Rent Controls or Landlord Subsidies? (2013), by D.J. Webb

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Rent Control or Landlord Subsidies?
by D.J. Webb
Posted on the LA Blog on the 7th September 2013

Steve Davies constantly intervenes in public debate to argue for what he sees as free markets. However, in the absence of wider economic reforms, some of his arguments may end up, however inadvertently, supporting skewed markets, markets skewed by government intervention, rather than genuinely free markets. As Education Director of the Institute of Economic Affairs (IEA), he may represent the views of the IEA more broadly, and the IEA is an organisation with a reputation for libertarianism. But it is important that libertarians argue for a wholesale restructuring of the economy, to remove existing distortions, and not simply oppose further intervention while retaining existing distortions, because otherwise we may unintentionally end up supporting government intervention that currently works to deliver unearned gains to the well-heeled.

We recently saw Davies write in support of interest rates of more than 5,000% per year charged by loan sharks such as Wonga, without any discussion at all of the way in which immigration and the welfare state have distorted the labour market so that opportunity is removed from the lower end of the ranks of the employed. In his analysis, he didn't discuss whether the minimum wage would suffice to allow a worker to raise a family in Britain or whether immigration is being used to stop wages rising to their natural level. Some might conclude that those on low wages, competing with Poles and Lithuanians, who can't afford to pay their rents and energy bills (both inflated by government policy) have only themselves to blame if they take out a payday loan to keep the lights on, and then see the debt spiral to 50 times the amount borrowed, with Wonga emptying bank accounts at will, regardless of disputes over the amount owed. The IEA probably has a considered view on the way in which the labour market is distorted by state intervention, thus forcing the low-paid into desperate financial strategies, and so I think libertarians would agree that payday lenders are as much a consequence of an unfree economy as of the fecklessness of the debtors, and so I think it better to site all such problems in their wider context of economic unfreedom.

Davies' latest intervention was that opposing rent controls in The Daily Telegraph. Once again, this article opposed fresh government intervention to prevent abuses in the rental market, but unfortunately without discussion of the government interventions that have produced those abuses in the first place. Our theme should not be, however inadvertently, "there must be government subsidy for me, but not for thee!" I'm sure most libertarians would agree there should not be rental controls—but, and here is the main point Davies overlooked—there should not be government intervention to pump up the property market in the first place, and if the government did not intervene in the property market, there would be no need to discuss rental prices at all in any case. It is important to make clear that libertarians do not support state intervention in support of the banks and the existing middle class in a way that can only mean that work does not and cannot pay for large numbers of young people. Organisations that support the free market should constantly raise the question of whether labour and capital should be subject to greater and greater impositions from rentiers, as support for rentierism cannot be accepted as a legitimate form of libertarianism at all.

Davies says, "we would not expect people in any other trade to stay in business if price controls meant they could not make a profit. Why should landlords be any different? The result is homelessness and urban decay". Countries that do have rental controls do not generally show high levels of homelessness and urban decay. He discusses the example of Germany—where he points out, with validity, that planning laws are less restrictive—but in any case, it would be difficult to argue that homelessness and urban decay were more widespread in Germany than in Britain. The problem in his argument is in the phrase "we would not expect people in any other trade to stay in business if price controls meant they could not make a profit". Whoever said it should be state policy to ensure that buy-to-let landlords make a profit? So what if they can't stay in business?

Let us consider the ramifications of arguing that government policy should be drawn up in such a way as not to affect the profitability of the buy-to-let market. Rental controls might cause these landlords to make a loss, forcing them to sell up, and hence the IEA opposes such intervention that would deter the supply of rentals. What about removing housing benefit (aka landlord benefit)? Davies may have not considered this, but the logic of the IEA's position is that all existing subsidies to the property market that form a vital part of the profitability of buy-to-let landlords' property holdings must remain in place. To remove or seriously limit housing benefit might cause buy-to-let landlords to make a loss, forcing them to sell and no longer engage in the letting business. We can extend this argument further. Should interest rates be raised? What if buy-to-let landlords, who have bought property at relatively high prices, could not service their mortgages at high interest rates? Maybe Mark Carney should hold off on interest-rate rises in case the buy-to-let market is affected, because any policy move that impaired their business models would cause buy-to-let landlords to leave the industry.

