22 January 2020

Sadiq Khan’s housing plan holds renters to ransom

By Adam Bartha

Rent controls have been tried, tested, and have failed in numerous European cities. Yet Sadiq Khan is campaigning on a ticket to introduce rent controls ahead of the London Mayoral elections in May. Rent controls might seem like an intuitively good idea, but the experience of other cities shows the disastrous unintended consequences of such measures.

Take Sweden, which introduced effective rents controls nationwide in 1947 as a temporary measure, and yet which remain to this day, despite criticism from academics, thinktanks and the OECD. While its intention to create a more socially dynamic society was laudable, the reality has been much bleaker.

Instead of a fairer rental market, where tenants can easily afford rent and live in high-quality housing, Sweden suffers from increased social segregation; eruptions of violence as a result of disagreements in its massive black market of sublet housing; and companies that face immense difficulties in recruiting talent, as potential workers are unable to find suitable housing.

Proponents of rent control often emphasise the fairness the measure: rent controls are meant to create a more egalitarian society, where individuals irrespective of their income live in the same neighbourhood and can afford similar quality housing. This could not be further from the truth.

The Swedish experiment shows that it is high income, well-educated individuals who benefit from rent controls the most, whereas less-educated, or not as well-connected individuals such as younger renters or immigrants, are highly disadvantaged by the system.

In theory, housing stock that becomes available for rent is allocated through the Stockholm Housing Agency, which ensures the rental prices are kept on ‘an average level’. The average waiting time in Stockholm for such housing allocation is over 11 years. As tenants realize the true value of their contract – e.g. the money they can receive for their apartment on the secondary rental market – they are unwilling to return the property to the agency, even when they move out. Instead, they rent it out to someone in their extended circle of friends or exchange the flat for one in a different area – only in practice, not on paper of course. No wonder that only 0.5% of the housing is returned to the agency, resulting in a massive queue of 670,000 people on Stockholm’s housing waitlist – out of a total population of 970,000.

This system benefits the most well-connected individuals, but highly disadvantages people who lack broad social connections. These groups are often forced into the black rental market, where the prices are on average double that of the official rent controlled numbers. One in five young Swedish renters face have admitted renting on the black market. Due to the lack of legal arbitration, disagreements between parties can lead to violence and in some cases even murder.

Another problem has been the inflexibility of rental contracts, which have made it difficult for people to move between cities, – leading to a fifth of Swedish companies facing severe recruitment problems due to the lack of suitable housing.

The steep increase of rental prices in London is certainly an problem that needs tackling. But politicians should look at rectifying the supply-side problem by introducing measures that would enable more, cheaper housing to be built. Policies that would scrap parts of the ‘Green belt’ – the areas that are effectively industrial wastelands – whilst simultaneously increasing the density of housing in certain areas of London – by building higher and not just further out – would be a good way to start. Scrapping 3.7% strategically located, non-Green parts of the ‘Green Belt’ could lead to one million new houses in London, helping residents to get the ever-increasing rental prices under control.

Global European cities, such as London, Berlin, or Paris will always be sought-after destinations and remain popular places to move to; both within their respective countries’ and from abroad. Sweden is a cautionary tale of what not to do, when politicians are looking for answers to ease the pressure on renters in major cities.

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Adam Bartha is the Director of Epicenter