Rent controls are no cure for Irish property market problems

When the fuse runs out on rent controls, prices in the ‘pressure zones’ will explode

Rent control is a false god. That any of its adherents are still around is testimony to the stubbornness of false logic surviving in the face of facts.

Rent controls are used all over the world and have the purpose of protecting tenants from unfair – and sometimes unlawful – price increases or tenancy terminations. Their consequences are widely covered, they work to the extent that incumbents benefit but, typically, new entrants don’t.

In Ireland, we skipped over that risk by imposing controls on the price that passes from one tenancy to the next, irrespective of the fairness of the price. For this reason, I am sure that, soon enough, we’ll see a lease-sellers’ market where tenants moving out ask the new lodger for what amounts to ‘key money’.

This is likely in tenancies where the current rent is substantially below market rent. If a tenant is moving on, why not advertise to sublet privately and if the market rent is €1,400 a month, but you have secured it for €1,000, you ask for, say, €1,000 in cash, or whatever price tickles your fancy to pass the lease onwards?

There is nothing to prevent this from happening, because while ‘covering all bases’ we forgot the obvious, that landlords are not the only cute hoors in Ireland – everybody is, including tenants.

While some rent control laws have had favourable results, they aren’t effective in every region in which they’re imposed. An example of this can be seen in Germany (the same Germany is also an example of the success of rent controls). In Germany, any raise in rates above a cumulative total of 20 per cent over a three-year period is prohibited by law, even with extremely low vacancy rates of below 2 per cent.

Germany’s average monthly rent is relatively low compared to other European Union nations. With an average German’s monthly earnings almost exceeding €3,400, they rank among the European Union’s wealthiest, trailing only Sweden, Switzerland, Netherlands, Luxembourg and Finland.

However, their percentage of monthly income spent on rent stands at an incredibly low 25 per cent, meaning a quarter of the average German’s income is spent on housing in one of the most attractive housing markets with one of the lowest vacancy rates.

This is only possible due to the rent controls imposed on landlords who would be happy to increase rents. While that may increase vacancy rates (which remove the effective locational squatter rights based on when a person moved to an area) in the process, it would also hasten new investment.

In Ireland, our government-led price setting is being implemented in “rent pressure zones” such as Dublin and Cork, and more recently in commuter areas. This outward spread will not change the fundamental issues at play – it will just mask over them for a while, and when the fuse runs out on rent controls, prices in these areas will explode.

Populations continue to rise; people continue to want to move to rent pressure zones. This measure prevents many families from being evicted from their homes due to not being able to pay the increased rates, but passing power to the incumbents – in the way we have – means the tenants we can’t see (those who are locked out) don’t get a chance to live anywhere.

They must make do with longer commutes and other arrangements because those who were in the right place at the right time got preferential treatment.

Sweden is another good example for rent control issues and, yes, this is the same Sweden that is also used as an example of how ‘great’ rent controls are.

The average tenant in Sweden spends roughly 35 per cent of their income on rent, some 10 per cent more than tenants in Germany. In addition to higher rents, Sweden also has an extreme shortage of housing with nine out of 10 Swedes living in a municipality experiencing shortages. Translation: it affects everybody.

Waiting lists for a flat (not a three-bed semi in the location of one’s choosing) can take 11 years and more to obtain. People are beginning to use shipping containers as make-shift homes. Sadly, this is not ‘fake news’. What is even sadder is that they’ll probably put our own ‘rapid build’ schemes to shame.

Swedish rent control doesn’t allow for a raise in rates unless something was done to the apartment to raise the quality of living. So, landlords often complete unnecessary renovations with the agreement of the unsuspecting tenant, and then raise rates under the guise of “enhanced quality of living”.

“Renoviction”, as it has come to be known, has displaced many families and will continue to do so because any time you make it too rewarding to circumvent rules this is what happens. This is part of why rent control is the cancer and not the cure.

For the most part, rent control is an economically unsound idea, albeit crucial for families who can be pushed past the eviction threshold due to price increases. But the solution is better quantity provision rather than price fixing.

Fewer families are being displaced, but only if you count ‘displacement’ as being those who have to move out of where they are now. What about the displacement of everybody else who can’t move in?

This article originally appeared in the Sunday Business Post on the 26th of February 2017.

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