Peter Morgan argues that earnings-based rent-control would be better at increasing demand than quantitative easing, and will do so for less money as well.
By Peter Morgan
Recent attempts to increase the level of demand in the economy to tackle a deflationary gap, created by the lack of credit fuelled consumption, have consisted of the expanse of the monetary base through quantitative easing. However, this method of increasing demand is often considered a last resort due to the impact of currency debasement often seen after the application of such a policy.
Many economists do not believe an increase in money supply will increase the level of output and consider it to be a monetary illusion of wealth creation.
Interest rates are already at record lows and further reductions seem unlikely if not impossible. The lack of lending and the resulting lack of spending hamper the ability of the western economies to recover.
This would suggest the key to economic growth lies with the low to middle income consumption brackets that have been kept out of the market due to increased risk assessment on borrowing and the fear of negative growth. This would indicate that a successful mechanism to encourage consumption enabling growth should direct funds to the lower or middle income brackets.
One of the largest expenses for lower and middle income earners is housing. Renting is becoming more common place due to the difficulties in getting a mortgage as a result of employment uncertainties and market risk. Currently the cost of renting a property is based partly on demand and partly on the value of the property.
Landlords usually receive an income of 3% – 5% of the value of the property per year. Dependent on the cost of housing the disposable income of the individual will increase or decrease, enabling an increase or decrease in consumption due to the funds made available or retained by the landlords’ income.
As the tenant in this case is a lower or middle income earner they will likely receive a lower income than the landlord so their propensity to consume will be greater, partly as a result of necessity. Therefore by the landlord receiving less rent and the tenant keeping what would have been paid a greater level of consumption is likely to be attained.
Instead of charging rent by the level of demand or by the current value of the property a charge of a percentage of the tenant’s earnings makes the cost of living more transparent and potentially fairer. The cost of housing is now based on output and directly linked to the individual tenant’s income.
By introducing a cap on the percentage of the tenant’s income a landlord can charge the cost of housing is now relevant to what the tenant can pay and helps them maintain a good living standard.
A universal maximum percentage could be introduced setting a standard limit on the cost of housing. This percentage could alter to increase or decrease the disposable income of tenants throughout the affected area. In turn, the level of consumption will increase or decrease dependent on the percentage set.
Through this mechanism it is possible to control demand by giving the lower to middle income brackets access to funds that they can use to consume, compensating for the lost consumption created by the decrease in availability of credit. In this suggestion there is no debasement of the currency, merely a transfer of wealth from affluent people who do not consume to less affluent people who consume at a greater velocity.
See also:
• We need to invest in infrastructure if we are going to reduce the deficit – Cormac Hollingsworth, September 19th 2011
• The 50p tax debate: Are we taxing off our nose to spite our face? – Luke Bozier, September 16th 2011
• The ‘Big Five’ banks’ private welfare state – Lydia Prieg, September 8th 2011
• Flat taxes do not deliver growth – Will Straw, August 23rd 2011
11 Responses to “Could earnings-based rent-control replace quantitative easing?”
t.j greene
Could earnings-based rent-control replace quantitative easing? – http://t.co/VohrNFQS #housing #rentcontrols #QE
Duncan Stott
RT @leftfootfwd: Could earnings-based rent-control replace http://t.co/O1Uw1I0B << Interesting but flawed
London IWW
Could earnings-based rent-control replace quantitative easing? http://t.co/E4Dirsgj | #UKeconomy
Duncan Stott
Interesting. There are problems though.
A growing number of landlords have bought their property with a buy-to-let mortgage. If capped rents do not cover the repayments, then the landlord goes bust, the property is repossessed and the tenants are booted out. This is already an issue now and this scheme would strongly exacerbate the problem. At the very minimum there would need to be strong protections for tenants in repossessed homes.
P.S. I live in Oxford, which is one of the main areas that would be affected by such a policy, with house prices (and therefore rents) way out of line with earnings: http://twitpic.com/5azi11 A large number of the property transactions in Oxford are to landlords, as house prices are too high for those on ordinary incomes to afford, which in itself creates rented sector demand. Capping rents would dissuade landlords from buying, which would cause the entire housing market to grind to a halt. A stagnant housing market will cause job losses in the estate agency, removals, furniture and home improvement sectors. It will also lead to house underoccupation, as unsold houses go empty.
This sounds like an overly creative solution, when all we really need is simply to build more houses. The government should be lending to the construction sector to get more houses built, and press ahead with their much-needed planning reforms.
nyc renter alliance for housing choice
This solves one short term problem at the expense of destroying substantially the entire housing market.
Put simply: people in rented accomodations choose where to live based on their earnings, their job and social locations, and their FUTURE earnings, and the market allocates housing such that flats go to those who value them most.
Hence the phenomenon of students (who make very little money) living in desirable parts of Oxford in cramped conditions, while more mature individuals live in the suburbs.
Capping rents to income would encourage tenants to occupy excessively large flats or to occupy flats in desirable locations long after their incomes dropped or they got divorced, etc..
This is exactly what happened in Berkeley, California in the 1980s; students were forced to commute from all over the Bay Area as the near-campus apartments were locked up in rent control.
Landlords stopped maintaining the properties and they fell into disprepair.
We strongly agree with the previous commentator– the only solution to Britain’s housing costs is to build more housing, and to make the council approval process much quicker and more predictable.