Build-to-rent attraction for investors

A significant amount of research has tended to highlight the adverse effects of keeping rents below market levels

Author: Simon Rubinsohn

30 April 2020

Note: this was written in late February 202 before WHO declared COVID-19 a pandemic which has prompted lockdowns around the globe.

The affordability of homes whether for purchase or rent is a critical issue in major cities around the globe. This challenge is in many respects a product of the very success of these cities and peoples desire to be part of a vibrant cultural hub. This is a significant change that occurred in just a few decades. As recently as the 1980s the rush for a home in the suburbs appeared hard to resist. The debate around how to address this issue is a live one and arguably nowhere more so than in Berlin.

The implementation of a rent freeze in the city in February has raised the stakes in a contest that has until now largely revolved around fiscal policy whether in the form of attempts to discourage overseas buyers or domestic investors. The measure is intended to last five years and will affect around 1.5m apartments although it will likely be subject to a court challenge sooner rather than later. Meanwhile lawmakers in California passed a bill in late 2019 that would cap rent increases and the mayor of London has made calls for similar action.

At one level these initiatives are wholly understandable given the spiralling cost of housing. The more important question is however whether they are the right tools to address the problem. Now I would stress that I am writing in a personal capacity and as an economist rather than reflecting a specific RICS policy position. But from this vantage point the appeal of intervention on rent levels appears far from compelling.

A significant amount of detailed research has been conducted over many years around the issue and generally highlights the adverse consequences of keeping rents below market levels. It includes a potentially reduced supply of property in this segment of the market a tendency to overconsume space the discouragement of mobility and a decay in the quality of rental stock as maintenance spend is reduced.

The evidence is not all one-way though with research rightly identifying the benefits of rent capping for hard-pressed tenants particularly those at risk of displacement as rents move upwards. But a 2019 paper published in the American Economic Review entitled The Effects of Rent Control Expansion on Tenants Landlords and Inequality: Evidence from San Francisco is an exhaustive study finding that good intentions in this area are likely to prove counterproductive. The broad conclusions are that while rent controls may have helped affordability for existing tenants in the near term further out they make property in the Bay area that is not covered by the constraints less affordable and could actually fuel gentrification elsewhere.

None of this is to play down the significance of the problem with housing in major cities. But arguably the way to address the issue is to make it easier to build new supply across tenures rather than intervene on pricing. San Francisco is a case in point where a rigorous zoning regime designed in part to preserve neighbourhood character has come at a considerable cost.

It is conceivable that the outcome of the Berlin experiment will be different though it will take some time before we have enough data to reach such a conclusion. One estimate by the investment bank UBS suggests that over the next couple of years demand for housing in the city will continue to outpace supply leading to a further fall in the vacancy rate to less than one per cent by the end of 2021. For now at least other cities in Germany appear in no rush to follow the capitals lead preferring instead to keep a watch on developments.

Simon Rubinsohn is chief economist at RICS

Related competencies include: Housing management and policy, Housing strategy and provision

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