Rent controls - a timeless and controversial intervention

Introduction

Over the last twenty years interest has returned to the subject of rent controls as housing affordability has worsened and the importance of the private rental sector has grown. This comes after a long period, dating back to at least the 1970s, when many countries emphasised deregulation of the private rented sector. Interest in the (re)introduction of rent controls has increased since the Global Financial Crisis as market rents have continued to rise and the traditional linkage between local incomes and local rents has weakened. The result is increasing political pressure to strengthen rent regulation as well as a growing body of analysis of different ways of developing a better functioning private rental sector including issues around how best to support poorer tenants. It is in this context that a virtual workshop bringing together researchers and practitioners was held in 2021, organised by the Housing Finance Working Group of the European Network for Housing Research (ENHR) and the German Economic Institute. One major outcome from the workshop has been this special issue.

The workshop: recent trends in rental market regulation, Cologne, 20.1.21

The workshop entitled "Recent Trends in Rental Market Regulation" was originally scheduled to take place in Cologne in January 2021, but was held virtually due to the COVID-19 pandemic. This transition to online offered the opportunity to discuss regulatory developments with a wider range of researchers from three continents (Europe, USA, Australia) as well as to include some professionals working on implementing regulation and standards in the sector. A major theme was the detailed examination of national policies that have been used in individual countries including Germany, Ireland, Portugal, Australia and Great Britain, as well as of some instruments specific to individual cities.

A number of key ideas and trends were presented some of which form this special issue. There was useful clarification about the latest forms of rent control legislation across countries and how they might be improved to help achieve longer term stability. There were also papers covering broader regulatory issues relating particularly to energy efficiency and housing standards. Others set out the results of more formal empirical analyses, notably with respect to effects on housing supply. Political-economic studies of local markets were discussed, as was the role of interest groups in determining local policies. Even though the two-day workshop was virtual, there was very intensive discussion on the research papers presented. As such the event was both very broad ranging and extremely topical.

At the core of much of the discussion on the topic were distributional issues—in particular who benefitted and who suffered both in terms of the immediate response to changes in regulatory regimes and into the longer term.

We would like to thank all the presenters for their excellent contribution. These included Pekka Sagner, Kath Scanlon, Chris Martin, Alistair Sisson, Sian Thompson, Montserrat Pareja Eastaway, Teresa Sánchez-Martínez, Konstantin A. Kholodilin, Sebastian Kohl, Gabriel Lee, Jan Philip Weber, Marco Peverini, Michaela Lang, Sónia Alves, Alda Azevedo, Luís Mendese, Katielle Silva, Conor O'Toole, Ken Gibb, Adriana Soaita, Alex Marsh and Kenton Card. While only a small number of contributions can be included in the special issue, we encourage readers to engage with the work of all the participants.

The special issue

Most of the six papers that comprise the Special Issue speak to regulatory changes introduced over the last decade and current circumstances but some look more at principles, while one, in particular, examines historical data over the last century. We have grouped the papers by methodology and content. The first two papers are distinguished by their use of econometric techniques together with detailed quantitative data. The second group concentrate on two countries (Ireland and Scotland), which have been taking similar approaches to the introduction of rent controls limited to specific pressure areas. But they also address both principles and the potential costs and benefits to regulation in times of rapidly rising rents. The third group of two looks at countries where private renting has been more of a residual tenure (Spain and Australia) and there has been little success in protecting private tenants.

Rent controls and housing supply

The paper by Konstantin A. Kholodilin & Sebastian Kohl ‘Do rent controls and other tenancy regulations affect new construction? Some answers from long-run historical evidence’ discusses the outcomes from an analysis of a remarkable data set covering sixteen developed countries over a period of more than a hundred years from 1910—2016. Simply putting together a consistent dataset, both over time and across so many countries, was a major enterprise in itself. The results from the high-quality econometric analysis are even more impressive. They strongly suggest that (as economic theory would indicate) rent controls that are in place over long periods negatively affect both new construction and investment in the existing stock—and that the more constraining the regulation in terms of potential returns the greater that negative impact. But what the analysis also shows is that there can be offsetting effects, notably increased new building in other sectors of the market as well as benefits from exceptions policies such as allowing market rents for new build investment. The results clearly have lessons for policy makers currently looking to implement rent controls aimed at helping tenants.