It would be ludicrous for libertarians to argue that government policy should be governed by a perceived need to help the business models of buy-to-let landlords prosper. Given that many landlords have recently bought property at artificially propped up high prices, it would seem we could be left with a policy of opposing anything that would might a house price crash, just in case the landlords lost money and had to sell up, removing rental stock from the market. My heart would fail to bleed if they sold up at a loss en masse. Would the result be "homelessness and urban decay"? Well, if buy-to-letters sold up en masse, what would be the impact on house prices? It would surely exert downward pressure on the property market. Buy-to-let landlords would no longer be outbidding first-time buyers on properties, and they would have to sell to those first-time buyers for whatever price they could get. The result would be cheaper house prices, a development that libertarians ought to welcome if it entails less government intervention in the housing market.

Cheaper house prices do not in fact spell more homelessness and urban decay; they spell the opposite. As the average wage in the UK is around £25,000, I would welcome a collapse in prices, as shown by the Halifax and Nationwide indices, which have the average prices around £170,000, to around £100,000, or even lower than that. This would mean that most people could buy houses at non-inflated prices, with mortgages of around 3 times one person's income, or less in the case of lower-end properties in depressed towns. But it would impair the market for rentiers.

There are many ways in which the state is supporting house prices, thus preventing people from buying at reasonable price levels and encouraging buy-to-let landlords to buy in at inflated prices that in turn create an argument for continued intervention lest buy-to-letters make a loss and are forced out of the market. The elevated level of house prices is the reason why banks are demanding 25% deposits, or more—the stuff about "responsible lending" is just a cover for lending practices that indicate clearly that the banks believe a 25% fall in house prices is possible when interest rates rise—thus, forcing more and more people into the rental market. We've had the Funding for Lending Scheme, the NewBuy scheme, the FirstBuy scheme, and now the two stages of the Help to Buy scheme. These are all designed to prevent house prices from falling, and thus let the banks off the hook. (The various bail-outs of the banks can also be described as a support mechanism for those with property.) It could be argued that immigration and the public-sector London weighting are ultimately policies designed to support property prices. Public-sector salaries in poorer Northern towns often reflect nationally set parameters, once more underpinning local property prices at levels that would not otherwise be obtainable without massive state spending.

An even more egregious subsidy, one that is direct rather than indirect, to the property market and to buy-to-let landlords in particular, is housing benefit, a welfare scheme for landlords paid out of general taxation. To argue there should be no rent controls, but housing benefit should remain in place would be a twisted approach for libertarians. I believe the IEA does not support welfarism, and so logically we can agree that state props to house prices should be kicked away. We have had some minor limits on housing benefit, but restrictions on welfare remain designed to give landlords more or less whatever they want. Where I live in Lincolnshire, you can rent a three-bedroomed terraced house for £275 a month, and yet the Local Housing Allowance offers landlords multiples of this figure further south, thousands of pounds a month in some cases. Apparently, even when Universal Credit comes in fully, landlords will be able to receive the rent direct if the tenant persistently falls behind, in an example of state intervention to prevent the landlord from shouldering the risk of his business. Libertarians cannot accept the idea that business should carry no risk and that the state should intervene to ensure that.

Part of the debate on rental levels surrounds the fraudulent behaviour of lettings agencies, with fatuous fees to "register onto the service" before even taking up a property, and a range of unexpected fees when in the property, including a renewal fee every six months. The law allowing the serving of a Section 21 notice is designed to allow landlords to turf bad tenants out, not to allow lettings agencies to extract a fraudulent fee for renewal under threat of eviction. Often—in nearly all cases, in fact—such notices are served, illegally, on paying tenants the landlord wishes to remain in the property, in order to prevent the tenancy from turning into a statutory periodic tenancy at the end of six months. Tenants could remain in place and challenge the lettings agency to take them to court for repossession or allow the tenancy to become a statutory periodic tenancy without the payment of a fraudulent fee, but in most cases, tenants do not wish to have the hassle, and just pay the fee or move out. Landlords are frequently not told the lettings agency has served the Section 21 notice. Checking-out fees at the end of tenancies have given rise to frequent claims that inspections charged for and cleaning services charged for have not, in fact, been carried out, as it seems most lettings agencies routinely claim to have had to hire expensive professional cleaning services for even the most squeaky clean accommodation, and they are curiously unable to provide documentary proof in the form of receipts for payment for this. While libertarians support the free market, this is not the same thing as saying we support fraudulent business practices, and something should be done about the behaviour of lettings agencies.

