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Would German-Style Rent Controls Work for London?

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Berlin  property investment  London  Paris  rental sector  rent caps  rental market  private rental market 

Would German-Style Rent Controls Work for London?

By - Wednesday 12 August 2015

In June, Berlin became the first city in Germany to introduce a cap on rents in the capital. On 1st August French President Francois Hollande enforced rent controls in Paris, delivering on his manifesto promise of sweeping housing reform.

Both Berlin and Paris have experienced spiralling property prices, with some of the fastest-rising rents in Europe. London is in exactly the same boat with more and more tenants being forced to move out of the capital, into the suburbs and beyond where rents are significantly cheaper.

Rents in Berlin rose more than 9% between 2013 and 2014 leading to a new law allowing rent controls on inner-city property to be implemented on June 1st. The legislation prevents landlords charging new tenants more than 10% above the local average rent. The rent caps are intended to put the brakes on Berlin’s rents, some of the fastest-rising in Europe.

Paris the Latest City to Implement Rent Controls

Rent controls in Paris were introduced on 1st August to limit rents across the perennially popular city to 20% above and 30% below a neighbourhood’s average, based on apartment size, year of construction and location with an additional surcharge for luxury homes.

Critics of the Parisian scheme say that real estate investors will be deterred from the City’s property market and while the wealthiest tenants stand to benefit from the new rent caps, less wealthy renters are likely to suffer.

Many are now asking whether Paris and Berlin’s rental cap is the answer to Britain’s housing crisis. Germany has always preferred rental over home ownership and more than half its population rents their home which is why Berlin has experienced such a steep increase in rental values. Between 2003 and 2011, property prices in Berlin went up by 40% while rents increased by more than 9% between 2013 and 2014 alone.

Reiner Wild, managing director of the Berlin Tenants’ Association said it was important to act now to prevent Berlin becoming like London or Paris. He told the Guardian: “The rent ceiling is very important for Berlin because the difference between the rent paid in existing contracts and new contracts is so high. We don’t want a situation like in London or Paris. The reality in Paris or London is that people with low income have to live in the further-out districts of the city.”

Should London follow Germany’s Lead?

The disproportionate rise of rents to property values is a problem in many prime markets in 2015 and nowhere more so than London. If the Mayor of London was given formal powers to regulate private sector rents as proposed by the Labour Party, a similar scheme to that in Berlin and Paris could quickly be established in London’s meteoric property market.

When Ed Miliband first announced his plans for private renters in May last year, the London School of Economics’ Christine Whitehead described the then Labour Leader’s proposals and the attacks on them as “knee-jerk, partial responses to a problem that can only be addressed by more nuanced, coherent and evidence-based policies”. Whitehead illustrated that the problem is complex and that what has worked well in Germany might have perverse ill-effects in the very different context of London.

Rent Controls not appropriate in London’s Market?

Research shows that while statutory longer-term rent-stabilised tenancies may benefit the better off tenant, they can worsen the position of poorer households looking to rent privately, harming the very people the suggested approach is trying to help.

The LSE’s Whitehead and her colleague Kathleen Scanlon recently produced a report on rent stabilisation for Camden Council, published last September. In the words of Camden’s leader Sarah Hayward, it was commissioned to stimulate debate about “what can be done in London to influence quality and price in the private rented sector without adversely affecting the supply”.

Hayward points out that a third of Camden residents rent privately – higher than the fast-inceasing London average of 26% - with a growing number of families joining the young professionals and students traditionally housed that way. Camden administers the voluntary London landlord accreditation scheme which all the boroughs are sighed up to and seeks to help private landlords raise standards. Hayward wanted to find out if the scheme could be improved by adding measures to regulate rent levels.

Conclusions of LSE Report Make Interesting Reading

The detailed report seeks to explore the possible effects of imposing rent caps and concludes as follows:

“New York provides perhaps the best example of what is likely to occur. Those who live in rent-stabilised properties (where rents are held below market rents) do indeed stay for much longer than those in market rented properties. But they also tend to have higher than average incomes, so the profile of those benefiting from the system is quite different from that which the policy makers wished to achieve.”

Given that calls for rent controls are often made in the name of preventing exploitation of people on low pay, this is a sobering insight. The report makes an interesting recommendation to Camden:

“Camden should positively enable longer-term tenancies with index-linked rent increases, voluntarily agreed by landlord and tenant, while at the same time improving transparency and contractual enforcement for both landlords and tenants across the sector.”

Should Rent Controls be statutory or voluntary?

A statutory power to regulate private rents might be useful to future London mayors but would need to be deployed with great care if it wasn’t to do more harm than good. Meanwhile, it could be that the most effective levers for improving the lot of London’s private renters are already in the hands of its 32 boroughs and that the best thing a future mayor could do would be to throw his or her considerable political weight behind ensuring that those levers are put to the best possible use.

From a property investor’s point of view, rent controls can be helpful when considering buying a new property for your portfolio because margins are set in stone which can give weight to price negotiations. It also prevents unscrupulous landlords from profiting from strong demand in London by encouraging bidding wars for rental property or unnaturally inflating rents.

 

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