The West is facing an unprecedented rent crisis
Property prices and rental values are skyrocketing
Energy bills are driving up the cost of living. But property prices are also rising fast — which might be good news for owners, but it’s a disaster for tenants. Data from the Rightmove Rental Price Tracker shows that private rents in Britain are rising “at the fastest rate on record”. Outside London, they are nearly 10% higher than last year.
Rental values are spiking in America too. According to Wolf Richter’s Wolf Street blog, “rents for single-family houses and condos on the rental market exploded by 12% year-over-year in the US.”
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Given the impact of Covid on household finances there’s a question as to how tenants are managing to pay so much extra. Part of the answer is that increasing numbers of them aren’t. In a separate post, Richter notes that the percentage of tenants making rental payments on time has deteriorated — from nearly 96% just before the pandemic to 92% now.
The chart also records the impact of the $1,400 stimulus cheques sent out last year by the American government to millions of qualifying individuals. It appears that the ‘free’ money helped a higher proportion of tenants to make rent. However, because this was a one-off payment, the effect was temporary.
This is just one illustration of a wider problem faced by governments as they’ve tried to revive their economies. Whether it’s a short-term measure like a stimulus cheque or a long-term investment in infrastructure, a significant proportion of any boost to growth will be captured by landlords in the form of higher rents.
Given constraints on new supply — and the sheer hassle of moving — rental values tend to be determined by the point at which they absolutely force people out of their homes, or businesses out of their premises. Throughout the pandemic, governments have tried to help cash-strapped households and businesses, but in the process they’ve increased the level of rent that the market can bear.
Is there anything that governments can do? Yes, many things. They can increase the supply of new homes and workplaces through planning reforms. They can provide social alternatives to the private rented sector. Rent controls are another possibility.
The simplest option, though, may be to hit the landlords with higher taxes. For a start, property is easy to tax because it can’t be hidden. Furthermore, with the market already paying what it can bear, the cost can’t be passed on to tenants. Finally, while most taxes disincentivise supply, what landlords deal in — i.e. land — continues to exist no matter how hard you tax it.
No to taxing landlords! This will not help with the housing crisis. It will only hinder the housing crisis, by disincentivising supply. Land exists no matter how hard you tax it, but land is not and never was the problem. Housing is so much more than ‘land’. It is ‘land’ + ‘build’ + ‘services’ + ‘proximity to economic opportunities’.
When you tax property you disincentivise this kind of investment. This will reduce supply further, pushing up rents to the level where the taxes are effectively priced in. The tenants will end up paying for the tax AS WELL AS for the supply crunch.
There are three issues: the first has been identified – it is supply shortage. I will say once more: when you shut down the economy for a year and a half, you have supply shortages, resulting in rising prices.
This can be addressed by (1) opening up the economy and NEVER EVER shutting it down again like we stupidly did; (2) reducing build costs and helping councils provide services for new units / subsidies to renovate.
The second issue is income inequality. The population in the UK is not outgrowing the supply of housing by very much. But there are more empty-nester boomers / second homes than every before. There are questions of intergenerational fairness, as well as more basic questions of how resources are distributed between sectors and regions.
Finally, in the UK context, the ‘housing crisis’ has always been as much a ‘regional balance’ crisis as anything else. I remember for fun a few years ago finding a two-up two-down for sale in Fulham (West London). It was built on the same design as a street in Middlesboro (North East England), in which a number of houses were up for sale. Can’t remember the exact sales price, but you could have purchased the entire street for the price of the (exact same) single house in London.
This suggests the real problem was regional balance, something England in particular has failed to address for far too long.
I just made the same point – though you managed to do it rather more succinctly!
“Rent controls are another possibility.”
Frankly, anyone who thinks Rent Control is the answer to the housing problem doesn’t understand the question.
A few years ago Harvard produced a research paper surveying economists around the globe to see if there were any areas on which there was almost universal consensus – …. Guess what one, single issue topped the list? …… yup …. The ineffectiveness of Rent Control.
Fully 93% agreed with the statement that: “A ceiling on rents reduces the quantity and quality of housing available.”
Swedish economist Assar Lindbeck, an expert (and also a Socialist who you would think fellow travellers in the Labour Party might just listen to) spelled it out even more starkly – “Next to bombing, Rent Controls seem to be the most efficient technique we know for destroying cities”.
