As cynical vote grabs go, it’s a pretty smart one.
Ed Miliband’s Labour party has promised to introduce rent controls on private landlords if elected. At least, that’s what’s being reported.
Price controls – as most have been quick to point out – are a daft idea, and end up reducing the supply of whatever is having its price controlled.
But while it might be economic stupidity, it’s pretty smart politics – which sadly sums up the general tone of this election campaign nicely.
Suddenly, housing affordability matters
We all know that housing – specifically, house prices – is one of the most important issues to the British electorate. That’s why politicians like to make sure that they keep on rising.
If your average British homeowner sees that the price of their property is going up, then all must be well with the economy, and therefore they should vote for whoever is in power. That’s the simplistic – but I suspect, highly accurate – political calculus involved.
But there’s a twist this time around. Prices have been going up for so long that an ever-increasing group of people is feeling somewhat disenfranchised. In 2005, 70% of people owned their own homes. This year it’s down to less than 65%.
Those left at the foot of the ladder still aspire to own property. They still dream of the day when they too will benefit from an unearned, tax-free windfall resulting from a leveraged bet on house prices, as is every hardworking British family’s birthright.
Trouble is, they can’t see how they’ll ever get on to that ladder. And it’s clear that their parents are worried too. Apparently, 80% of the public believes Britain faces a housing crisis, says Mori. Polls by both Mori and ComRes – reported in the FT – note that more voters consider it a critical issue now than at any time since the last housing bubble.
In short, it’s no longer as simple as making sure that prices keep rising. Now there’s a big enough constituency of the ‘excluded’, that affordability has become an electoral issue. Campaign group Generation Rent reckons that renters outnumbered homeowners in 60 constituencies in 2010. That’s double the proportion in 2001.
So, with the polls still extremely tight, politicians are falling over themselves with gimmicks to attract this valuable demographic. The Conservatives have decided to extend ‘right-to-buy’ to housing association properties. Meanwhile, they’re also continuing with their half-baked help-to-buy scheme and Isa, which is just a subsidy for housebuilders funded by the taxpayer and first-time buyers.
But Labour has gone right for the jugular. It’s tossed in its own gimmick for first-time buyers – giving them a stamp duty exemption for any property under £300,000. But it’s also targeting those hated beneficiaries of the property boom – landlords.
Labour could drive house prices down – for all the wrong reasons
Here’s how Labour’s ‘rent control’ plan would work. Three-year tenancies rather than six-month ones would be made standard. There’d be a six-month break clause, before the deal was signed for a further two and a half years. Rents would then be capped over those three years, at the rate of consumer price inflation.
You can argue that this isn’t capping rents as such – instead what will happen is that every time there’s a new three-year tenancy, landlords will start the new tenants off on higher rents if they feel that the market can handle it.
Yes, there’s a clause suggesting that landlords would have to tell new tenants what the old ones were paying, to help the new tenants negotiate – but that’s hardly going to make a difference to a determined landlord in a supplier’s market.
In short, Labour’s plan arguably would mean that tenants would start out paying inflated rents, which would then rise by inflation over the following three years.
So in itself, this plan is not that radical. I’ve been a tenant often enough through my life to know that there are areas of the market that could do with better consumer protection – I seem to remember letting agents being far worse to deal with than individual landlords themselves.
But Miliband’s policies are certainly not going to help ‘Generation Rent’, the target market. It won’t increase competition in the rental market – which is what would bring down prices – because at the margins at the very least, it will put new landlords off. In fact, it rather gives landlords an incentive to push prices up to compensate for the lack of freedom to do so over the three-year period.
Politically speaking, though, it’s what people want to hear. Landlords aren’t much more popular than estate agents and in any case, our property market is so rife with interference from the government – of whichever stripe – that it’s hard for any of them to argue the merits of a free market and keep a straight face (take a look at my colleague Merryn’s blog for more on this).
The risk for Miliband is that Labour’s reputation goes before it
However, the risk for Labour is that this is yet another sign of the sort of direction they plan to take the country in. Today it’s three-year inflation-capped tenancies. If they get into power, it might be actual rent controls. It’s all about the state essentially dictating what you get to do with your private property, and as soon as you start tinkering with property rights, that’s very unattractive to investors.
If you were an aspiring buy-to-let landlord, or an institution looking at building a residential real-estate investment trust, or a foreign investor considering London property – would you buy in now? Clearly, you’d wait until the election was over and done with before you even considered it.
And if Labour were to get in – well, all those people predicting a rush of investment into buy-to-let from ‘liberated’ pension funds can forget about it (stupid idea that it is anyway).
We might even see house prices fall. But we’d rather see prices fall as a result of monetary policy getting back to normal, a more equitable property taxation regime in the UK, and a sustainable increase in housing supply – not because investors are too scared by the local political regime to put their money to work here.
We’ll be looking at all the parties’ plans and their impact on the economy in a lot more detail in the next issue of MoneyWeek magazine. And later this week we’ll also be letting you know more about our special project to keep MoneyWeek subscribers informed of exactly what the result means for their finances. More details coming soon – but if you’re not already a subscriber, now’s a good time to get in.
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