Rent controls in London would backfire, like they always do
“Rent controls in London could bring ‘immense economic costs’ and increase ‘social segregation’, finds new report”
Courtesy of the IEA
Calls from politicians, including the Mayor of London, to introduce rent caps are misguided and would impose immense economic and social costs on the capital, according to a new report from Swedish think tank Timbro, part of the IEA’s EPICENTER network.
‘Rent Controls: How they damage the housing market, the economy and society’, by EPICENTER and Timbro, argues that implementing rent controls would fail to achieve its primary policy aim of egalitarian economic outcomes and, in practice, could worsen housing shortages. This would likely have a negative impact for London’s businesses and their ability to recruit, as has been the case in Stockholm, where one in five companies report that housing shortages have made recruitment more difficult.
Rent controls implemented in the Swedish capital have channelled excess demand into the subletting market, pushing up rents for secondary tenants. In Stockholm, these tenants pay rents twice as high as the primary tenants – a cost often borne by those who can least afford it.
Rent controls also contribute to social segregation in Sweden. New renters – including young people and immigrants – are forced into less desirable areas because primary renters, usually wealthier native Swedes, are incentivised to keep their properties within families and social circles rather than allowing them to be reallocated to those on the waiting list.
The introduction of rent controls, even in a mild or watered-down form, is likely to snowball. Sweden’s controls were introduced in 1947 as a temporary measure and yet remain in effect today, despite widespread criticism from academics, think tanks, and the OECD.
The report outlines 9 main lessons from Sweden for cities considering rent controls:
- Rent controls have caused housing shortages and long waiting lists for primary tenancies, with an average waiting time of 11 years in Stockholm
- Rent controls have channelled excess demand precipitated by low primary rents into the subletting market, pushing up rents for secondary tenants – who on average pay twice as much for their rent.
- One in five young tenants admit renting on the black market in Sweden – these illegal contracts have an estimated annual value of 110 million euros.
- Rent controls have caused an inefficient use of the existing stock of apartments, as tenants are unwilling to give up contracts even when the apartments become unsuitable in size, or location.
- For companies, the regulation has led to recruitment difficulties as a fifth of them reported the inability to recruit talent because of the lack of housing.
- Rent controls have caused social segregation between market insiders, who are more likely to be highly educated individuals with good connections, and outsiders, often immigrants or young people.
- The system fails to achieve its primary policy aim: egalitarian economic outcomes. Large apartments in the best areas belonging to highly-educated and well connected individuals are subsidies the most.
- Regulating rents skews incentives, which has led to a rapid conversion of rental apartments into co-op flats
- Rent controls have led to sub-optimally high standards of housing.
Commenting on the report, Adam Bartha, Director of EPICENTER, said:
“As more European capitals are introducing rent controls – from Paris to Berlin – it is time to assess these policies by their outcomes and not just their intentions.
“Whereas the intention of affordable rents, social dynamism, and thriving neighbourhoods are undoubtedly laudable goals, the actual outcomes of rent controls have been disastrous. Sweden’s experiment with rent control since 1947 resulted in increased social segregation, violence erupting as a result of disagreements in its massive black market for subletting, and companies unable to recruit talent due to a lack of housing.
“Rent controls have been tried, tested and they failed. Growing global cities should instead look at measures that would ease new construction or the expansion of existing housing stock by scrapping unnecessary burdens on developers.”