Rent control, the policy whereby government sets rent prices typically below market value, is increasingly being championed as a solution to the housing crisis in Britain. Figures such as London Mayor Sadiq Khan, the Green Party, and even a Labour-commissioned report have thrown their weight behind this idea. In Scotland, rent increase caps were in place until March 2024, and even now, tenants can challenge certain rent hikes. Yet, a briefing paper from the Institute of Economic Affairs (IEA) casts a stark light on the potential pitfalls of such measures.

Authored by Dr. Konstantin A Kholodilin, a senior researcher at the German Institute for Economic Research (DIW Berlin), the briefing delves deep into six decades of research, spanning 196 studies across almost 100 countries on all inhabited continents. What emerges from this extensive analysis is a strong consensus among academics: rent control, while seemingly beneficial on the surface, often produces far more negative outcomes than positive ones.

Dr. Kholodilin argues that although rent control might appear to help existing tenants, this benefit comes with significant societal costs. Lower maintenance spending, a reduction in new property construction, and an increase in properties being converted to owner-occupied homes are just some of the detrimental effects that follow. These consequences ultimately aggravate the very housing shortages rent control aims to alleviate.

Moreover, rent control can spark 'excess demand' for housing, making it increasingly difficult for newcomers to find homes. This scarcity not only stymies labour mobility but also exacerbates discrimination against marginalized groups and fuels black market activities. Dr. Kholodilin further points out that rent controls often encourage people to remain in housing that no longer suits their needs, such as staying in a spacious, rent-controlled apartment long after their children have moved out. This stagnation leads to a ‘misallocation’ of available properties, inflicting further economic harm.

"Rent control effectively reduces rents in the controlled sector," Dr. Kholodilin explains, "but it comes at a high price. Tenants occupying the rent-controlled dwellings benefit the most, at least in the short run, while newcomers lose from rent control. In the long run, rent control can undermine the rental sector, forcing landlords to convert their dwellings and tenants to become homeowners."

Dr. Kristian Niemietz, editorial director at the IEA, emphasizes the remarkable agreement among economists on this issue: “Economists are a notoriously divided profession: ask three economists, and you get four opinions. But there are exceptions to this, and the study of rent controls is one of them. This is an area where the empirical evidence really overwhelmingly points in the same direction. The finding that rent controls reduce the supply and quality of rental housing, reduce housing construction, reduce mobility among private tenants, and lead to a misallocation of the existing rental housing stock, is as close to a consensus as economic research can realistically get.”

Ronan Lyons, an associate professor in economics at Trinity College Dublin, adds, “Dr. Kholodilin’s comprehensive review of the rent control literature is tremendously helpful, not just for academics but also for policy analysts and policymakers, as numerous cities across the high-income world grapple with housing shortages. The resurgence in rent controls over the last decade is, given the affordability challenge in housing, perhaps politically understandable. But, as Konstantin’s thorough overview shows, the economic costs of such policies can be significant. Armed with the key facts marshalled by this review, policymakers can make better-informed decisions on rent affordability policies.”

In summary, while rent control may seem like an attractive remedy to housing affordability woes, the evidence compiled over decades suggests that its long-term consequences can be far-reaching and damaging, creating more problems than it solves.