When rent caps were introduced in Berlin last summer, many in London looked on with a mixture of interest and envy. It is hardly surprising that swathes of UK renters have applauded the new German legislation – a system that forces landlords to never charge more than 10% above the local rental average. As a result, serious questions have been asked as to whether this could work in London, where average rents now hover at around £1,500 per month, after a 4.2% increase over the past year.
Once upon a time rent caps were almost unheard of outside the US. But their successful implementation in Berlin has seen the UK debate shift up a gear.
Here we investigate the impact and success of the system in Germany so far, and consider some of the options that have been proposed to implement a similar concept in the UK as a remedy to spiralling rents.
Public support
So far, public opinion over the question of rent caps in London looks to be fairly clear cut. A survey conducted by pollster Survation in December last year revealed that less than 10% of people are against mandatory legal rent limits in the UK. Only 6.8% of those surveyed were “strongly” against them and in London there is a support rate of 64.5% for rent control – a figure that increases to 77% nationwide.
But a decision this complex cannot be made on demand alone. Rent control has failed in the past in the UK and abroad. And there are a plethora of arguments to suggest that this time around would be no different. Many have raised concerns that caps in isolation could make living in London more, not less, expensive as landlords unable to charge what they want opt out of the market altogether, seeing competition – and prices – soar. And this, in turn, could impact on housing volume and supply in its entirety.
British Property Federation figures show that 14,000 units were started in London during the past two years in the build-to-rent sector. A figure that Ian Fletcher, director of policy at the BPF, suggests could not be as high if rent brakes were in play. “I am not in the business of scaremongering,” he says. “I am sure some of that would have still been built with a form of rent stabilisation, but not as much would have been delivered. A rent cap gives a short-term benefit but ultimately it is taking us further away from the long-term solution, which is to build more housing.”
Taking the plunge
When Berlin took the plunge and introduced the scheme in June 2015, the effect was instant. Rents dropped by 3% in the first month, according to German real estate portal Immobilienscout24.
But since then prices have started to creep back up, says Jan Hebecker, head of research and analysis at Immobilienscout24. He adds that part of the reason for this is that the laws are not tough enough. “People pay the rent that the landlord asks because there are more people that want to rent than there are available flats.”
He adds that this creates a climate where renters feel that they cannot ask questions for fear they will lose out on being able to rent the property.
Hebecker also points out that the laws in Berlin do not apply to new-builds until five years after completion on properties that have been significantly renovated. This means that almost 20% of rental properties in Berlin are exempt from the legislation.
For now, it looks as though it is too early to tell how successful the introduction of rent caps in Berlin has been – or, indeed, will be in the future. But there are those who argue that this should have no bearing on the London debate.
Dan Wilson Craw, policy manager at campaign group Generation Rent, says it is almost impossible to compare the cities like-for-like and that the discussion over rent caps in London should be entirely separate.
“There is a huge difference between the two cities in terms of renting,” he says. “Rates in Berlin are already at quite a low rate and are affordable. In London, rents are so high already we need a different system. We need one that does not just put a cap on rents, but results in the creation of more properties so there is a long-term solution built in. Imposing a system of rent stabilisation to prevent renters being priced out could take years. The only way to bring rents down significantly in London is to increase housing supply.”
So, what might this solution look like? And how likely is it that any of those proposed could help to address problems around supply as well as price?
Surcharge
Generation Rent’s proposal would see landlords who refuse to comply with a rent cap system paying a surcharge on anything they charge above the threshold. The percentage has yet to be decided, but early discussions suggest it could be as much as 50%. Those funds would go towards developing more social housing.
“The charge would be sizeable enough for landlords to be encouraged to stick to the lower rent threshold,” says Wilson Craw. “But if they don’t then the charge would at least go towards tackling the bigger problem. More housing means less demand. And that is a far more sustainable system to see rents come down.”
Other proposals for versions of a rent cap system have included Ken Livingstone’s “London living rent” – an idea he floated in the 2012 mayoral elections. This would have meant that Londoners would have handed over only a third of their wages each month to live in the capital. But London mayor Boris Johnson was victorious. He believed the plan would be “counterproductive”. Now, with elections back on the agenda, the idea of a rent cap for London is once again on people’s lips.
In October last year, Tooting MP and Labour’s London mayoral candidate Sadiq Khan said he wanted to link the average salary of a London borough with the cost of rent in the area. He gave the example of Lewisham, where the average salary is £2,000 per month; under his scheme, rent would be £650 per month. This, Khan believes, allows tenants to live in London and put money aside to go towards a future deposit on their own home.
Although this seems noble, there may be significant unintended consequences to such a plan that tie in with Generation Rent’s concerns. Khan’s proposed system addresses spiralling rents for a short term, but not the overarching supply problems. Not only is this bad news in the long run for renters, but it could have a negative impact on investment into the sector.
“Investors will naturally be shy of what looks like political interference,” says Andrew Allen, director of global property research at Aberdeen Asset Management. He suggests a system of depoliticised rent regulation.
“There are models of rent regulation that can work and we cannot underestimate the scale of the crisis of housing in London,” he says. “Interest rates can be set independently by a monetary policy committee which is free from political influence, so why is housing strategy so different? It has been done with indexed leases on cinemas and student halls, so it is not outside the realms of possibility.”
Allen envisages a model that protects rent for 10 to 20 years on a property or for the duration of a tenant’s contract. After that time there is some form of reversion where investors would see their return.
Political interference
Options, suggestions and proposals aside, there are some in the industry who remain firmly opposed to the idea of a rent cap of any kind. Duncan Salvesen, director at London property investor Dorrington, says there are other methods to control rent and help make housing more affordable.
He says that institutional landlords being more transparent about what a rent will be over a two- to three-year period, coupled with educating tenants that they can ask for longer-term tenancies, may help people budget and avoid being priced out of their homes.
Another solution is using rental covenants. “We can produce more affordable rents by starting to use public sector land,” he says. In this scenario, local authorities allow a developer to build on brownfield land but their consent carries the caveat that the developer must let what it builds at 20% below market rent.
Of course, the only way to know for sure if any of these systems could actually work is to implement them. What is clear is that there is a disconnection between public opinion and industry reality when it comes to rent caps.
On one hand, rent regulation has historically not worked in the UK and Berlin’s attempt to keep rents affordable is still in its infancy. On the other, London must tackle its housing problem quickly with something, anything, that will help make the city an affordable place to live. Because if the UK capital has any chance of remaining a socially diverse, creative and profitable city, action must be taken.
