Sadiq Khan’s rent controls are a boon for AirBnB

“Next to bombing, rent control is the most effective technique so far known for destroying cities”

Assar Lindbeck (Swedish professor of economics)

Politicians love to talk nonsense when it comes to garnering votes. Johnson said give £350 million a month to the NHS instead of the EU, Trump said build a wall and Sadiq Khan claims he’ll bring in rent controls if re-elected as London mayor.

It’s this rhetoric and blatant self-interest that makes politicians so unlikeable. They take the public for fools and suggest policies that sound good on the surface but are either impossible to implement or completely unsound to begin with. Rent controls are both.

Khan’s re-election promise is based on implementing something he doesn’t have the powers to do, and extremely unlikely under a Tory government. Even if Labour get in at the next general election, many on the Left see rent controls for what they are: a bad idea that harm the people they’re supposed to protect.

This time it’s different

“Those who cannot learn from history are doomed to repeat it”

George Santayana

We expect our doctors and airline pilots to be qualified, it’s a shame we don’t have the same expectation for Mayors, MPs and Prime Ministers. It’s hard to tell whether it’s a case of being unread and unknowledgeable or arrogance: I’m smarter, this time it will be different. It’s probably a bit of both, which explains why politicians have an uncanny knack for repeating mistakes of the past.

Khan has said “We can learn from international precedents, such as those set by Paris, Berlin and New York, to design an effective system of rent control for London.” Those learnings are being kept from the public though. We’re yet to hear how Khan’s rent control system will be different from failings of the past. The mayor of London website no longer tells us anything on the topic and only returns an error.

What’s learnt from Berlin?

Berlin’s rent controls were a catastrophic disaster. After one year they have already been scrapped. Rent controls in Berlin did exactly as expected, the supply was severely constrained “The number of classified ads for rentals has fallen by more than half” The Economist explained.

“After a year, Berlin’s experiment with rent control is a failure”

The Economist

Paris

Rent control was reintroduced into Paris in 2018 after only lasting for two years between 2015-17. The rules are similar as before where local councils set the average price per square foot. Prices can be higher though when properties feature “an exceptional characteristic”. Needless to say, an overwhelming number of properties meet this criterion which begs the question are these really rent controls?

New York

Rent control has been phased out in favour of rent stabilisation which makes up ~50% of New York apartments. However, this only applies to buildings built before 1974 with 6 or more floors. The remaining properties are governed by the free market.

Living in a rent stabilised property means rents can only go up by a small amount each year, which sounds good. But this works as a deterrent for rents going down, the Covid pandemic has been a prime example. I (like many landlords) have helped tenants out over this tough period with a rent reduction. But when landlords aren’t allowed to put rent back up, it makes for an environment where landlords are less hospitable.

The AirBnB effect

The ‘Airbnb effect’ increases rents and property prices by reducing supply from the long let market. To try and counter this, in London you can only rent out your property on AirBnB for 90 days of the calendar year, however, it’s considered to be ineffective as you can list your property on multiple portals.

Unless Khan also tries to control hotel rates, there would be an inevitable surge of supply in the short-let market. The landlord profile in the UK is very different to other countries with 45% of landlords owning just one property, this would make a pivot into short letting much quicker and with less complications than say a building owner in New York.

The long let rental supply in London has surged under Covid as previous AirBnB short lets have converted to long term rentals. But Khan’s rhetoric will make these owners keen to switch back as soon as the tourists start arriving.

Needless to say, there are many other reasons rent controls fail such as reducing the incentive to build. This is often countered by making new buildings exempt but as the economist and philosopher, Henry Hazlitt put it: builders are not stupid and know whatever is promised is likely to be repealed.

Summary

There are very few things economists agree on, however, overwhelmingly economists agree that rent controls don’t fix housing problems. Rent controls are good for politics but bad for renters.

To add insult to injury, Khan’s proposal comes at a time when rents are plummeting in London with oversupply and low demand. Although the free market is doing its thing, Khan shows he favours planned economics.

Politicians don’t care about voters, they care about votes and Khan’s rent control promise wreaks of political pandering. As unpopular sounding as it is, the cure for bad landlords and high rents is more landlords but that’s hard to make a catchy campaign slogan from.