

Though the USA is seen as having one of the world’s most free market economies, many large cities have regulated rental prices for decades. In San Francisco, for example, rent rises in buildings with five or more apartments have been tied to the consumer price index (CPI) since 1979.

In 1994, a referendum extended this control to smaller buildings built before 1980. A recent study by Stanford University, analysing the effects of this extension, concluded in the short term rents were contained. Consequently many local people – especially the elderly and racial minorities – remained in their homes and were not forced to leave the neighbourhood.

However, in the long term many landlords chose to withdraw their properties from the rental market, dedicating them to private use or to the construction of high-end housing. In the words of Rebecca Diamond, lead author of the report, this dynamic encouraged the arrival of new neighbours with high purchasing power and contributed to the “gentrification of San Francisco” and the “widening income inequality of the city”.

Diamond and his team suggest that an effective alternative policy in the Californian city would be to award public subsidies or tax benefits to tenants who struggle to make their rent payments. But Giggling points out an obvious problem with this approach: that the taxpayer can end up paying ever greater rent subsidies to private landlords, helping to further inflate rental values and exacerbating the very problem that rent controls were designed to address. And this represents a trap for the public finances: the UK government spends some £22bn (US$25bn) annually on housing benefit, with spending having doubled since the early 2000s due to a decline in social housing provision and rising private rents.

New York: mixed measures

In New York, home of some of the world’s highest rents, authorities have tried to stop uncontrolled rent inflation for almost a century by taking different kinds of actions. Today a small portion of its housing supply has strict limitations on rent increases, while around 50% of the market is “stabilised” by authorities. This system has been reinforced in recent years with successive moratoriums on rising prices in certain areas of the city. Simultaneously, different administrations have tried to complement these policies with increased spending on public housing.

While it is not perfect, the New York model has demonstrated its effectiveness as a social policy. A study by the Columbia Business School published in 2019 indicates that rent controls in the city have helped reduce housing inequality, particularly benefiting low-income families. These measures “can be a valuable policy tool and increase the welfare of a city”, they conclude. Lorcan Sirr, housing studies professor at the Dublin Institute of Technology, notes that holding down rents also tends to boost local economic activity, as tenants have more disposable income to spend in shops and invest in education or business ventures.

Stockholm: supply shortages

However, there are also examples of cities where several generations of rent controls are showing troubling effects. Stockholm, the Swedish capital, has maintained strict rent regulation since the first half of the 20th century. Today prices are calculated based on a ‘utility value’price index and rents are among the cheapest in Europe, despite the country’s high living standards.

However, constraining landlord’s returns has kept the rental market relatively small, and high demand makes it almost impossible to secure tenancies: the waiting list can reach 20 years. So a rentals black market has developed, and

Sweden is currently debating whether the time has come to make these controls more flexible.

Where strong city economies attract workers from other regions, says Aznar, rent controls are likely to exacerbate housing shortages. In the long term, he argues, governments should adjust wider economic policies to spread growth beyond overheated urban economies: “To have long-term effect, housing policies must be accompanied by a harmonized policy of territorial cohesion”, he says, noting that price pressures on Spain’s city rental markets reflect the lack of investment and depopulation affecting many rural areas.

Relieve the pressure, build local tools

Governments can also reduce the pressure for rent controls by building more social and keyworker housing. Sirr points out that in areas where the social housing stock is declining, “the use of the private rental sector as de facto social housing” has constricted “rental accommodation for non-social housing tenants” – pushing up rents. An increased supply of public housing can alleviate the need for rental control measures in the most affected cities, he says.

Where governments do back rent controls, argues Sirr, the key is to allow city administrations to create systems that meet their unique needs. “One-size-fits-all policies tend to be troublesome as issues with rent and affordability can vary widely across a country”, he says. As Katrin Lompscher, senator for urban development and housing in Berlin, said recently in an interview with Bloomberg: “The politics of housing and urban planning are city-specific. It’s good to look around, to the right and the left – but then we have to decide what’s right for Berlin”. So this is an issue for city administrations to decide – but national governments have an important role to play in giving city councils the powers required to meet local needs.

And when those powers are used, it’s important to find a balance between the interests of the tenants and owners – protecting affordability for renters, while offering landlords sufficient margins to attract investment into the rental market. “Rather than being seen as a battle between tenants and lessors, this must be seen as a ship we are all in,” concludes Aznar.