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Labour & housing: a bunch of charts about rents and construction

Rent controls, if they have any teeth to them, make it less profitable to let out houses, which means fewer houses in the private rental sector and less construction of new homes for rent. So the theory goes, and we're all being reminded after Jeremy Corbyn's speech to Labour conference that everybody agrees with this theory. (Everybody, in this case, means "Paul Krugman almost twenty years ago".)

The official rent statistics only go back to 2005, which means I can't show you a longer-run chart or one covering the period when the UK had rent control. But you can see that there's no simple connection between rents (or rent increases, which is what's on this chart) and the rate of construction.

Is that the wrong thing to look at? The build-to-rent sector is still young and small, so most construction is for owner-occupiers, which might mean completions are less important than shifts of property into the rental market.

Increases in private rental sector (PRS) homes don't bounce around as much as construction. There's a steady increase, though the rate of increase has been slowing since an early 2000s boom in buy-to-let. But again it doesn't seem to have much to do with changes in rents.

Actually this is a red herring. Nobody would think of it as a triumph for housing affordability if there was a surge of homes for rent but not in construction - that would just mean fewer people living in homes they own. The point is to establish policy settings that draw more investment in building residential property. It didn't look like rents are the main driver. What is?

This is starting to look more promising, but we can go one better:

Unsurprisingly, if you focus on private construction the market relationship is a lot closer. The market price of houses moves very closely with private-sector construction activity. But to repeat, that doesn't have all that much to do with rents. Here's rents and house prices.

That's not to say that the level of rents - and, consequently, rent controls - has no long-run impact on construction. But if it does, it's primarily through the effect of rents on house prices, which are generally quite likely to be swamped by the 80% of dwellings which aren't in the private rental sector.

More broadly there's something very odd about idea that housing policy should be geared to ensuring that housing remains an above-average investment and prices raise steadily, in the name of rental affordability. For one thing, it means enriching owner-occupiers and the owners of the existing rental stock - a total of around twenty million homes - and making homeownership more difficult for those who don't already own, for the sake of (optimistically) 200,000 new rental homes a year.

The more significant issue is that private construction is basically a sideshow. Overall completions have, since the early 1990s, tracked private-sector completions very closely. But that doesn't mean boosting private construction is the key to revitalising the housing supply.

Almost the entire fall in the construction rate in the last fifty years - from 300,000 a year at the end of the 1960s to barely 150,000  in 2015-16 - is made up of an incredibly sharp fall in construction by councils and housing associations. That's where the action is, which makes Corbyn's rent control proposal yesterday vastly less important than the 2017 manifesto's undertaking to increase public construction to 100,000 homes per year. (That level hasn't been reached since Margaret Thatcher was elected. Do you believe in coincidences?)

The conclusion of all that isn't that we should be completely sanguine about the line the Opposition Leader took yesterday. Giving rent control powers to local authorities, which seems to be what Corbyn had in mind, is a nice localist gesture but has clear downsides. Council areas are small and more likely to be worried by short-term and very local issues caused by rent control implementation than a national government with a five-year mandate.

Local government boundaries also don't align with the economic areas that drive house prices and rents, which mean council-level policies are more likely to be distorting. (Rent caps might not be severe enough to turn you off being a landlord altogether, but if you can make much more by investing in one borough of the city rather than another you may well do that, with unwanted aggregate effects on how investment and housing accessibility are distributed across the city.)

Maybe most seriously, some of Corbyn's suggestions would make council building harder. Regeneration projects which put a mix of private and social housing on existing council sites are a way for local authorities and housing associations to fund construction which they're otherwise hard-pressed to afford. Between 2010 and 2015 councils took a 37% real-terms cut to the funding they receive from the national government. Cutting off a major funding source and requiring approval of existing residents for any redevelopment are not, on the face of it, moves that will help expand the supply of publicly-constructed housing.

Of course the whole point of Corbyn's new Labour is that it's vehemently opposed to the austerity that crippled council budgets, and not afraid to spend lots of government money on important projects. The question is whether that's followed through. An admirable, politically valuable commitment to running (at least some version of) the fiscal numbers on their policies before the 2017 election meant that Labour's manifesto didn't commit to undoing the benefits cap. It'd be a worry if the amount of money involved means the construction pledges stay at the level of rhetoric and are substituted with popular policies - like rent control - that will never get to the core of the issue.