All Rent Controls do is reduce the availability of places to rent. Promising to solve the housing problem with rent controls is a cynical easy-fix announcement that makes for a good soundbite for the news but it completely flies in the face of experience and analysis. Corbyn backed the idea for a while, but even he was eventually disabused of the notion by wiser heads.
The sight of starry-eyed former Corbyn supporters (hopefully now chastened) applauding Sadiq Khan as he proposed policies that have been demonstrated not to work shows how the cult of personality sadly trumps more sensible, pragmatic and workable solutions.
Rent control directly incentivizes fewer new builds and existing buildings will not be maintained. Do we need to see more appalling tragedies like Grenfell to make that point?
If such a daft policy were to be carried through – what level should rent controls be set at? What would be the sense of setting the rent control level above the market price? None. If you set it below market price that leads to a shortage.
You know those Supply and Demand graphs you find at the front of any and every Economics books – from a “Beginner’s Guide” through to the work of Nobel laureates? They’re there for a reason.
Supply and demand is not merely a whim, that can be ignored in favour of some more ideologically appealing argument. It works. It describes the realities of the situation and is the foundation and fundamental principle of economics.
If you tamper with it, seek to control it or otherwise get in the way of it then there will be a downside. Artificial reduction in the price of something will cause demand to rise, supply will fall, and there will be a shortage.
The market price of something is the market price. If you wish to reduce that price then you must either lessen the demand or increase supply.
Any sensible economist, politician or just anyone at all acquainted with how things actually work could tell you that if you wish to see lower house prices/rents then you have two obvious options: you’d better build more houses for people to buy/rent or reduce the number of people looking to buy/rent them.
Of course, some Labour supporters will still have faith that Mr Khan and his team might stumble across a rent control level which doesn’t cause either shortage and decay, nor a surplus, but that magic formula is already well known – just known by another name, – it’s called “The Market Price”.
Well right now when I see the appalling decaying conditions of rental accommodation, seems to me that the market is not inducing landlords in reinvesting part of their profits in maintenance but maximising their profit on a short term. This is reminiscent of the tenements era which was induced by the same mentality, desperate people will always need accommodation and go for what comes as a matter of survival even if the state of the property is appalling.
If I take Dublin where rents are rocketing most of the new developments are pre bought by investment funds ( the new landlords of Dickens ) and they will probably resale the accommodations on a piecemeal basis in 15 years when the latter will need to engage in serious maintenance.
Can one speak of a market in such circumstances ? Not only it prevents younger generations of becoming owners at reasonable prices but the level of rents is dictated by funds ( who are foreign) who can afford to purchase these developments at the expense of the local population . Where is the market in such circumstances? The developers are the winners in these circumstances.
Politicians and the EU express their fair of the Googles of this world but do not pipe a word when it comes to the intervention of these funds on the non commercial property market or the role of developers in this problem.
While I profoundly dislike state intervention I today have to concede that temporary rent control is not to be disregarded until such time a proper housing policy is put in place taking stock of all the different aspects like those described above not to mention inflation and not just the simplistic supply , demand, and market price when the latter is distorted from the start and drives to the pauperisation of large parts of our societies all over Europe .
Times have changed and Harvard is long over rated if you ask me and financed by the above mentioned.
Austria and Vienna is an interesting example as to what could be considered.
The mass sell off of council/state houses was an unmitigated disaster. Forcing young families into the clutches of private landlords has destroyed for many of them the chance of saving a deposit to buy an (overpriced) family home. Rising rents leave no disposable income for local businesses that create jobs and growth, which leads to our zombie economy whereby industry can only survive due to cheap credit and they full time workers needing government assistance simply to keep the wolves from the door.
a third of the NZ population has been disenfranchised – and going to Oz appears to be their only option. Labour attempted a capital gains tax 12 years ago and the two thirds haves voted overwhelmingly for slimey John. It is going to look very bad for the third – disgusting greed .
Stupidity is doing the same sort of policy that didn’t work in the past like rent controls end expecting a different outcome. Unfortunately, politicians can rely on a lot of stupid people to support dumb ideas time and again.
But if the underlying circumstances are dramatically different, perhaps you might expect a different outcome? That is the point Patrick Fox is making.
But the current system clearly isn’t working either, so would it not be stupidity not to try something different?
Tackle immigration, be strong on deportations, overhaul pre-war suburb housing stock by converting them into 3/4 floor town houses like that report the Government issued early last year (and Roger Scruton worked on).
