Rent Control in Berlin…and the UK

15th April 2021 Commercial Litigation

The courts in Berlin have just struck down the rent cap that has been in force there since early in 2020. There is not a really anything that is applicable to the UK in this as the legislation was struck down because it was an attempt by a state legislature to pass law in an area in which there was already a federal piece of legislation that did similar things. This is not permitted by German law. However, it is interesting in the context of the UK where there have been a number of recent calls to regulate or control rents which have been repeated as a result of the Covid-19 pandemic.

What Control?

One of the challenges of talking about rent control is what is actually meant by this. Berlin had instituted a rent freeze which stated that rents could not exceed those which had been agreed on 18 June 2019 and that was to be held for five years. This is usually referred to as first-generation rent control as it is a hard cap on rents fixed to a specific historical time. Second generation rent control is one which allows rents to rise but where they are controlled by a public body which sets them on some basis. The Rent Act 1977 control mechanism with rents set by rent officers is a good example of this. Third generation rent control is one which allows rent to float more freely and seeks to fix them at a rate that is more closely linked to the market. So mechanisms that limit rent increases to RPI or a similar index fall into this group.

The UK and Rent Control

As I have already said, the UK had second generation rent control with the Rent Act 1977 and this was abandoned with the Housing Act 1988. There has been legislation in force in Scotland to allow for control of rents in Rent Pressure Zones (RPZ) for some time. This is a form of third-generation control but it has never been used as nowhere has ever qualified as an RPZ. The Labour Party under Jeremy Corbyn called at one stage for a form of Third Generation control by linking rents to RPI and Sadiq Khan has suggested something similar in London. In Scotland the proposed Fair Rents (Scotland) Bill does a similar thing. However, there has not been a fully articulated model for rent control put forward beyond these rough sketches.

Challenges of Control

One of the key difficulties with rent control is demonstrating their effectiveness. Likewise it is hard to conclusively demonstrate its ineffectiveness too.

Berlin had actually been using a third generation rent control mechanism which sought to limit rents to a prices index but had abandoned it as ineffective in favour of the rent cap which had now been voided. The Rent Act 1977 generally led to a reduction in quality of the UK rental stock and a failure to improve or invest in rental property. The rent freeze in Berlin had been accused of doing the same thing. There is better quality evidence from the USA that rent controls have led to a lack of mobility in the rental sector with people tending to stay in rent controlled property even where it is unsuitable rather than moving to more appropriate property for their needs. To some extent, the popular TV comedy Friends used this premise as its starting point. However, not moving when alternative property is more suitable prevents other people who might have need of a rent controlled property taking it up. If this is coupled with the claimed reduction in investment then it is possible to claim that rent control makes things worse. But the evidence for all of this is not exactly clear.

However, it is hard to show that rent control makes things better. Historic control models have focused on rent control and have not tended to link them to property standards or management quality. With the far more regulated approach to renting it may be the case that other legislation around standards can prevent a quality drop caused by rent restriction. In addition, the reality in the UK tends to be that rents do not rise by much more than RPI anyway if you look at them over time and across the country. Specific areas often see sharp rises in short periods before the pace drops back. So rent controls may do little more than spread rises over time rather than actually reduce the cost of living.

One of the problems is that most studies are carried out by economists. This means that they tend to evaluate the financial costs and things such as property value. There is little measurement of less tangible factors such as how people feel about rent controlled properties. There is no index of happiness, satisfaction or security that is linked to rent control. Although perhaps there should be!

Rent control will keep being raised as a means to try to reduce cost of living for people in rented accommodation. However, these are temporary solutions to a more fundamental problem. If property prices exceed the ability of people to pay for them then this is largely because demand exceeds supply and the people involved do not have enough income to pay for the resource. The problem ultimately remains the complete failure not just to build enough houses but to build them in the right place and of the right sort. This also represents a wider failure to enable people to work in such a way that they are not constantly pressured to pack into more and more expensive land in and around London and other major cities. Rent control alone, of any type, will never be the answer and fails to recognise that the housing market is highly interconnected internally and with the economy as a whole. Simply controlling rents is a short term solution and is highly likely to have a range of unintended effects. Alone it is likely to lead to stagnation as it has in the past.

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David Smith is a Partner located in Londonin our Commercial Litigation department

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