Tuesday 22 January 2019

Controls will only do damage in a restricted housing market

Controls rid New York of more than 300,000 rental units through the 1970s and destroyed most of the South Bronx. Getty Images
Controls rid New York of more than 300,000 rental units through the 1970s and destroyed most of the South Bronx. Getty Images
Mark Keenan

Mark Keenan

'Rent control appears to be the most efficient technique presently known to destroy a city - except for bombing," the Swedish economist and socialist academic Assar Lindbeck once said.

Fellow socialist, Nguyen Co Thach, former Vietnamese foreign minister, agreed: "The Americans couldn't destroy Hanoi, but we have destroyed our city." Rent controls again.

"Ultimately you can decide to freeze rents in the morning but that doesn't actually solve the problem," one of our own foremost experts stated.

That was Housing Minister Simon Coveney, who in August cited the two-year 'rent stability' measures set by his predecessor Alan Kelly as a key cause of rent inflation. It is somewhat ironic then that yesterday's announcement of a regime of rent controls for Dublin and Cork Cities - albeit permitting 4pc increases per annum - has Coveney continuing in a similar vein.

Rents will now be controlled for three years in both cities now designated 'rent pressure zones'. Other areas can be designated going forward.

Why? There is agreement among economists that rent controls cause only damage in a market where supply is restricted. A survey of almost 500 US economists from all sides of the political spectrum in 1990 showed 93pc in agreement with the tenet that rent controls not only cause supply to decline (the opposite of what we want) but reduce stock.

The Americans should know - controls rid New York of more than 300,000 rental units through the 1970s and destroyed most of the South Bronx. In East Bloc cities, controls without supply saw tenants sub-divide until families were living in the tiniest spaces.

Rent controls divert new investment out of new home construction and home purchase for lettings and into other sectors. Their introduction and renewal leads investors to fear more radical impositions in the future. Their absence causes rents to rise, which in turn quickly encourages more new building of homes.

In markets where rent controls have become a feature, new tenants are 'loaded' to compensate for losses from sitting tenants and landlords have no incentive to upgrade units.

Controls create a black market for under-counter payments and inspire new types of fees. In the 1990s it was common for those acquiring shop leaseholds with long, fixed rents to pay key money' - lump sum compensations. Could a Dublin landlord not seek an additional €500 'key fee' for a unit which has had its rent restricted to maximum rent of €1,400 until 2020? With a shortage, tenants will pay it.

Aside from controls, yesterday's report is largely an aspirational distraction. Look to the home building measures in the greater housing plan to provide more supply, the only real solution.

Irish Independent

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