London's rents are rising as high as its new apartment buildings. Photographer: Simon Dawson/Bloomberg

How Not to Solve London's Rental Shortage

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of “The Up Side of Down: Why Failing Well Is the Key to Success.”
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Rents are rising. The economy is stagnant, and household formation has fallen from its pre-crisis level, so why would rents go up?

It's actually not that surprising. The convulsions in the housing market trashed credit scores; a combination of high unemployment and tighter lending standards have made it harder for people to get mortgages. Meanwhile, on the supply side, construction loans are harder to get, so fewer new units of housing have been built. In other words, the demand for rentals has increased more than the supply.

The same thing seems to be happening in the U.K. And the Labour Party wants to fix this new problem with a very old idea: rent control.

The U.K. abandoned rent control in 1988 under Prime Minister Margaret Thatcher for the same reason that many other countries and localities have gotten rid of it: As an economist once remarked, it is the most effective way to destroy a city short of aerial bombardment. Rent control does create below-market rents for lucky insiders. But unlucky outsiders get stuck paying more or going without, for two reasons. First, rent controls, by depressing a landlord's earnings, mean that less rental housing gets built. And second, people who have gotten their hands on a rent-controlled unit tend not to move, so everyone who isn't lucky enough to have a controlled apartment has to compete fiercely for the small amount of available housing stock.

To be fair, Labour's proposal is not as restrictive as the schemes that have made New York and San Francisco real estate such a disaster. The party is proposing to mandate three-year leases with limited ability to raise the rent during that time but, as far as I can tell, no cap on what the landlord can charge after the three years is up.

Still, if the proposal succeeds in helping tenants pay lower rents, it will also probably succeed in depressing the supply of new rental housing. As in the U.S., mortgage rates are likely to rise. If rents are controlled while loans get more expensive, the much-reviled buy-to-let landlords may obligingly put their money in something other than new housing. That would indeed be ironic.

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