The UK Housing Crisis and Forms of Market-Based Housing Provision

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The UK housing crisis is an intensely debated issue which has been at the forefront of many political, academic, and media debates. It can be attributed to over three decades of neoliberal housing policy, the ramifications of which are more far reaching than anyone could expect. Combining both orthodox and economic definitions, rent is defined as any income derived from the “ownership, possession, or control of scarce assets and under conditions of limited or no competition”. 

Thus, rent regulation is a general term that refers to any policy with an aim to make rent more affordable and rent controls come in two forms: first-generation and second generation. First-generation rent controls act as a complete freeze on rents, strictly limiting the increase. Whereas second-generation rent controls are more varied and complex protecting tenants from excessive rent increases by creating a schedule for reasonable and gradual rent increases, while ensuring that landlords receive a reasonable return on their investment. 

This essay will critically discuss whether rent controls, in particular, second-generation rent controls can help to address the UK housing crisis. Firstly I will discuss the arguments against rent controls, followed by an analysis of the myths behind them and arguing that second-generation rent controls would be effective in addressing the UK housing crisis.

Since 1979 successive UK governments have pursued a continuous neoliberal ‘project’ towards the wider housing system aimed at rolling back citizen’s protections from market forces and rolling out new forms of market-based housing provision. Originally starting with Margaret Thatcher’s Conservative government, where free-market capitalism was cherished and the welfare state was deemed too big to allow freedom. In order to promote privatisation, the ‘Right to Buy’ scheme was established, forcing local authorities to sell council houses to tenants with the ability to buy at 50% market value. 

This aimed to expand home ownership at the expense of the public housing stock, with the added contention of councils suffering huge spending cuts and an inability to spend the money earnt from selling public housing to provide more. This is one example of past and current government’s making the UK housing crisis worse, through introducing policies that increase overall house prices without taking steps to increase supply of public housing. 

Consequences of neoliberal housing policy go much further: predictions of a UK housing shortage of 1.2 million homes by 2025, resulting in homelessness growth, over five million people on social housing waiting lists and increasing landlord repossession claims for properties exacerbates the supply problem. In addition, a switch from ‘social rented housing’ to housing associations puts increases pressure on rents due to commercial borrowing. Since 1979, there has been a net loss of 1.9 million social rented homes that once represented 31.4% of housing supply to 18.1% today. Moreover, debt levels in the PRS rose, closely linked to the rise in those unable to keep up with rent payments, causing eviction levels to reach 170 a day across the UK.

The UK’s large rentier economy (where income is unearned), has grown a malign presence and is associated with neoliberal urbanism that captures the mechanisms through which city space is continuously reorganised and re-regulated in the interests of global financial capital. Despite economic benefits generated, the UK needs to re-evaluate their neoliberal housing policy to become more efficient for those in need. Piketty argues that capitalism and not rent is the problem due to landlord’s profits exceeding the rates of economic growth and tenant income. 

As a result, the average tenant in England spends almost 50% of their take-home pay on rent with an extortionate rate of over 70% in London (Osborne, 2015). Rent regulations assist in situations of imbalance in the rental market, that can threaten deeply held social priorities like maintaining neighbourhood stability and preventing landlords from profiting excessively from passive ownership of land. A clear problem has emerged in UK housing sector; thus, this essay will go on to discuss whether second generation rent controls are an effective solution.

The economic argument regarding rent controls has long frowned against their implementation, with Navarro (1985) stating “the economic profession has reached a rare consensus: Rent Control creates many more problems than it solves” (90). One argument against rent controls is the drastic impact on supply, with basic economics showing that a rent ceiling would create a shortage of rental properties. A lower fixed rent price would increase the demand for rental housing causing a reduction of properties offered for rent . As a result, the initial scarce supply problem would be exacerbated leading to an increase of non-regulated rental prices and would further worsen the UK housing crisis. 

