Sadiq Khan’s Rent-o-Kill crusade
BY MADSEN PIRIE
London mayor, Sadiq Khan, wants to introduce rent controls, and intends to make the forthcoming mayoral election “a referendum on rent controls.” Lacking the power to do so, he claims that a big win for him will pressure the government into granting him that power.
There is no chance at all of this happening because the proposal is economic illiteracy of the highest magnitude. The distinguished Swedish economist Assar Lindbeck wrote that, “In many cases rent control appears to be the most efficient technique presently known to destroy a city – except for bombing.” A late 1970s poll of US economists found that 98 per cent of them agreed that “a ceiling on rents reduces the quantity and quality of housing available.” In 1989 the Foreign Minister of (Communist) Vietnam admitted that rent controls in Hanoi had artificially encouraged demand and discouraged supply, and that the city’s housing had fallen into disrepair as a result of them. They had, he said, succeeded where the Americans had failed.
Prof. Lindbeck understated the case. Rent controls are more effective than bombing because bombing takes out demand as well as supply. It removes people as well as houses, whereas rent controls only reduce the available housing. It does so for very straightforward reasons. While a cap on rents might buy the votes of current tenants, it does so at the expense of would-be future tenants, and it degrades the quality of rental housing.
Rental caps reduce the return on housing for landlords. This causes some of them to sell their properties as soon as they can, and look elsewhere for higher returns on their investments. Controls discourage others from going into the property business by making rentals less attractive than other investments. Thus, while current tenants appreciate the curbs on rent rises, the supply of rentals shrinks over time.
Because the return on their investment is below market rates, there is a tendency for landlords to economize on maintenance. Things such as redecoration, rewiring and general repairs are done less often, and the quality of the properties deteriorates. This double effect of diminished supply and degraded quality has been observed in cities where rent controls have been applied.
The problem is that there are political short-term gains for left-wing economic illiterates who propose to introduce controls. The tenants who stand to gain happily vote for such politicians, sacrificing the future of their city for a short-term advantage to themselves. This is why political charlatans and idiots have an incentive to propose a measure that has been tested to destruction wherever and whenever it has been applied. Like Pied Pipers, their superficially attractive tune leads their followers into oblivion.
Dr Madsen Pirie is President of the Adam Smith Institute.