Rent Control isn't scary when you already live in Worst Case London

Apr 26, 2015

A 2000 Paul Krugman article arguing the problems of rent control was going round twitter yesterday in response to Miliband rent control proposals in the UK. Ignoring the fact the Miliband's rent control is a controlled-rise system rather the the traditional set-up Krugman attacks, anyone who finds his San Francisco example scary doesn't really understand the current problems in the housing market:

On the other side, consider an article that appeared in yesterday's New York Times, ''In San Francisco, Renters Are Supplicants.'' It was an interesting piece, with its tales of would-be renters spending months pounding the pavements, of dozens of desperate applicants arriving at a newly offered apartment, trying to impress the landlord with their credentials. And yet there was something crucial missing -- specifically, two words I knew had to be part of the story.

Not that I have any special knowledge about San Francisco's housing market -- in fact, as of yesterday morning I didn't know a thing about it. But it was immediately obvious from the story what was going on. To an economist, or for that matter a freshman who has taken Economics 101, everything about that story fairly screamed those two words -- which are, of course, ''rent control.''

After all, the sort of landlord behavior described in the article -- demanding that prospective tenants supply resumes and credit reports, that they dress nicely and act enthusiastic -- doesn't happen in uncontrolled housing markets [emphasis mine]. Landlords don't want groveling -- they would rather have money. In uncontrolled markets the question of who gets an apartment is settled quickly by the question of who is able and willing to pay the most. And so I had no doubts about what I would find after a bit of checking -- namely, that San Francisco is a city where a technology-fueled housing boom has collided with a draconian rent-control law.

I find it hard to be too scared by this doomsday vision of prospective tenants at the mercy of strange landlord demands because this is pretty close to what I've actually experienced. I've written about it before but one place we almost moved the landlord, despite the fact the letting agent would do a reference check, demanded to see bank statements and have a meeting with us before accepting our offer.  This wasn't a friendly meeting, it was an aggressive "how do I know you won't leave early", "how stable are your jobs", "you don't have friends and parties right" meeting. You got the impression quickly he was of the "unexpected visit" school of bad landlords and having come from another bad landlord situation we got the deposit back and moved into another place. Here we spent the next year dealing with mould, rats, mice and cockroaches, but the choice we made was absolutely the right one. That would not have been a good landlord to have.

This can't be dismissed as "just one creep". Looking at bank statements is a practice defended on landlord forums because of the "risk" landlords take by being landlords. Another place wasn't even interested in renting a two double-bedroom place to a group of three because they were looking for "professionals" rather than people who knew each other - essentially they wanted people with few connections who would treat the place as a dormitory rather than a place to be lived or socialised in (with the "risks" that might entail).

But London doesn't have rent control - if the landlord had so many offers that they could afford to be picky why don't they just raise the price? Don't they just want money? The way to make sense of this is that the wrong people operate the private rental sector. In 2010 a private landlord survey found that:

  • Eighty-nine per cent of landlords were private individual landlords responsible for 71% of all private rented dwellings, with a further 5% of landlords being company landlords responsible for 15% of dwellings.
  • More than three quarters (78%) of all landlords only owned a single dwelling for rent, with only 8% of landlords stating they were full time landlords.

Small-scale landlords are the major player in the rental sector and they're not always going to be good capitalists. The ones that act like the above are risk-adverse and want their investment bothering them as little as possible. If the amount of money you are willing to accept to balance the greater perceived risk is greater than the difference between the price where you have one buyer and and the price where you have enough choice to chose less risky tenants, you will charge less than you can and screen.  People who will put up with this before even moving in are likely to be less troublesome, less likely to make demands of work that cost money/require attention, less likely to understand their legal situation, etc. This is a better and more comfortable position for the investor-landlord. The rate of return is still ridiculous regardless.

When people say that rent control means that properties won't be maintained and landlords will have invasive and offensive tests of potential tenants I'm not scared of rent control - I'm scared people don't seem to understand the full extent of the problem. We clearly do not live a housing market where tenants are only discriminated against on the size of the wallets - when your uncontrolled situation is pretty close to the controlled bogeyman something has gone very wrong.

Previous Post: Reporting on Suicide Notes

Next Post: Truth In Elections