The Institute of Economic Affairs (IEA) develops the supply and demand argument further suggesting the problem is primarily related to excess demand and insufficient supply; therefore, the solution is to increase supply by reducing government intervention in the housing market to allow free market forces to attain market equilibrium. The 1994 San Francisco rent control expansion exemplifies this, and saw landlords convert rental properties to suit higher‐income families to avoid regulation. Accompanied with a fall in new rental housing supply, underlying market rents increased by over 5% . This provides a strong argument to suggest rent controls in the UK would negatively impact the overall housing crisis by increasing non-regulated housing rents, restricting the supply, and most people never getting access to rent-controlled flats (Edwards, 2015).

Another argument against rent controls is that of efficiency. The price fixing nature of rent control causes interference with the effectiveness of the market economy. Therefore, tenants would block others from gaining a foothold in the rental property market, as well as disincentivizing them to take employment elsewhere because of not wanting to lose their low-cost housing thus disrupting the dynamic labour market. The IEA highlights that under a rent-controlled housing market there is less of an incentive for families to reduce accommodation demands, further disrupting the market efficiency. 

Due to asymmetric information between agents in rent control systems, landlords become choosier and tenants may stay in properties for longer than necessary. In New York, those with rent controlled apartments tend to have higher median incomes than market-rate renters, indicating that rent control does not limit a households with better resources to find rent-controlled housing and so becomes counter-productive.

However, in markets free of regulation this allows both tenants and landlords to overcome the asymmetric information problem. The freedom of choice in a free market (one without rent controls) would allow tenants and landlords to overcome this and reach not only efficiency but rent can become lower across-the-board than what occurs in rent control systems. Therefore, evidence further suggests that greater efficiency in the market can be achieved without rent controls and so their implementation would be detrimental to the UK housing crisis.

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The final argument against rent controls being able to address the UK housing crisis is a decline in quality of rental properties. Rent controls can negatively affect the standard of homes on offer, due to the landlord’s inability to increase rents and so dis-incentivises or causes an insufficient amount of funds to maintain properties, even if they wanted to. 

Despite tenants with rent‐controlled apartments often benefitting financially, this can become a major trade-off with properties falling into disrepair until the market price for the unit reflects the rent‐controlled price. Beyond a deteriorating property posing as a serious threat to the tenant’s health, this could purposefully act as a stimulus for the tenant to leave the property. This structural decline is heightened if the rent controls are expected to be long-lasting and sitting tenants are incentivised to remain in occupancy. 

In response to this, there have been suggestions that in order to counteract this, the tenant should be able to withhold rent to cover maintenance costs or over ways to penalize the landlords. However, this would only heighten tensions between landlords and tenants, thus deterring property owners away from this rental market. Therefore, the deterioration of property quality is a major side effect of rent control and can further attribute to the UK housing crisis.

Despite the evidence against rent controls being widely publicised, some key counter-arguments must be addressed. Agnotology (or the production of ignorance) can be beneficial in understanding the housing question, as it has been used to trace governments beneficial use of free market think tanks. This the process of justifying what is built in order to protect the efficiency of the market and desire to not upset these forces, therefore ignoring knowledge that should be present but isn’t. 

Exemplified by Gordon Brown’s referral to an IEA study to suggest public opinion believes rent controls are the causation of the current UK housing crisis. Also, the majority of the arguments against rent control are based on economic theory, therefore suggestions are not necessarily looking for the most socially responsible outcome. 

For example, Basu and Emerson note that rent controls lead to a pareto sub-optimal outcome but an economy without would optimize resource allocation so that the one agent’s welfare cannot be raised without lowering the welfare of another. However, pareto efficiency is considered a minimal notion of efficiency that does not lead to a socially desirable distribution of resource and does not take into account equality or the overall well-being of society. Therefore, I argue that specifically second generation rent controls do raise the overall well-being of society.

