Rent Controls – Short term gain for long term pain

In the face of the ongoing rental housing crisis and the current weak governing system, it was perhaps inevitable that rental controls of some form would be introduced. With renters far outnumbering landlords, the government has chosen to ride the populist wave and implement measures that will have an immediate gain in the back pocket of the electorate but whose harmful effects will only become evident in time. In essence, the government has traded the long-term interest of the country for their own short-term political benefit.

Minister Coveney has been keen to stress that the measures are time bounded and will only last for a maximum of three years. Given that a similar commitment was given just a year ago when introducing the two-year rent reviews, one could be forgiven for doubting the sincerity of this commitment. However, therein lies the heart of the matter. When one starts down the path of market intervention, further tweaking becomes a continual necessity as the market becomes more distorted and dysfunctional. The real danger is that the such controls become the norm and abandoning them carries too high a political cost for the market to be reset and revert back to the free market principles of supply and demand.

By capping rents, the government is addressing the effect of the problem rather than the root cause. The lack of supply of housing is the problem and the pace of rent increases is the effect. Price rises are merely a signal that transmits the information that there is a shortage in the market – introducing rental caps is a classic case of shooting the messenger. With construction activity just beginning to respond in a meaningful way to the housing shortage, the introduction of the measures at this juncture represents a major set-back. For example, areas with the highest price rises tells a developer where the shortage is greatest and where they should develop – with everywhere in Dublin now artificially constrained at 4%, developers will not know what part of the city they should devote their resources to.

The latest intervention in the market is the third significant government intervention in a year, following on from the rental review legislation introduced last year and the finance bill of this year. Taken together, they signal to the international investment community that Ireland is increasingly straying from its reputation as a stable investment environment to one increasingly characterised by unpredictability, confusion and chaos. With developers already facing a challenging funding environment, one should expect the situation to worsen as the international capital they have relied on upon becomes increasingly shy of Ireland.

The body of evidence against rent controls is so intuitive and well established at this stage that repeating the arguments here is almost irrelevant. Unfortunately, the below comments made in 1981 by a University of Toronto Professor reflecting on the detrimental effects of rent controls introduced in Ontario in 1975 will just as easily be applied in the future to Dublin in 2016.

“The introduction of rent control in Ontario in 1975 was an example of legislation aimed at short-run objectives which contained the seeds for long-term disruption. To the tenant, the appeal was direct, and the payoff immediate in reduced monthly payments. To the politician, controls can be translated into guaranteed votes whose lure is irresistible. Forgotten, in the scramble, are the lessons of past experience, the long-term welfare of city residents, the rights of the landlord minority, and, last but not least, the elementary principles of the behaviour of our economic system.”

Knight Frank

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