Britain already has rent controls
Well, kind of
It is cliché to say that rent controls don’t work. But when Sadiq Khan is again flirting with foisting rent controls on London, sometimes clichés need repeating.
Rent controls don’t work because they reduce supply of rent controlled homes, pushing people into the non-rent controlled sector (so-called luxury flats). In the rent-controlled sector, landlords have no incentive to improve the quality of housing as they can’t increase rents to pay for the improvements meaning housing quality deteriorates.
Unfortunately, anyone who has been in the capital knows London has all the problems of rent controls without trying to cut rent.
Costs are high as the average rent for a room in London rose from £794 per month in 2022 to £995 in 2024. Quality is also bad: the Resolution Foundation last year found that 16% of Londoners were in substandard accommodation.
But this is not a normal market.
This is the result of many policy decisions. The planning system discourages building. Landlords face other unaccountable costs, mainly service charges and ground rent on leasehold properties. And the tax system taxes borrowing and penalises improvements.
Won’t somebody please think of the landlords
Buy-to-let is a business and in a normal market, it works like this: I buy a house, you live in it in exchange for money, I use that money to pay expenses (mortgage, service charge, repairs) and make some profit.
This is a good thing. People need somewhere to live but they may not be able to afford it. Some people can afford it but may not want to live where they currently work. Either way, there is need for people to rent somewhere and landlords meet that need.
In a normal market, both sides win. You, the tenant, get a home at a reasonable price and I, the landlord, get money and make a profit. If there’s a problem, I fix it. If I want to make more money from my tenant I improve the property. I pay income tax on any profit I make after deducting my expenses. If you don’t like it you move somewhere better.
In a normal market, a socially-minded landlord (yeah yeah, but let’s assume they exist) can go home at the end of the day happy that he has made some money whilst giving his tenants a nice place to live.
But this is not a normal market. Landlords’ costs have risen meaning that many are losing money on their rental properties.
It was said that Britain gained the Empire in “a fit of absence of mind”. Britain has, in a similar absentmindedness, shaped a rental market that gives us the problem of rent controls without the noble pretence of low rents.
Planning cuts supply, migration raises demand
Property is stupidly expensive. There is high demand due to (among other things) high immigration and not enough supply.
The most obvious problem is that we are just not building enough houses. Yes, numbers of new homes are at their highest levels in 30 years but these consistently fail to hit the government’s house-building target of 300,000 new homes. In addition, that target is based on having net migration of 170,000 a year – a quarter of last year’s net migration figures.
We can (and should) cut migration. But even if net migration was zero, there’s still a huge backlog which needs clearing.
Our current planning system does not help. Planning applications can take years and politicians try to gain credit for homes that aren’t built. Councils spent £50 million on legal advice in the last three years to not build homes. Planning consents in England in the year to December 2023 were 30% below pre-pandemic levels.
Homes inevitably become more expensive. In London, the median house price in September 2023 was £530,000. Around 12 times the median income.
Leasehold and other charges
In addition to already high purchase prices, landlords pay a myriad of costs such as agency fees (typically 10% in London) and sometimes pay for rental licences from local authorities. One of the biggest and most uncontrollable costs, however, is associated with leasehold property.
Nearly 85% of privately rented dwellings in London are flats which are usually leasehold flats requiring a leaseholder (your landlord) to pay service charge and ground rent to a freeholder. Service charges pay for maintaining common areas in a block of flats (cleaning, insurance, security). Ground rent, on the other hand, pays for nothing and is an act of pure extraction by the freeholder.
In London 20% of flats have a service charge of over £4,000 per annum and ground rents can be as high as £1,000. A leaseholder can’t challenge ground rent, and it’s difficult to challenge a service charge if you think it's too high. Leaseholders can’t withhold payment because they risk losing their flat altogether. Landlords, therefore, pass these costs on to the tenants, so rents go up.
Taxes raise rents
In any ordinary business (like commercial property) borrowing costs are tax deductible. But, buy-to-let is no ordinary business.
Landlords typically borrow money to pay for an expensive flat (see above). Most buy to let mortgages were issued when interest rates were at historic lows. When rates on those (already expensive) homes rise, so do mortgages.
Since 2017, mortgage costs are no longer tax deductible, instead you can claim a tax credit for 20% of your mortgage payments. It means that if you are a higher or additional rate taxpayer (the demographic that is likely to have money to buy a rental property), you can only claim relief on 20% of your mortgage interest instead of 40% or 45%.
The only thing you can do is pass those costs on to your tenants. Rents go up.
Taxes worsen quality
The taxman also penalises landlords who want to improve their properties. If a landlord needs to replace a damaged item with a modern equivalent, he can only claim tax relief if he replaces it with an equivalent item. He cannot claim a tax deduction for any improvements.
In practical terms, if a landlord replaces a damaged washing machine with a new washer-dryer or a better washing machine, he can only offset your tax against the cost of an equivalent to the old washing machine.
By “equivalent”, I mean if 10 years ago an basic washing machine cost £200 and today it costs £300, the landlord can claim for the £300. But if he wants to buy a washer/dryer for £400, he can only deduct £300 as that would be the cost to replace the modern equivalent of the old machine.
This principle extends to repairs and maintenance, too. A landlord can get a tax deduction for the costs of restoring a the property to its original state between tenants. However, he cannot upgrade the property.
Landlords, therefore, have no tax incentive to improve the quality of housing for their tenants. Quality, therefore, gets worse.
The result
Ultimately, landlords will sell their properties if they aren’t making enough money. If they can eek out a profit on their properties, they won’t be incentivised to make them better. This isn’t hypothetical. They are selling. In huge numbers.
You may cheer at evil landlords selling their homes but there will fewer homes on the rental market. Your rent will be higher and you won’t be able to save.
To cut rents, don’t call for rent controls or demonise landlords. Instead, abolish our current de facto rent controls with three simple, but not easy, steps: build houses, abolish leasehold, cut taxes and reward improvements.
It was said that Britain gained its Empire in “a fit of absence of mind”. Britain has, in a similar absentmindedness, shaped a rental market that gives us the problem of rent controls without the noble pretence of lowering rents.