Let's Talk About Rent Control and Social Housing
Neighbourhoods in different parts of the world are becoming increasingly expensive and unaffordable for many members of society due to other high income earners driving up the price. Financial services employees in London drive up rents and make it difficult for artists to rent an apartment. Tech workers in San Francisco make it difficult for teachers to afford housing.
In order to ensure everyone has access to good quality rental housing, Govts take various initiatives to keep the rental market in check. In the US, this is primarily done using rent control laws, while in Europe, social housing is the method adopted. Both initiatives try and achieve the same goal.
Rent control is essentially when the rent of a property, once it reaches a minimum threshold (like age), is capped by the local Govt and the landlords are not allowed to charge beyond that - even if there are tenants in the open market who are willing to pay more.
Social housing is a mechanism through which many European Govts built rental housing for low earning sections of society. Many countries in other parts of the world have implemented similar mechanisms as well.
Let’s dive into the details -
Modern day origins of Rent Control
While the origins of control over housing and rents can be traced back to the Roman empire, modern implementations of rent control go back a little over 100 100 years. As with many other aspects of the modern economy, it started with World War 1.
Australia was one of the 1st countries to introduce a bill to regulate rents in 1913, and it was eventually passed in 1915 after World War 1 broke out. France introduced a ‘Rent Moratorium’ in 1914 and kept extending the same till 1918, when it was eventually replaced by a more comprehensive law. Britain introduced it’s own rent control laws in 1915, and most other nations in Europe followed quickly to implement their own versions of the same.
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The US had it’s own version of ‘Fair rent’ legislations starting from 1918, but they were more of guidelines and were left to local authorities to implement. Better versions of the same started to emerge in the 1920s. Propelled by the Great Depression, rent control laws become more common through the 1930s and 1940s.
By the time World War 2 broke out, most of Europe was prepared for it (from rent control perspective) and had mandated landlords not to increase rents!
Social Housing and its origins
Post WW2, many European countries found themselves in tough situations - Their economy in shambles and much of their infrastructure destroyed due to the war. To add to it, there were now millions on soldiers who needed to re-skilled and employed. It all added to a mounting pressure on Govts to address the housing crisis, as many sections of society were unable to pay the rent.
This was the gateway for social housing as we know it.
Either directly, or by working with the private/NGO sector, Govts created housing stock which could only be rented out to members of society who were earning below a certain threshold at rents which were also capped. Private real estate developers or local NGOs who were willing to participate in these programs were given incentives (like Tax Sops, lower cost of borrowing, etc.) to lure them into creating such housing. This laid the foundation for modern day social housing.
To understand the scale, ~15% of all households in the UK and ~11% of Mainland Europe, lives on social housing today. These are fairly high numbers and can’t be ignored.
Pros and Cons
The advantages of controlling rent include:
Ensuring rental stock is still accessible to members of society who are not compensated as well as others
It provides a hedge against rent inflation for those who won’t be able to relocate to cheaper neighbourhoods. Ex. When rents increase in a given neighbourhood, a few people can possibly move to another part of the city where the rent is low. But those who have equity in the neighbourhood (Like have their children in the local school, or own a small business in the location) can’t do so
While these are good reasons, the common problems with rent controlled buildings have been around for a long time including:
Improper maintenance and upkeep of the property by the landlord
Real estate developers end up selling their housing stock instead of renting it out (As it is not profitable to do so)
Discourages landlords and developers from building more rental housing in the city as they fear Govt interference
All of the above factors end up accentuating the housing problem.
At their core, rent control and social housing mess with the principles of free market economy which has long term consequences.
What is the solution to the affordable housing crisis?
BUILD MORE HOUSING!
There are studies which clearly indicate that in cities where it’s easier for real estate developers to construct housing units (Easier permits, friendly zoning laws, etc.), rents are under control purely by market dynamics. As supply increases, rental prices drop as a market function.
A second factor that influences rental prices is developing infrastructure, especially public transportation, across different parts of the city. With easier/cheaper ways to get around the city, people can choose to stay further away from their work as the commute is still quick, and it helps keep rental prices in check as well
What are your thoughts on rental control and social housing? Does your city/country have this? Drop a reply or a comment and would love to discuss more!
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