The last blog piece on so-called ‘second generation rent controls’ (SGRCs) argued that while these controls would not necessarily cause a lot of damage, they would do nothing to solve the affordability crisis of the London rental market either. If high and rising demand meets low and inelastic supply, rents go up – with or without SGRCs. The latter can only change the timing and incidence.
Yet theory can only take us so far. Labour MP David Lammy argues that SGRCs have worked well in Germany, and would also work here. Does he have a point?
First of all, it is true that you could do a lot worse than being a tenant in Germany. I lived in various rental properties for six years there and found it to be a relatively tenant-friendly market. Perhaps the best ‘soft indicator’ for this is the fact that people there rarely talk about housing, whereas in London, the topic is constantly under discussion. The problem with Lammy’s argument, though, is that he looks at two rental markets which differ in a lot of respects, and simply assumes that SGRCs must explain the differences in outcomes.
However, we cannot isolate developments in the rental market from developments in the overall housing market. The main difference between the British and the German housing markets is that for several decades, Germany has consistently released more land for development than the UK, and has therefore consistently achieved higher levels of housing development (see Graph 1). This has nothing to do with SGRCs and has a lot to do with the fact that Germany has no green belts, no ‘Campaign to Protect Rural Germany’ and no National Trust. NIMBY hysterics are generally treated with the contempt they deserve.
Graph 1: Dwellings completed per 10,000 inhabitants, UK vs Germany
-based on data from Eurostat
You can see the results in the graph below. In Germany, income growth has been relatively slow since reunification, but house prices have remained constant, so the ratio of house prices to incomes has shown a gradual downward trend. In the UK, income growth has been quite robust, but house price growth has been explosive, leading to an escalation in the ratio of the two (i.e. a decline in affordability).
Graph 2: Ratio of average house prices to average incomes, UK vs Germany (1995 = 100)
-based on data from The Economist House Price Indicators
You cannot meaningfully compare the British rental market to its German counterpart if you ignore all this. When overall housing market conditions differ so drastically, of course the conditions in rental markets will also differ. In Germany, the release of sufficient amounts of land for development has kept both house prices and rents in check, and would have done the same in the absence of SGRCs. In the UK, the failure to release sufficient amounts of land has led to an escalation of both house prices and rents, and would have done the same in the presence of SGRCs.
What London needs is policymakers who do not continue the sentence ‘London needs more housing’ with a ‘but’. How about replacing the waffling that usually comes after the ‘but’ with something more like ‘…and therefore we need to abolish green belts and most height restrictions, while tarring and feathering the NIMBYs’.