We need rent controls to help solve London’s housing crisis

The words “rent control” are anathema to housing policy wonks and Westminster politicians. They react rather as a vampire presented with garlic and are reduced to babbling about the sacrosanct nature of the market.

But the truth is that London’s housing market is broken and trying to apply first year undergraduate economic analysis to it will not solve London’s housing crisis. Because London is in the middle of a housing crisis which touches almost everybody. Amongst other issues: there are 200.000 households defined as overcrowded:  the average house price in London has reached an all-time high of £514,000 and  average private rents will be over £1,600 a month by the time Boris Johnson steps down. These are the highest rent in the country. Too many Londoners are paying half their take-home pay in rent. But it is not just a crisis if you are renting or trying to buy. You yourself may be adequately housed, but if you have adult children, you know their chances of being able to buy in London are faint to non-existent. Private rentals indirectly affect social rents, generating political pressure to align the two.

Some people suggest that there is a market fix to all this, in simply increasing supply by building on the green belt or building garden cities. Neither is an immediate solution, not least because increasingly supply alone will not bring London’s housing prices down. There is an almost infinite supply of the super-wealthy willing to buy property in the centre of London, generating ripples of house price inflation month by month. It has forced middle class professionals further and further out and now record numbers of Londoners in their thirties are leaving London altogether despairing of ever being able to afford to buy a home.

And the housing crisis is not just a problem for individuals, it is damaging for London’s economy. For instance the NHS in London has the highest vacancy rate and turnover in the country. And this is directly attributable to housing costs. Because health service workers increasingly have to move out of the capital to afford to buy somewhere, the NHS in London is overly dependent on expensive agency staff. Across the public sector and much of the private sector the story is the same, London housing costs make it increasingly difficult to recruit and retain staff. Furthermore, the amount of money that the average Londoner has to pay on rent, means they have less money to spend on goods and services as people’s disposable income is eaten away by housing costs. This translates to fewer jobs, lower tax receipts and a higher benefits bill.

The fundamental answer is to allow councils to borrow to build. But I believe that rent controls also have a role to play.  One method is to allow landlords to charge more, but with a financial penalty for doing so. That money would then be ploughed into a London Housing Corporation to help fund genuinely affordable housing. It would work as follows:

1. Base the rent control on Council Tax bands. Cap rents at 50% per month of the annual council tax band for the home. Croydon for example has a band A (pretty much a bedsit) band of £780. The rent cap would therefore be £390 per month.
2. Charging more rent. Landlords should be free to charge more rent but this should be subject to a 50% surcharge. This surcharge should be paid to the GLA into a ring-fenced housing fund that is invested in house building and potentially used to provide temporary respite to owner occupiers experiencing negative equity, a fund to soften the blow of the inevitable bursting of the housing bubble.
3. Taking an example of a luxury apartment in Chelsea, the very top end of the rental market, a 4-bed penthouse might be rented for £32,000 per month, but the band H council tax is £1,536. This would place the rent at £31,232 above the rent cap, therefore attracting a surcharge payable to the GLA of £15,616 per month. While this is about the largest such surcharge that could exist, there is a balance where the landlord can set the rent wherever they like but if they breach the cap, they start to fund the building of affordable homes. The more they breach at the luxury end, the more they are funding affordable homes at the lowest end.
4. The rent cap becomes accountable. Landlords would be free to lobby government for more Council Tax bands or to lobby councils for higher Council Tax rates and it would be up to politicians to decide these things and to be accountable publicly and electorally for those decisions.
5. There should be punitive financial and criminal sanctions on landlords who seek to circumvent these rent controls.

For housing policy wonks who have only known unregulated rents since the 1980s and the buy-to-let boom since the late 1990s, these proposals may seem extreme and hard for the market to swallow. However, the market is too hot and land prices are too high. Current political proposals fail to address the affordability problem for tenants over the coming decade or more, while in-tenancy caps on rent rises do not reduce rent levels or the price of land.

By the next census in 2021, there will be 49 parliamentary seats in London that are renter majority (in terms of both social and private tenants) Renter households will outnumber homeowners by 500,000 homes. Politicians can no longer provide housing solutions that only benefit homeowners; if they do, they will become increasingly irrelevant to their electorates – in London in particular – and condemn millions of people to ongoing exploitation.

The potential consequences of a failure to act have already been outlined above – the collapse of the London economy, and its decline as a global economic centre.

Limiting rents already has widespread support amongst the general London population and has been shown to be compatible with a lively thriving rented sector in cities like Frankfurt, Berlin and Paris. The scale of the London housing crisis now requires bold and radical action, and I believe that rent controls are an unavoidable part of that.