There you go I just fixed it. Will our feckless elite and politicians do any of this? Of course not, it’s all a “bad look”. Meanwhile they wonder why more and more younger people are turning to political extremism at both ends of the spectrum.
There has already been tax increases on individual Landlords
- extra 3% stamp duty on purchase of any additional property
- extra CGT rate of 10% on any gains when selling
- dissallownce of any interest costs in income tax calculation
Most of the focus has been on individual landlords but little on the Corporate landords , here in the UK where several banks are setting up to buy up blocks of appts for rent (even John Lewis has talked of doing this.
Ditto US see link
Didn’t a Swedish economist say ” the only better way to destroy a
City than rent controls was to bomb it” Presumably referring to the shenanigans in Stockholm on “key money” etc.
Build more & increase supply is surely the answer
After yesterday’s piece, I am afraid it’s straight to the comments.
I am commenting way too much – one of the people I care for (in my house) died a couple weeks ago and I seem to have lost all interest in anything from an Excruciating depression at the loss. So mope about here instead of building a house.
But I have cleared the land, and have to just submit the plans, and in a short time be beginning the foundation, and so the whole place, it will be a rental. I personally build the entire house, from ground to roof peak – wire, plumb, everything – this is how I have made my living for decades, the only one I know who does this. In my years I am on about 20, self build, houses now.
But here is the thing – many building materials are doubled from 2020! Labour is also high – I hire a helper carpenter for the whole job. The high lift I will hire has gone way up in price, the hiring of the land clearing is close to double from a couple years ago….
This is wile a vast bubble in house prices is just waiting to pop – I would not be surprised if real estate lost 30% – 40% (in real terms) in the next couple years, it always does revert to mean once it becomes overpriced this badly.
If the price of building has gone up 50% – how can rents not rise? It is a bad thing, this material and labour and equipment inflation. It is more then just ‘monetary Inflation’ of prices – it is that building in USA is going at an absolute furious rate! Everywhere ground is being broken, crews building houses – I have never seen anything like it. Then they run into shortages – even with lumber tripled – there are shortages – appliances too, doors and windows….as the production does not meet increased demand. Take 12-2 wire, 250 ft was $80 a couple years ago – now $135……
I think it is people leaving the cities from urban blight – and people freed from the office – so they move to lovely places like my town and cause a building boom, and I do not blame them. City real estate goes up because of insane Zero Interest; because this means mortgages are dirt cheap – Plus it means savings are eaten by the 10% inflation, so all bonds and savings have net negative real interest – so the money flows to ‘Hard Assets’ like real estate making a bubble.
1000 unintended consequences of the covid insane lockdowns are the cause of it all. This mess in everything is entirely due to the covid response.
My sincere condolences and sympathy.
Stay strong and (in the words of Churchill) keep buggering on.
My sincere condolences and sympathy.
Stay strong and (in the words of Churchill) ‘keep b*ggering on’.
(The mod-algo has deemed my comment unacceptable without the asterisk)
Britain needs some form of land tax, and to scrap all CGT avoidance schemes.
…what if the Fed were to do a “Volker” act, and deflate the bubble across all asset classes? Would be a stunning move, in more ways than one, and might reset property prices. Also an interesting time to reflect on the option of Henry George’s theory in “Poverty and Progress”.
I fail to see how increasing tax will solve the problem. If the owners fully own the property and are thus free of any debts higher taxes do not work as they just reduce their gains nothing else. Freezing the rents is much more efficient as owners still gain, renters have more purchasing power to inject in the economy and the State can’t be accused of plunder and meanwhile should invest in the necessary housing.
Freezing rents will only exacerbate supply shortages, while reducing labour mobility and creating ‘insider-outsider’ effects that tend to disproportionately affect younger tenants.
And create a black market in rent-controlled houses. Witness the sub-letting phenomenon in council houses here in the UK (and flats – Grenfell); and see also the market distortions that occurred recently in Berlin during their attempt to fix the market.
Yes! Ditto in New York City, where stealth AirBnBs are operated by rent-controlled tenants who live somewhere in New Jersey.
the Horse has already well bolted in NZ and now NOTHING can fix it – parts of our cities are going to look third world – esp as the panic temporary accomodations are phased out. Total derilection of duty by past govts and the the ‘haves’ of the population – disgusting greed.
Rent controls were brought in as a temporary measure in 1919. They were still in place in the 1980s. The effect of rent controls was simply to reduce both the quality and supply of rented property.
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