Even the otherwise brilliant publication Moneyweek has argued that the lack of availability of longer tenancies is down to the failure of tenants to negotiate with landlords, claiming "if tenants want longer contracts, they are free to negotiate them with their landlord". They most certainly could try, but it would certainly not work, as property is a rigged market in the UK. Countries with high levels of rentals, like Germany, have better protections of tenants' rights. In the UK, laws providing for assured shorthold tenancies lasting just six months, forcing tenants to be constantly on the move or to pay constant fraudulent fees, form part of government attempts to force everyone in the UK into the mortgage market. It is no good for libertarians to say that there should never be any regulation of anything. We could try an anarchist approach, but if we won't try that, there need to be some laws. I would argue that laws should be passed by Parliament and be few in number. There should be no regulatory bodies or regulations/statutory instruments passed without Parliamentary oversight, but in any case there will need to be some laws, and statutes should not be drawn up with the explicit aim of forcing people to buy freehold title that few normal people, with lifespans of around 80 years, really need.

Finally, the taxation system is rigged in favour of rentiers, in  a system that was not supported by J S Mill. This is because the burden of taxation has been shifted from land to labour and capital. A levy on land ownership was provided for in English Common Law: the feudal system of land ownership held that allodial title was ultimately vested in the Crown, which had the right to impose feudal duties or taxes on its tenants. Freehold title, so-called, is not absolute title to land (allodial title), but just a new name for tenancies held in fee simple of the Crown. Libertarians who claim that a land value tax is an attack on property rights are confused: a freehold property is not held absolutely, and so the property rights that go with it can only be those rights that rightly belong to a tenancy in fee simple held of the Crown. Buy-to-let landlords are tenants too.

The reason for this is simple: land is a naturally occurring resource, the gift of God if you like, and not the result of anyone's investment or ingenuity. When Britain conquered parts of America or Australia, it immediately parcelled up the land there and started handing out or selling off tenancies in fee simple, thus creating freehold property. The Crown's right to do so was purely based on the fact of conquest. As such, all freehold property is the creation of the state. The origin of land ownership in England is lost in the mists of time—dating back to the Conquest or even to pre-Conquest titles that were then taken over by others at the time of the Conquest. But the ownership handed out then, that has survived as freehold property today, is not an absolute thing. It cannot be, because land in itself is just a natural resource that belongs to the whole of society—as shown in allodial title vested in the Crown.

Yet ownership of property offers an advantage to those who have occupied prime natural resources, such as well-located land. There is no distinction between a tenancy in fee simple and the licences to exploit oil resources in the North Sea. While exploiting oil resources requires investment—and licences and taxation systems have to be calibrated to allow for profitable exploitation—the oil is no one's creation, and doesn't belong to anyone, and so its use is controlled by licences issued by the Crown, which is a military power that controls the seas where the oil is located. The Crown takes a share of the profits. Ownership of well-located land is akin to a licence to use a natural resource likely to confer windfall profits on the owners.

The price of anything is just what you can get for it. If you own an oilfield in the North Sea and see oil prices double, you will make a windfall profit. You might find the state wants a larger share of the windfall gained by the ownership of such natural resources. Similarly, land values, and I'm talking about the value of the unimproved site and not the value of buildings sited on them, which do represent a form of investment and ingenuity—the values of the unimproved sites reflect demand for those sites. So those who manage to buy before a site becomes valuable may gain a greater windfall. If you bought in Southwark before the Jubilee Line was mooted, you will have seen your land values rocket, as public expenditure was capitalised into the value of your property. Infrastructure and social activity can improve the attractiveness of a site. We have read recently that Google's decision to build a headquarters in London in the King's Cross area has lifted land values of adjacent properties. Once again, we are talking about the unimproved land value (you could get a rough and inaccurate estimate of this by subtracting the building reinstatement value from the property value) and not about anything that is the result of investment spending by the landowner. Public spending and investment decisions by other individuals and businesses enhance the value of a location. A square mile in London will be worth much more than a square mile in a depressed mill town in the North of England.

