In this article I plan on approaching rent controls initially listing the different types of controls with an outline. I will mainly be speaking in regard to Third-Generation controls as these are poster-boy of “rent-stabilisation”. In regards to this I will initially set out my opinion and then explore the real life evidence of its impact in Europe. At the end I shall discuss my conclusion.
First Generation: These rent controls will set rents to a fixed level and they shall remain unchanged over a long period of time (typically). The most clear example of this is the War Restrictions act introduced in 1914. This was to prevent people or an organisation from profiteering unfairly from the war.
Second Generation: This typically will reduce the level of increases allowed to rent. Often the allowed increases will be aligned with an economic factor such as inflation. Although the rents during tenancies are typically regulated more so.
Third Generation: Now, this is the one that’s the center of discussion. This means that the initial rent can be freely set however, rent increases within the the tenancy is restricted similar to second generation. This is often referred to as the preferred champion of “Rent-stabilisation”
I typically believe that increased regulation of any market leads to consequences that weren’t considered at the start. I also believe that free-markets incentivise the growth of the market as long as those who conduct in manipulative and unethical behaviour are seek out. But overall the market is stronger as the majority are ethical and look for win-win situations.
European Commission conducted a review on the increase regulation of the Private Rental Sector in 2014.
They found that in essence setting a simple limit to increases in rent and rent in general does not realise the full complexity of the economic impact that property is involved in. Additional tariffs & exemptions were introduced in regards to property type and many other factors which, led to the system becoming even more complex. The complexity of the system discourages new investors seeking to invest their money into an asset rather a bank that doesn’t offer interest that exceeds inflation (typically).
The complexity also leads to difficulty to execute a property investment to the new regulations whilst maintaining desirability for both the landlord & tenant.
Another consequence they found, is that properties are less likely to be invested to develop them further in quality. This leads to properties remaining in their current quality. There is no clear evidence suggest the quantity of poor properties increase. However, properties were found to remain in their current level of quality, stagnating growth of quality of living.
An unfortunate trait they found, was that landlords would charge rents initially high above market value (true rental market values were made difficult to discover without signing a tenancy. To explore this more please refer to the original article.). Trying to regulate this behaviour become increasingly difficult as in essence the relevant Government bodies had increased their workload massively.
That then brings us onto our next point. Administrations costs for this form of regulation is undoubtedly large. Considering our U.K government is removing Section 21 we are already facing increased strain on our court and admin systems.
There are a whole variety of unforeseen impacts on the labour forces. For example Scandinavia rent controls have in part resulted in massive distortions of the labour force and developing skills.
We have reached the end there are many more issues that can be found. Potentially Third-Generation controls is properly understood could maybe, at a push lead to some benefit to tenants. However, the evidence is substantial. If you want to disregard the evidence against this then that’s fine but you have to agree that the system is not properly understood. Many unforeseen consequences can occur and it is not a simple solution for a complex system!