The discussion stressed the value of long data series, and the difficulties in ensuring their quality. It also concentrated on the importance of examining the impact of controls on other tenures - notably with respect to the growth in owner-occupation in response to rent regulation.

Pekka Sagner & Michael Voigtländer ‘Supply side effects of the Berlin rent freeze’ looks at the short term impact on rents and the supply of new lets as well as the prices of dwellings for sale that followed from introducing rent caps and freezes below the market rent in Berlin. Using econometric techniques, they found significant reductions in rents as required but also a very large decline in the supply of new lettings—by around 60% in some parts of the city. House prices however were unaffected, perhaps because the legislation was expected to be short lived.

The paper emphasised the benefit of attempting to estimate the impact of controls even over a relatively short period as well as the complex political environment in which regulation in Berlin had been introduced. Obviously, the resultant uncertainties themselves impacted on the strength of supply response even though the tendencies were relatively clearcut.

The discussion raised both methodological and policy issues. It was noted that in general, econometric studies tend to be concentrated in the USA where the federal system makes it easier to compare different regimes and quantitative data are more readily available than in most other countries. They also often reflect a strong negative bias towards rent controls. These two articles were seen as atypical of the relevant literature and therefore particularly valuable.

The first article stands out for covering so many countries and such a long period of time. That the authors observe reductions in supply arising from regulation is not surprising. What was seen as particularly interesting was that they identify mitigating responses which mean that the impact on consumers overall is more limited. The second article was seen as very much at the other end of the spectrum, looking at a very short period and tracking immediate responses. Two important lessons were noted: that enforcement is possible but also that the sudden introduction of regulatory constraints leads to immediate negative supply responses. There will undoubtedly be follow up analyses covering the impact of the later changes in policy.

Analysing specific forms of new controls

Further papers analysed the introduction of forms of rent control into systems that have been mainly market based for decades. They reflect the growing pressure on governments to introduce at least temporary rent controls in the face of worsening affordability and increasingly limited access to other tenures among lower income households. The analyses depend on three types of evidence: extensive literature reviews examining international evidence of past experience of rent controls; regularly available national and local based data sets (which are particularly detailed in Ireland); and survey analysis specific to the proposed changes.

The two papers included in the special issue discuss Ireland and Scotland. The two Anglo-Saxon countries are similar in that both had removed rent controls and had provided only short-term security of tenure from the early 1980s. Latterly they have both looked to introduce controls in high pressure zones as well as, more generally, to strengthen tenure security for tenants. Both countries have also now introduced temporary rent caps in the face of increasing market pressures. Importantly, the Residential Tenancy Board (RTB) in Ireland collects and analyses detailed individual data which has both informed policy development, notably with respect to the delineation of rent pressure zones introduced in 2016, and enabled outcomes to be monitored. The Scottish government has come much later to the introduction of similar zones and as yet has very limited data available both with respect to the definition of these zones and predicted outcomes.

The paper by Conor O’Toole ‘Exploring rent pressure zones: Ireland’s recent rent control regime’ is a case study of the introduction of Rent Pressure Zones in 2016 in the face of rapidly rising rents. In the identified zones rent rises were limited to 4% per year with some exceptions covering new provision and necessary maintenance and energy efficiency costs. The evidence suggests that in the pressure zones, rent rises have been moderated by between 2% and 5% but increases are still on average higher than the cap. While the policy has been generally regarded as a useful experiment there are two major concerns.