Rentiers have captured the natural resources of society that were the gift of God. Libertarians once argued that taxation should fall on land, not labour and capital. We have the opposite in the UK: heavy taxes on labour and capital, but none on the ownership of land. There is a council tax, but it is not levied on owners, but on residents, ensuring that people who own not a square inch of the country pay more as a percentage of their minimal wealth than millionaires sitting on large tracts of England, often obtained in dubious ways in years gone past. The result is that school-leavers face high property prices and jobs paying ₤6 an hour that cannot cover the rent in London or any of the larger cities, let alone finance the raising of a family. This is supplemented by a grotesque architecture of welfarism, where in-work benefits make up the difference, being in turn covered by high taxes on labour and capital.

Those who have wealth find government policy designed to funnel more of it to them, and those who have nothing find government policy calibrated to prevent wages from reaching their natural level, a level that the worker must demand in order to live a normal life in society. This is not a free market. The ramifications are endless, including the shocking phenomenon of the elderly sitting on landed wealth reluctant to sell their properties to finance nursing care, despite the fact that they are not in a physical condition that will ever permit them to return to the properties. It is claimed the properties are a legacy, and so the state must step in with more funding for the wealthy to ensure the property heirs inherit a tenancy in fee simple held of the Crown, a tenancy they regard as tantamount to allodial title in nature. High property prices then pin many on benefits, because work, even with in-work benefits, scarcely pays more than the benefits, and state schemes, including nursing care, are shackled with huge land-related costs.

It is argued by some libertarians that a land value tax would be passed on to tenants, and that the council tax therefore represents the reality that a land tax would in any case increase their rents as landlords passed the tax on. However, cost increases may not always be passed on, as there is a hard limit to what people can pay. No one I have met can pay more than 100% of his salary in rent. This is analogous to how retailers cannot always pass on increases in factory gate prices: they can try to do so, but sometimes have to absorb an increase in costs. As a land value tax would vary according to location, attempts to raise rents would be countered by tenants' moving elsewhere. The advantage of a land value tax, therefore, is that rocketing increases in land values are countered by annual increases in the land value tax, ultimately helping to constrain demand for the best-located land.

It is clear therefore that the removal in the early modern period of taxation from land to labour and capital amounted to a state policy of subsidising rentiers, who gain windfalls from the socially created values of the locations they monopolise. This skewed property market is not just the normal free market, and so libertarians ought not to argue that the state must do nothing to depress the price of land. Davies may be right to say that rental controls would cause landlords to offer fewer properties for rent, but he fails to comment on the downward impact on property prices of rental controls. Probably for reasons of lack of space in the article in the Telegraph, he did not match his opposition to rental controls with opposition to the myriad schemes of state support for landowners. But high rentals are a sign of an already skewed property market, subject to too much intervention, and in each case unpicking state intervention would lower land values and scupper the business plans of buy-to-let landlords and cause them to reduce the supply of rentals, while allowing first-time buyers to buy at reasonable prices (and thus not need to rent in the first place).

Libertarians should oppose the attempt of buy-to-let rentiers to ride a wave of government policy support for property prices in a way that keeps younger workers priced out and necessitates the maintenance of a huge welfare state. Land ownership is not an investment; it is ultimately just speculation, and so the buy-to-letters deserved to be burnt in a future collapse of the housing market. Let us start calling for lower taxes on labour and capital. Let us start calling for a normal functioning of the labour market as support for rentier parasites is eliminated. Let us call for a restructuring of the economy in a way that allows labour and capital their head of steam, to the eventual advantage of everyone in the UK. With things as they are, it is no wonder that teenage girls set their sights on being granted a council flat as soon as they have a child, as working for their living and saving up for a nice property have become an impossible route to prosperity for millions. Yet if the ideas of John Stuart Mill mean anything at all, it is that we should remove the restrictions and impositions that are holding labour and capital back.