How to fix the broken housing market

Should we introduce rent controls?

March 8, 2024 8 Minute Read

By Jen Siebrits

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A notable consequence of the broken housing market over the past few years has been rapidly rising rents in the private sector. Over 2023 rents increased by 6.2% across the UK, the highest annual figure on record. While some of the increase reflects wider inflation levels, it primarily reflects an acute demand and supply imbalance. With the general undersupply of homes, fewer rental homes than are needed are being built. In addition, changes to the tax landscape, have reduced the attractiveness of buy-to-let investments, which has led an exodus of buy-to-let landlords from the market. We estimate 183,000 rental properties have been sold by landlords since 2022, and more than 450,000 since 2016. The undersupply situation has been ongoing for at least a decade, with RICS survey data consistently showing a surplus of tenant demand over landlord instructions since the series began in 2012. This undersupply of homes is feeding directly through to higher private rents.

Figure 1: Rental growth and supply-demand imbalance

Source: RICS, ONS

Rent control regulations, which can come in many forms, , are often cited as a way to ensure private sector rents are affordable. But we know from the past that while the introduction of rent controls might tackle the symptom of rising rents, it doesn’t tackle the disease itself. In fact, the introduction of rent controls can make things worse, by further reducing the supply of rental homes.

At the time of WWI, private renting (PRS) was the dominant tenure, with three quarters of all households renting. However, throughout the 20th century the size of the sector shrunk significantly. There were many reasons for this, including societal preferences shifting towards home ownership and increased mortgage availability. However, rent controls played a significant role. Imposing rent controls on a market with a severe lack of supply only exacerbates the problem by deterring private landlords. This was the case in the UK, where the Government kept rent controls for over 70 years in an attempt to control rental growth. At the time when rents were deregulated in 1989, the PRS accounted for just 9% of the overall market. 

There are more recent examples of how rent regulations can distort the market and actively reduce the number of homes available for rent. For example, following the announcement of a five-year rent freeze in 2020 in Berlin, there was a 35% drop in rental supply within a year. After the freeze was abolished, rents were restored to above the pre-freeze levels, but Berlin still faces housing shortages. Similarly in the Netherlands, when it was announced that legislation would come into force to extend the current regulated rental sector to include mid-rental housing (as well as low- value), investor appetite for mid-rent complexes dropped significantly. In San Francisco, all large multifamily buildings built after 1979 are rent controlled, equating to around 60% of all rental units. A 2019 study found that rent controls had reduced supply by 15%, as owners converted rented stock into owner-occupied units or redeveloped existing stock to exempt them from rent control.

The Build to Rent sector in the UK is still fairly embryonic, accounting for roughly 1.9% of private rented households, but it is growing and is no longer seen as an alternative asset class. Investors are attracted to the sector as it is less correlated to property market cycles than other real estate sectors. As a result, it provides strong and stable returns and can be used to diversify portfolios. Reflecting this, investment in the sector has proved resilient; almost £28 billion has been invested into the UK’s BtR sector since 2015, which has facilitated the development of around 267,000 rental homes. The sector is now attracting an increasing share of UK investment from both . , which is largely development funding as so will directly boost the number of rental homes. However, investors like predictability, and changing government policy is a threat; even the anticipation of future rent controls will deter investment.

Evidence from the US suggests the introduction of rent controls would hinder the continued flow of capital (into the UK residential sector); 34% of multifamily market participants in US cities and states that had or where considering rent control had already cut back on investment or development, and a further 49% were considering doing so. The relative immaturity of the UK market compared with the US multifamily market suggests a similar, if not bigger, impact on UK BtR investor sentiment.

Figure 2: Residential investment volumes

Source: CBRE Research

Introducing rent controls may also prohibit the ability of landlords to deploy capital for necessary maintenance or invest in upgrades. This has implications for the quality of rental stock. A key concern being that rigid rent regulation does not adapt or align to unexpected economic changes, such as high inflation or new EPC requirements, impacting return on investment.

Our assessment is that rent controls should not be introduced. The short-term benefits would not outweigh the long-term cost of supply shortages and poor-quality stock. Implementing rent controls would risk reversing the positive increase in supply of of the PRS over recent years, and halt the development of the emerging BtR sector, which has now facilitated around 267,000 homes. And, as we’ve seen from other markets, once controls are introduced, they are very difficult to reverse. In our view, the primary focus for the Government should be fixing the continuing supply shortages, incentivising BtR investment, and reducing the barriers that exist within the planning framework. Our housing targets are still far from being met, and the way to ensure housing security for the long-term is to focus on supply both in the social and private rental sector.

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How to fix the broken housing market

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