To win the next general election, the Labour party believe that they have to win just over one third of all the votes. The electorate is salami sliced and policies are tailored to an electoral sub-set. Two policies that have gathered a lot of attention are: the notion of freezing electricity prices and the introduction of a statutory freeze on rent increases. These policies are intended to appeal to home-owners (who are now paying upwards of £2000 a years for gas and electricity) and young people who have to pay an increasing percentage of their income in rent.
The consequences of a price freeze and rent control will be an energy shortage, higher rents, a property shortage, and an unregulated rental market. But at least re-runs of Rising Damp will be funny again.
Energy prices are high because Britain has to import natural gas and it is the price of imported gas that determines the price paid by the consumer for electricity and gas. Britain’s energy infrastructure is aging and needs to be replaced. It is the private energy utilities that are expected – by government – to shoulder the costs of building new energy infrastructure.
If gas prices rise and companies cannot pass on the costs to the consumer, then they will lose money on purchasing fuel and generating power. If companies are losing money, they cannot service the massive debts incurred in building power stations and other energy infrastructure. No energy company will invest in new infrastructure if consumer prices are likely to be frozen by an incoming Labour government. A price freeze will produce an energy shortage by freezing essential investment.
People rent housing because they cannot afford to buy or because they are transitory. The rental price of property is set by the quality of the building itself and the range of alternative options that people have – the availability of housing. Prices serve to signal quality and availability. A landlord wishes to gain the maximum amount of revenue at a level sufficient to service the mortgage used to buy the property and assume against maintenance costs. A landlord’s ability to raise rents is limited the amount of and quality of the competition (the alternative options).
If landlords cannot determine that they can always secure sufficient revenues from rents to service debt (which increases due to interest), they will simply not enter the rental market by leaving a property vacant or will sell a property. This reduces the amount of rental property, creates a shortage and produces higher prices. However, these prices are function of scarcity and high prices attract low quality entrants into the market. This lowers the quality of the available property and because low quality properties will rent, no-one has an incentive to improve the quality of housing.
To bypass controls on rent increases, landlords will insist on higher starting rents and longer contracts. The people who need to rent may not be able to afford either and are thus shut out the legitimate rental market. This forces people into the unregulated housing market. In an unregulated housing market, housing is poor quality and often control by criminals.
There is also the enforcement problem. To prevent landlords from increasing rents, the market has to be policed. The costs of policing will fall to local governments (unless the Labour party envisage Whitehall demanding copies of every tenancy agreement in the land). It is too costly and time consuming to police the housing market and the costs of compliance will be shifted to landlords who will have to certify that they have not increased rents. Legitimate landlords will pass on the costs to the renter (increasing rental costs) and increasing the likelihood that properties will be left vacant. Slumlords will simply ignore the law.
The Labour leader, Ed Miliband has stated that he wished to make Britain a socialist country. Socialist countries are characterised by shortages, reduced quality, lack of investment, bankrupt companies and exploited desperate people. Still, at least Rising Damp will be a documentary and not a unfunny sit-com.
by Dr Keith Baker