First, pressure zones have been extended to much larger areas where rents have been under less pressure. This is similar to experience in Germany, perhaps reflecting popular support for more general controls. Secondly the experiment was intended to last for four years but shows no signs of ending. This reflects the understanding that the market is getting tighter especially in Dublin. But it also provides a good example of how once in place it is difficult to remove temporary constraints. What matters into the longer term is how landlords respond. Reports from the RTB based on individual data suggest that some landlords are pulling out or moving to different parts of the market. They also note that local authorities are finding it difficult to find suitable temporary accommodation which has normally been drawn from the lower end of the private rented sector.

Much of the discussion was about how difficult it was to maintain the original concept of pressure zones and not to find control extending to less pressured areas as well as about expectations as to whether the controls would be temporary. There was also discussion of how the introduction of controls had led to the collection of valuable data which could lead to a much better understanding of the role of the sector as a whole.

The article by Alex Marsh, Kenneth Gibb & Adriana Mihaela Soaita ‘Rent regulation: unpacking the debates’ is much more broad brush in its objectives. In part it reflects the outcomes of a research programme carried out to help inform the Scottish government who are intending to introduce a national effective form of rent control by 2025.

One element of that research was an international review including both economics and wider social science literature published since 2000 (Gibb et al., 2022). The evidence suggested that even the economics literature does not show the expected homogeneous mass dismissal of rent controls but rather a much more thoughtful analysis of the possible ways of managing the market in twenty first century conditions. More broadly based analyses tend to place significant emphasis on who benefits (Gibb & Marsh, 2022; Kettunen & Ruonavaara, 2021; Turner & Malpezzi, 2003).

The literature review provides the framework for the article which uses Scottish experience to illustrate their discussion. A core question which they address is the extent to which either the drivers of policy change or the changes themselves are evidence driven. They suggest that evidence has little effect on the ‘what shall we do?’ (eg limit rent increases) which is mainly the result of political perception and who the government wishes to support. But evidence has a much greater role with respect to ‘how to do it’ in this case how to identify pressure zones but more fundamentally how to revise tenancy agreements to ensure greater security of tenure for tenants. Evidence has also helped landlords by supporting the inclusion of a large number of exceptions aimed at mitigating the negative impact on their preparedness to let. In other words, the authors suggest that politics drives the need for regulatory change, but evidence helps to make the chosen policy more tractable.

While the Irish contribution stressed the potential for an improved evidence base the Scottish contribution asked whether policy itself when it is introduced tends to be evidence based—to which there was a clear negative response. So, the discussion concentrated on both the problems that arise when policies are strongly politically based and how evidence could be introduced earlier into the policy debate. On the whole, the conclusions were not optimistic.

The impact of regulatory change in particular contexts

The paper by Montserrat Pareja-Eastaway & Teresa Sánchez-Martínez ‘The private rented market in Spain: can regulation solve the problem?’ reflects upon the growing role of the private rented sector in a country where traditionally owner-occupation has dominated the housing market with very few social rented units and private renting playing a residual role at the margin. The article reviews the different regulatory frameworks that have been put in place since 1950 which have ranged from strict regulation to almost total market determination. Looking at this evidence the authors argue that, given that the regulation would apply to such a small and insecure sector, rent controls are likely only to generate benefits for a proportion of existing tenants and would give no incentive to expand the supply of rental housing. A related issue which is currently much under discussion is that in tourist cities such as Barcelona much of what rented property there is has been transposed into short term lettings, leaving very little of the housing stock available to lower income tenants. Policies to restrict this growing subsector are currently seen as the most immediate issue. The authors also argue that more fundamental policies need to be put in place that can both expand the supply of housing available for lower income households and maintain its affordability. This is seen as implying a much larger role for social housing.

The discussion centred around the difficulties of providing rental accommodation in countries where owner-occupation dominates-especially in environments such as tourist cities where the growth of short-term lettings is further restricting the traditional market and in some cases such as Lisbon excluding locals from city centres. It was agreed that controls are having very little positive impact, forcing poorer households into suburban areas with inadequate transport and infrastructure.

