THE MINISTER OF State for Housing, Labour’s Jan O’Sullivan, has called for rent price controls linked to the consumer price index (CPI) during a recent interview with the Irish Examiner. Average rents have come up by almost five per cent year on year, as of Q3 data, and in Dublin they’ve come up by 7.6 per cent.
This is, naturally, worrying for renters. What ought to be worrying to renters and buyers alike is that the Minister with responsibility for looking after this area might come out with such an ill-conceived and stupid policy proposal to fix the problem.
There are three fairly simple reasons why rent controls, and in particular those linked to the CPI, are a terrible idea.
Firstly, had Jan O’Sullivan or any of her highly paid advisors bothered to check the Central Statistics Office data they would have noted that had rents been linked to the CPI in the past, they would presently be 20 per cent higher than they are. As the UCC economist Seamus Coffey points out on his excellent blog, rents are now indexed at about 2003 levels while the CPI is substantially higher.
During the crash rents came down by a quarter, while the CPI came down by less than 8 per cent over the same period. If we followed Jan O’Sullivan’s proscription for rent controls, renters would have been substantially worse off both during the crash and now during our relative return to growth.
Indeed, at no point since the CSO was tracking the relevant data in 2003 would rents have been anything but higher were they linked to the CPI.
A second good reason to dismiss the idea, regardless of what random features of national life rents are tied to (electoral cycles, perhaps?), is neatly summed up by the left wing Swedish economist Assar Lindbeck. “Next to bombing, rent control seems in many cases to be the most efficient technique so far known for destroying cities.” So says a man who, if he were Irish, would be in the Socialist rather than the Labour Party.
His fellow Swede and left wing economist Gunnar Myrdal, winner of the 1974 Nobel Prize in economics and government minister in the Social Democratic Party that today sits in the same Party of European Socialists as our own Labour Party in the EU, was similarly scathing. “Rent control has in certain Western countries constituted, maybe, the worst example of poor planning by governments lacking courage and vision.”
One of our key challenges at the moment is a lack of supply in the cities, which is driving up rents at the accelerated rates versus the rest of the country. For all that we’ve had a massive property related crash and there are still ghost estates littering the land, we are overdue a construction spree in certain places.
The trouble with rent control is that it strangles investment into property, leading to Lindbeck’s famous quip to his students about it being second only to bombing in its effectiveness at destroying cities. Industries that suffer government price controls are a bad place to invest your money versus those with no control; so instead of putting cash into new construction, or even the upkeep of existing buildings, investors go somewhere the return involves less red tape and meddling.
A study by Paul Niebanck in the US found that 29 per cent of rent-controlled housing in the country was in a deteriorated state, versus 8 per cent of the uncontrolled market. Joel Brenner and Herbert Franklin cited similar statistics for England and France.
“Ah,” say the rent controllers in the room, “but we’ll just enforce better standards!” You can, of course, do this; and there’s evidence that we should do so anyway given the state of some kips up for rent in the country. But you can’t force people to invest in rental property in the first place, and as private sector supply dries up in an ever more regulated and controlled market it will fall to the State to step in with more investment in building – you know, the State with a debt-to-GDP ratio north of 130 per cent, which borrows a billion a month to keep the lights on as is. Good luck.
The third and particularly Irish reason why rent controls are a bad idea is because the Supreme Court ruled our last set of rent control laws unconstitutional. Now, that’s not to say that any future law would infringe on constitutional property rights; but it does show that we could waste a lot of time and effort dousing ourselves in petrol before the courts tell us we’re not allowed strike the match.
There are many issues around rented housing in Ireland at the moment. Supply and demand are mismatched; accommodation standards aren’t being universally upheld; and all of this is exacerbated by high unemployment, banking and negative equity issues among others.
Proposing a simplistic solution to arbitrarily try solve one facet of the problem is not good policymaking by Jan O’Sullivan or the government at large. Perhaps overwhelmed by the scale of our troubles, the political instinct is to look for a panacea. If there is one, this surely isn’t it: driving investment out of rented property at a time when there’s a supply shortage seems a poor policy choice.
We live in an interconnected economy. The lack of lending by our zombie banks is holding back the ability of the private sector to invest and provide more supply, which would alleviate price increases. Our ever-efficient planning process will have to kick into gear to approve projects quickly when they are on the drawing boards; though of course we should learn our lessons from the past and make sure that new developments come with proper infrastructure from the day the first families move in.
Investment requires confidence that the market will remain stable. Just as the Government and the IDA so successfully tell foreign investors that the regulatory and tax environment they’re coming to is solid as a rock, Jan O’Sullivan and the government might reassure potential investors that half-baked policy ideas aren’t going anywhere or likely to broadside them in future.
Aaron McKenna is a businessman and a columnist for TheJournal.ie. He is also involved in activism in his local area. You can find out more about him at aaronmckenna.com or follow him on Twitter @aaronmckenna. To read more columns by Aaron click here.
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