November 2, 2015
It appears to be an article of faith amongst the mainstream that rent controls are a “bad thing”. The last time we had such conformity or groupthink, we had the soft landing brigade reassure the country that “everything would be grand” and their models said so. Well in the end we weren’t so grand, were we?
The economic models of the Irish economy proved not only to be inadequate but they proved to be dangerous. How many times do we have to screw up to realise that economics is not a science?
The economy is not a mathematical equation that delivers scientific answers and obeys rigid laws. Economics is an art as much as a science; it involves human nature, group psychology, political aspirations and lobbies, credit cycles, social forces, fads, fashions, fraud and downright manias.
Nowhere are all these idiosyncrasies more evident than in what, to borrow a rugby expression, could be called “the breakdown”. The breakdown in rugby is that place when the ball goes loose and stuff happens on the ground, which even some of the best referees are helpless to police. (Many, many years ago while playing in the rarified position of winger in a school’s cup final at Lansdowne Road, I remember getting caught in the breakdown and realising pretty swiftly why I tended to offload quickly!)
The breakdown in Irish economics is the housing market. Stuff happens at the breakdown that does not comply with any rules of traditional economics.
The housing “breakdown” is a chaotic intersection of planning, credit, demographics, psychology, advertising, fear and loathing, the need for accommodation, hoarding, sub-letting, banks, auctioneers, and of course punters – renters and landlords both big and one-off. At the breakdown, first time buyers compete not just with each other, but also with “one-off” landlords who hope to turn the buyer into a permanent tenant. Bigger developers are pitted against foreign private-equity funds and the various international land hoarders who are waiting for prices to rise before selling up and moving on.
And the referee is never impartial. We have policy, not just housing policy but political bias and ideology, with one shower preferring to side with landlords and the other shower with tenants – as if the interests of one are at odds with the interests of the other when in fact, they are symbiotic.
Into this mix we have all sorts of incentives, tax nudges and policy shoves which have led to a housing status quo, which in Ireland over the past 20 years has been as dysfunctional as any market anywhere.
I say forget the models and look at the evidence.
Rugby is not played “on paper” but “on grass”; the Irish housing market doesn’t take place in charts and in textbooks but in real life, in real time, involving real people.
In reality, the Irish housing market doesn’t behave rationally but swings violently. Either we are building too many houses in the wrong places or building too few houses in the right places. It lurches between having too much money to having too little. It is characterised by 30 per cent swings in rents on the up and the downside (just look at the chart) and mass hysteria, leading to a generation of one-off landlords who were promised riches but are left with negative equity, many still technically bankrupt. We also have a banking system salivating over the prospects of renewed hysteria that will drive its profits, but who are so terrified of having “skin in the game” that they lobby to make sure there is no such thing as “non recourse mortgages” which might make them think again.
Look at the reality, not the textbook.
Now we are in a situation where there is an acute accommodation shortage. Here are the facts as laid out by this paper last week.
Since 2011, Dublin rents have risen by 35 per cent, including a 10 per cent hike in the last 12 months. One in five Irish people now live in rental accommodation, more in urban areas – a doubling of the total between 2006 and 2011. Meanwhile, house completions have collapsed from 93,419 in 2006 to around 8,000.
Put bluntly, more people are paying more to fit into less space. By any standards, Ireland has a housing crisis.
The reality is that the cost of this crisis is being borne not by banks, landlords or developers but by renters and first time buyers. That’s the truth. Say it loud and say it clear: the cost of the massive housing market failure is being shouldered by renters. That’s it, plain and simple.
Is this the norm? No.
Look at arguably the most successful rental market in the world, Germany. It has had rent control for decades. Look at the chart showing back to 1996 the dramatic swings in the Irish rental market compared to Germany and Netherlands. Both in terms of absolute cost of rents and the wild swings in rents, Ireland is an outlier. The system isn’t working.
German rents don’t jump around like in Ireland but increase slowly with the rate of inflation and population growth. There is no glut in building with rent controls. In fact there is the opposite; slow, steady building and slow, steady rental yields to landlords. A new law in Germany was brought in this year called “Mietpreisbremse” or rental price brake – which does what it says on the tin. This is added to the traditional “Mietspeigel” which stipulates that rents must stay the same for four-year periods and everyone can see the rents via a transparent system.
And the German system gives landlords a break too. Landlords can raise rents after having carried out work and new builds are not subject to old rent rules. So both sides are happy. Paris with a more similar “one-off” landlord structure to us, also has rent control and we have not seen a massive fall-off in building in the French capital. So too does Stockholm.
Rent control, if only to prevent the tenant bearing the individual cost for the collective failures of the Irish housing market, is a good idea. International evidence shows that it also works in many normal countries and doesn’t lead to a massive fall off in building. It may also help move the Irish rental/housing market towards a more consistent footing. In order to placate landlords, rents could be set so that a minimum yield and max yield to the landlord is taken into consideration, as well as the average of rent for the past four years in order to protect tenants. There are lots of ways to go about it. No one needs to be dogmatic.
One thing is clear: the present system in Ireland isn’t working. So why pretend it is?
There seems to be a lot of ideology involved in this debate. The mainstream economics profession and the property/landlord lobby appear to argue that we shouldn’t introduce rent controls because it interferes with the “free market” or the status quo. But this is silly because the market isn’t free; it is rigged at every stage and the “status quo” doesn’t deliver stability but delivers massive instability.
If we really want a free market in housing, we should scrap all tax breaks to property, stop allowing debt interest costs to be deducted from tax liabilities, stop any tax incentive into any form of building, introduce “use it or lose it” schemes in planning, introduce “non-recourse” mortgages and address a whole variety of other legacy interventions in this most tampered with market.
Until these are done, signaling out rent control as being uniquely distortive smacks of ideology, group think and a weakness for thinking economics is a pure science when in fact is it far from that. Groupthink and the tyranny of conventional wisdom are very dangerous – we of all peoples should be aware of that!