The paper by Chris Martin, Alistair Sisson & Sian Thompson ‘Reluctant regulators? Rent regulation in Australia during the COVID-19 pandemic’ uses a range of techniques to assess the impact of regulatory changes in Australia’s lightly controlled private rented sector during the COVID-19 pandemic. The government’s main response was to introduce generous income support. Specific to private renting they limited landlords’ rights to evict tenants and set up a framework which aimed to support mechanisms by which landlords and tenants could negotiate adjustments to their payments. Survey evidence showed that the negotiation framework did not work well, with relatively few tenants benefiting and many more building up significant future liabilities. On the other hand, the income support scheme was generous enough for many households to increase their savings and in some instances to help landlords to expand their portfolios. Tenants however did relatively badly—partly because assistance was often income related but more because tenants were relatively powerless. Taken together this has reinforced both intergenerational and inter-tenure inequalities.

The discussion concentrated particularly on the residual nature of the private rented sector in Australia although noting the fact that an unregulated build to rent market was beginning to evolve. Discussion also concentrated on how inappropriate the private rented sector was in meeting the needs of an ageing population of poorer tenants. The Covid regulation approach was seen as a failed attempt to address issues of relative power between landlord and tenant in a free market environment.

More generally, distributional issues with respect to housing have been seen as a major outcome of governments’ Covid policies. In many cities across the world, we are now observing massively increased pressures on privately rented sectors with demand outstripping supply and rents rising rapidly. Not surprisingly this is resulting in calls for stronger regulation with respect to both rents and security of tenure. The Australian paper provides an example of why this might be the case.

Taken together the six articles included in this special issue reflect a wide range of evidence, mainly addressing the consequences of regulation. But discussion also noted that rent controls themselves are not usually used on their own. In particular, policy almost always involves strengthening security of tenure. They also raise major issues as to longer term incentives, particularly with respect to housing supply. This is arguably why so many of the current attempts to regulate the privately rented sector involve temporary rent controls (which may well become long-term) but place more emphasis on wider tenurial conditions.

Outlook

A lot has happened in the world since 2021. After most of the restrictions of the Covid pandemic were suspended, Russia’s terrible war of aggression against Ukraine began. These developments have not only induced societal changes, but have also significantly altered the macroeconomic environment, which has repercussions on housing markets against which rent regulations may also have to be reconsidered.

The most significant change has been in the rise in inflation and the accompanying interest rate increases. Already in 2021, inflation rates were rising worldwide due to problems in supply chains and production shortfalls. With the start of the war in Ukraine, there were also significant increases in the cost of energy and sharp rises in food prices. In the meantime, it must be assumed that inflation is developing its own dynamic, especially as the shortage of skilled labour and increasing de-globalisation are further driving inflation (Goodhart & Pradhan, 2020).

As a result of rising inflation, interest rates have also increased, on the one hand because central banks are raising key interest rates as a countermeasure, but also because savers, the providers of liquid funds, are demanding compensation for the loss of purchasing power. As a result, very quickly after the start of the war, mortgage rates rose significantly, by several hundred basis points.

The low interest rates were a major motive for financial investors to enter the housing market in the 2010s. Residential real estate investments promised high returns on equity despite moderate rental yields. In other words, the difference between financing costs (e.g., by re-financing with bonds or mortgages) and the rental yield was so high that investors could leverage their equity yields. In addition, investors promised themselves additional returns through professionalisation and the exploitation of unused potential for rent increases (Whitehead et al., 2023). This phase of financialisation (Aalbers, 2016; Christophers, 2015) was a major motive for the renewed discussion about and introduction of rent regulation.

