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Why Rent Controls Can Do More Harm Than Good

Stockholm

Economists don’t like rent controls, and neither do tenants nor landlords.

Sweden, for example, has been an advocate of rent-controlled accommodation since the world wars, yet it’s a model that is failing the very people it’s supposed to support.

In theory, rent controls should protect vulnerable people on low incomes from high accommodation costs. However, in Sweden, it’s a system with many loopholes. The accommodation is not recycled for those who need it. Plus, it’s open to abuse with subletting and illegal rental agreements.

The Problem With Rent Controls

An article on BBC presented some of the issues Sweden has with rent-controlled housing including sub-letting on extortionate rent prices despite rent controls, black-marketeering and lengthy wait times.

Long wait time

In theory, rent-controlled accommodation should be an ideal solution. If Sweden is the benchmark for rolling it out everywhere else, it needs a lot more attention. For example, in Sweden, the wait time for a rent-controlled home is around nine years. Who can wait that long?

Long term renters

Another flaw in the model is once a renter has secured a rent-controlled property, they can have it for life!

Why wouldn’t they need to be asset-tested? There must be hundreds of these properties in the wrong hands.

Plus, the renter doesn’t actually have to live at the property. They have options, including passing it onto family or friends. They remain on the rental contract, but their family or friends live at the property. Or another option they have is sub-letting to tenants.

Second-hand market

Renters and some owners of rent-controlled accommodation are taking the risk of sub-letting their rented property to tenants for high rents. According to Swedish Rental Law, you need permission to sublet your accommodation.

Regarding subletting a rent-controlled home, the law couldn’t be clearer, yet it’s not putting firsthand renters off from subletting at market rates, i.e. way more than the rent control rate they pay for the property.

If your home is a “hyresrätt”, you can sublet for what you pay in rent yourself + 10-15% if the property is furnished. If you charge too much in rent, you are, per a new law 2019-10-01, actually committing a crime and may be charged.

Black market

Hard to believe, but there is a black market for rental accommodation, and it exists due to the lack of supply. As many as one in five young adults have secured accommodation illegally, and criminals are using the sub-letting rental market to launder their funds from criminal activity.

Recruitment

The economy is suffering as new people are locked out of affordable rental accommodation.

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Outsiders are keen to migrate to new areas, and foreign workers can not find affordable accommodation in Sweden.

Businesses particularly in major cities are struggling to hire workers new to the area. Even highly skilled workers who ordinarily can afford market rent can not find a place to live.

Property maintenance, renovation

The tight rent control system doesn’t the landlord to pass on maintenance in the rent price.

Regular upkeep prevents major replacement of infrastructure and appliances. There’s no stopping general wear and tear with use and the weather. Eventually, everything needs replacement. However, landlords have no incentive to carry out regular maintenance as the cost is theirs to bear.

Only renovations that improve the standard of the property can be passed on in rents. Therefore rent-controlled homes are of a low standard and will remain so while rents are controlled.

Rent Control Alternative

Rent controls deter landlords from investing in rental accommodation.

The increase in demand and lack of supply is the main reason rents have sky-rocketed in rental properties, but rent controls are not the answer.

Therefore increasing supply has merit.  The UK Government is building their way out of Brexit and Covid setbacks and, by doing so, taking positive action to solve the inequalities of their housing market.

Some of the actions the UK Government are taking to pave the way to getting lots of new homes built include:

  • Jumpstarting the development of affordable new homes for first home buyers
  • Increasing rental accommodation with development of buy to let accommodation
  • Working in partnership with private enterprise where the UK Government can clear funding bottlenecks private developers experience with lenders
  • Provide infrastructure loans and recycle the investments into future housing projects
  • Improving the planning system
    Encourage the uptake of MMC (modern methods of construction)

Final thoughts

Any Government considering the merit of rent controls would do well to study how it’s working out in Sweden. The most efficient way to control markets is to strive for the equilibrium of supply to meet demand. The UK Government are tackling it the way we all can.

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