Rent control reduces supply and makes life even harder for new tenants

At an early age children learn that if you squeeze a long balloon at one end it bulges at the other end, and squeezing too hard has explosive consequences.

The huge pressures on the housing market, resulting from the booming economy, have seen a series of housing market regulations put in place by the Government in respect of the rental sector. Some are arguing for imposing further controls.

These regulations have shifted some of the pressure from one part of the housing balloon to another, but without increasing supply, which is the only remedy that can ease the overall pressure.

While the regulation of the rental market has benefited existing tenants, the wider effect of the controls has been destructive. Smaller landlords have exited the rental business in droves. It’s those now trying to get a place to rent who have lost out. In the short term, regulation has seriously reduced the supply of properties to rent. Falling supply, while demand continues to rise, has driven up rents for new lettings.

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Rent control was introduced during the first World War. Until the late 1940s, given low inflation and a falling population, this had limited impact on the housing market. However, once house prices began to surge in 1947 and 1948, rent controls began to bite as landlords got out of the business.

As a result, between the 1940s and the 1970s the private rental sector shrank from about 25 per cent of all homes to just over 10 per cent. From the early 1960s the bulk of the controls were relaxed, but tenants in unfurnished accommodation remained on fixed rents and had permanent tenancies.

While beneficial for those fortunate to be renting unfurnished accommodation, it meant that no new unfurnished tenancies were created.

Many landlords find it is more attractive to sell up rather than continue to operate in a highly regulated market, where maintenance costs may be rising more rapidly than rents

Owners of rent-controlled property gradually found themselves losing money, given rising maintenance costs. In 1981 the restrictions were found to be unconstitutional. For the remaining protected tenants, the sudden ending by the courts of rent control had a potentially catastrophic effect, as rents rose dramatically from their historic levels.

This experience highlighted a number of lessons which should be heeded today. Once you go down the road of rent control, the supply of rental accommodation will gradually dry up and any new rentals will come at an increasingly high price. In addition, once rent control has been in place for a sustained period, it becomes increasingly difficult to end it, as so many people may find that they cannot afford uncontrolled rents.

The current situation is that in major areas of the country rents are controlled, with a limited rise permitted each year. For existing tenants, this means that, over time, their rents stay well below the rents for new tenants. However, many landlords find it is more attractive to sell up rather than continue to operate in a highly regulated market, where maintenance costs may be rising more rapidly than rents.

[ Should I sell my rental property ahead of any change of government? ]

Most landlords who are exiting will choose to sell their rental property with vacant possession.

The tenants who have to leave usually find it hard, and expensive, to get another place to live. Some become homeless. So there are now proposals mooted in the Dáil to prevent landlords selling property with vacant possession.

However, if it became clear that the Government, or a future government, seemed likely to go down this road, it could provoke a fire sale by landlords before new legislation came into force.

The outcome, rather than protecting tenants, could suddenly see a very large number of tenants thrown out on a disappearing rental market, with disastrous social consequences.

Until recently, there was significant investment by institutional investors in building new rental accommodation. However, factors like increased building costs, higher interest rates, the prospect of new controls, and opposition by councils to build-to-rent developments now means such investment is increasingly unattractive.

If these investors choose not to proceed with projects, that will dry up new rental supply. In an economy as mobile as Ireland’s, a substantial private rental sector is essential, even with major increased provision of social housing.

[ Why rent controls have failed ]

Rent controls are a short-term fix that usually turn into a long-term problem. Once in place, ending restrictions becomes increasingly problematic. The long-term effect is to curb supply of rental properties, raise overall rent levels, and ultimately damage the interests of tenants and potential tenants. Increasing the supply of rented accommodation, including social housing, is the better way to contain rent levels. Rental subsidies via the welfare system are a more efficient way to help low-income renters.