This period of financialisation may also have contributed to the fact that the side effects of rent regulation often noted by economists, such as less investment in the stock, more sales to owner-occupiers or the emergence of black markets, were less obvious. The hypothesis here is that due to rapidly falling interest rates and the resulting increase in property values, the development of rents themselves was less important. Even if there were regulations restricting rent increases or even rent freezes, this did not fundamentally change investors’ plans, as the prospect of returns from increases in value was still there. This could explain why regulations such as the German Mietpreisbremse (rental brake), the Irish rent regulation or the Australian measures, both discussed in this special issue had fewer unintended adverse repercussions than economists feared.

With the rapid rise in interest rates in the last three years, many financial investors have withdrawn from the market. Partly as a result, construction activity has also collapsed in many countries, as many project developers had been selling most of their new units to financial investors. At the same time, international migration is picking up again after the end of the Covid restrictions. In addition, there is increased pressure on the rental housing markets, because households are now often unable to afford home ownership and are turning to rental housing. In this mixed situation, it can be assumed that new contract rents could rise even faster than in the 2010s, especially since landlords will also try to protect themselves against high inflation by increasing rents.

It would therefore not be surprising if the demands for rent regulation were to intensify once again. From a research perspective, it will be necessary to examine how rent regulation will play out in this new environment. Owners can - at least in the near future - no longer assume automatic increases in value. Rather, returns will once again be determined by increases in new contract rents and adjustments to existing rents.

In addition, rent increases below the inflation rate inherently mean falling real rents - but at the same time tenants’ wages are also not necessarily keeping pace with the inflation rate. Since the market is also tightening because of declining construction activity, rent regulation in this environment could lead to more sales to owner-occupiers, for example, or to other circumventions, such as short term or furnished rentals, if there are regulatory gaps that can be exploited.

A particular challenge in this complex environment is energy efficiency investment. There is no doubt that the building sector is essential for the success of measures to limit climate change, as heating and air conditioning of buildings are responsible for about one third of the carbon dioxide emissions in industrialised countries. If we consider that new buildings often consume only a small part of the energy used by old buildings, there is a great deal of leverage for climate protection through energy modernisation. From a landlord’s point of view, however, modernisation is an investment that must pay off through higher rents. From a tenant’s point of view, on the other hand, energy-efficient modernisation often does not represent an advantage in the short term, as the energy savings tend only to compensate for the higher rents in the long term and as prices continue to rise. This landlord-tenant dilemma is not new (Ástmarsson et al., 2013), but it is becoming more acute now, in the light of significantly higher interest rates and rising construction costs.

One of the key experiences with rent controls is that they have a negative impact on stock renovations. After all, the demand for rental housing that is being held below market rent levels is so high that there is no need for additional investment (Diamond et al., 2019). On the other hand, however, it is understandable and justified from a socio-political point of view that tenants need to be protected from strong rent increases arising from refurbishments. How this dilemma can be solved and what relevant international experience is extremely relevant - but it is also an under-analysed field of research.

This is not the only reason why the rent regulation and its impact still offer numerous topics and case studies for research in the future. In view of the ever-increasing tensions in housing markets, especially in the big cities, there will be further policy experiments as well as a return to already used instruments. Researchers are therefore challenged not only to analyse and evaluate current schemes, but also to bring international experience and their own innovative proposals into the discussion.

Conclusions

The papers included in this special issue and those presented at the earlier workshop, together with many other valuable contributions from participants provide a wide range of analyses using both quantitative and qualitative methods. As the importance of private renting increases in many countries and particularly in growing cities, at the same time as affordability worsens, there has been an unpredicted, but not surprising, growth in interest in various forms of rent controls and rent stabilisation policies. Equally, since the papers were written the economic environment has changed out of all recognition generating further tensions that have yet to be fully understood.

We hope that this Special Issue makes a contribution to both national and international debate not just on rent controls themselves but also on the full range of instruments that can help improve housing outcomes. Equally, we hope that it will encourage others to get involved in bringing new thinking and analysis to an increasingly important area of housing policy.

Disclosure statement

No potential conflict of interest was reported by the author(s).