If the rent cap fits: the pros and cons of rent control

In the past few years, rents have risen faster than a helium balloon attached to a rocket. And that's leading to a lot of support for some form of rent control. So what's the deal with rent caps, and are they worthwhile?

Let’s begin with a quick history lesson (no talking at the back, please). In the late twentieth century, the UK had one of the most regulated private renting sectors in the world. But then things changed with the 1988 Housing Act: the apron strings were cut, consumer protections disappeared, and a deregulated and uncontrolled system emerged. The result? Rents have risen faster than a helium balloon attached to a rocket. This has led to recurring calls for some form of rent control or even a full rent cap.

The Mayor of London, Sadiq Khan, is one of the loudest voices calling for such a rent cap. That’s because London rents are the highest in the country: almost £2,000 per month on average, with a rise of 22% in just three years. Khan, who is a big cricket fan, has therefore repeatedly asked the government to introduce a rent freeze. This would be great news for tenants but it would knock landlords for six. So is rent control really the answer?

Rising rents

Although government guidance states that rent increases must be fair and realistic, there is currently no legal limit on what landlords can charge. Landlords can use a Section 13 notice to increase rent to whatever they like once the fixed term of a tenancy has ended. And because we’re currently chin-deep in a cost of living crisis, it’s extremely tempting for landlords to pass their increased expenditure straight on to terrified tenants.

In these circumstances, a tenant’s only recourse is to challenge an unfair rent rise in a tribunal. But this is time-consuming and extremely stressful. What’s more, landlords can always evict tenants with a section 21 if they don’t play ball - at least until the Renters Reform Bill is brought into law. As a result, rents are currently at the mercy of market forces. Sigh.

The pros of rent caps

Industry experts, as well as organisations like Shelter, have long argued that rents in the private sector are unaffordable. Modern rents can be half (or in extreme cases two-thirds) of a tenant’s monthly income. As a result, too many tenants get stuck in rented accommodation for life; they want to get on the housing ladder but can never save enough for a deposit.

With the cost of living crisis biting, online searches for phrases like “rent increase” and “landlord put rent up” have now reached an all-time high. Rents have also surged beyond pre-pandemic rates. Therefore, it seems (on the surface at least) that now’s the perfect time to introduce a rent cap, especially as the UK has rent controls for social housing.

The bottom line is this: rent caps would certainly prevent unfair rises in the short-term and give struggling members of ‘generation rent’ some stability in the long-term. So what’s not to like?

The cons of rent control

Here’s the catch. Although spiralling rents have made renting close to unaffordable in some areas, rent controls would soon make the private rented sector unaffordable for landlords instead. And that’s the last thing we need at the current time when there’s a shortage of available housing stock.

Let’s not forget that landlords already feel under tremendous pressure. They need to comply with upcoming minimum EPC requirements (which will be very pricey for those with less energy-efficient properties) and they’re also trying to deal with the cost of living crisis themselves. Ouch.

The big danger, therefore, is that rent caps will drive many landlords away from the sector altogether - especially if rents exceed buy-to-let mortgage payments. Many landlords will do their sums and either (a) sell up, or (b) switch to short-term Airbnb-style lettings.

Rent cap enthusiasts like Mayor Khan therefore need to ask themselves this: if landlords can’t make money from renting out a property then why should they bother? Capital growth would become the only incentive. And even that isn’t guaranteed according to the latest figures.

Rent controls also present another major problem: if landlords make less money then they’ll have diminishing dollops of dosh to invest in property repairs and upgrades. The result? Lower quality housing over time. Not good.

What’s going on elsewhere?

Although we can understand the demand for rent caps - up to 67% of tenants are currently in favour - there’s a danger that rent controls could have unintended consequences if we look around the world. Rent caps might also prove difficult to implement effectively.

In Sweden, for example, tight rent controls have created two different rental markets: state-controlled rental accommodation, for which there’s a waiting list of approximately nine years, and a rampant subletting market where properties go for hugely inflated rates. Similar things happened in Berlin too, where a regulated and unregulated market emerged.

Although rent controls work better in other parts of Europe - they have longer contracts in Spain and France alongside rules that prevent rents increasing above an inflationary index - introducing a similar system in the UK would take time. For starters, we don’t have a national register of landlords - not yet anyway - so it would be hard to track every tenancy to make sure they’re all complying with the cap.

It’s also interesting to note that ‘rent pressure zones’ in Scotland, where local councils can introduce rent caps when specific areas become unaffordable, have largely failed. This is because councils have to demonstrate that tenants are suffering and housing associations are struggling before they can intervene. In other words, red tape can be a real red flag, too.

Rising rents - the solution

So if rent caps aren’t the easy fix they seem to be, what exactly can be done to prevent eye-watering rents? Basically, it all comes back to building more homes: this would create more supply to match the strong demand and ease inflationary pressures. Indeed, supply and demand might finally smile at each other, hold hands, and begin living in perfect harmony.

The problem, of course, is that governments have frequently failed to meet their targets for new homes. But at least they’re officially trying. When it comes to rent caps, on the other hand, they’re not. In fact, Housing Minister Eddie Hughes ruled out rent caps earlier this year because they “discourage investment in the sector and would lead to declining property standards”.

Of course, the government probably feels that it’s done enough for tenants in the short-term. The Renters Reform Bill will strengthen their rights and, by abolishing section 21, prevent landlords from evicting them if they object to unfair rent rises. This won’t solve all of the sectors’ ills though. Consequently, expect the housing crisis to live rent-free inside the Prime Minister’s head for some time to come.