The UK housing crisis has resulted in existing properties having poor quality thus rent control can only improve it, denying the myth that quality will worsen. Statistics demonstrate this: one third of tenants living in the PRS have structurally inadequate housing; 10% of renters claim their health has been compromised due to inadequate conditions and landlords not dealing with repairs; and 9% of PRS parents said their children’s health has been affected. Consequently, the case of the Netherlands incorporating second generation rent controls to encourage regular maintenance becomes an appropriate solution. 

They have enabled this by allowing annual rent increases that are conditional upon the standard of the property they are leasing and a clearly defined law stating tenants pay for minor, inexpensive repairs and any major maintenance by the landlord. Thus, it is absurd to say that introducing rent regulation would worsen the quality problem, and so correctly implemented second generation rent control would result is a rental housing stock in far better shape than countries without rent control.

Furthermore, arguing that rent control will reduce housing supply is insufficient in preventing the implementation of rent control. Implying that people only desire to earn in a situation of maximum profitability, and that any regulation hampering this activity will create disinvestment in the sector is simply not the case. The argument is based on a false notion of a “perfectly competitive” market where landlords compete to produce homogeneous housing units, with no externalities, where agents possess perfect information. 

As Basu and Emerson (2000) state, we operate in an imperfectly competitive marketplace with asymmetric information. Therefore, an equally valid economic theory is that in tight rental markets (where developers and landlords have market power), rent controls can increase supply: if housing developers cannot generate extra profit through rent increases, it creates incentives to build more affordable units. 

However, if housing supply does decrease then a suitable complementary policy should be to increase the housing stock. Germany’s approach demonstrates their PRS, with rents and other variables suitably regulated, can be profitable to landlords as well as relatively free of tenant exploitation. Alongside this, long-term contracts which are common in Germany can be also beneficial. These are now trialled in Scotland, with the provision that landlords will be allowed to raise rent only once a year and that tenants can dispute those rises at a tribunal. Therefore, second generation rent control can be a beneficial way to help address the UK housing crisis.

Finally, in relation to the efficiency argument, it relies upon the assumption that the low-income consumer has the ability to ‘rationally choose’ where to live without any financial or social constraints. This is never the case. The Focus E15 group campaigned for the housing and urban rights of ordinary Londoners and their desire to stay in uber-gentrified areas with rapidly rising rent prices. The low-income Londoners that Focus E15 support, are squeezed into smaller and smaller units just in order to stay in the same location. Therefore, this illustrates low-income earners inability to move due to a necessity to stay near their support network and their financial situation. 

So, if this occurs with high rents, introducing rent control wouldn’t impact this factor. Furthermore, the Netherlands implemented quotas in social housing to prevent a misallocation of rent controlled properties. Each year, social housing associations must have 80% of vacant social housing occupied with an income less than €36,798 and 10% occupied with an income between €36.798 and €41.056. This allows for an allocation of the housing stock to those most in need. Therefore, arguably rent controls can in fact increase efficiency and benefit those who need it most.

To conclude, this essay has argued that second generation rent controls are able to contribute in addressing the UK housing crisis. I have argued that three key arguments against rent control are flawed and avoid key practical evidence. Introducing this policy should counteract the growing policy-outcome gap between state ambitions and results for the public, that has resulted from policymakers using market-friendly solutions that has only entrenched housing inequalities. The recent COVID-19 response provides protection for tenants from eviction and poorly maintained accommodation, illustrating the ability to protect those most vulnerable in the PRS. 

The potential for a situation akin to 2008, can start a paradigm shift in UK housing policy with focus on long-term benefits to economic, social and public health related objectives. Despite advocating the implementation of second generation rent controls, must be clear that they alone cannot fully solve the housing crisis. However, when they are paired with tenant security measures such as “just cause evictions”, implemented without loopholes such as “vacancy decontrol”, and with a vigorous effort to improve housing supply, the long term impacts would be phenomenal. The UK housing crisis is at breaking point, and the time for correctly implemented second generation rent controls has never been more of a necessity.  

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