LONDON — Rent controls are becoming increasingly popular in many European nations, but experts note that they rarely solve housing crises on their own and can even scare investors away.
Rent controls are government policies, whether on local or a national level, that aim to cap house price increases. They are intended to keep housing affordable, at least for the most vulnerable parts of a population. However, the policy has its critics.
In Sweden, for example, rent controls effectively toppled the government there. In Germany, the matter was subject to a year-long legal battle. Meanwhile, lawmakers in the Netherlands, the U.K. and Ireland have all had similar discussions about their property markets.
The root causes
Speaking about lofty prices in the Netherlands, Nic Vrieselaar, a senior economist at RaboResearch, told CNBC that the market is “becoming unacceptable.” “This is a matter of supply-demand due to the low interest rate environment,” he said.
There’s an age-old trend of people flocking to urban areas where there’s more jobs and higher salaries. But, at a time of low interest rates from central banks — which European nations have experienced in the wake of the sovereign debt crisis — and help-to-buy schemes, more people have bought property, either as a first home or as an investment to let. This demand then pushes up prices given the limited housing stock on the market.
In addition, the so-called “Airbnb effect” has worsened the situation, experts note. Rather than selling a property or letting it out long term, many landlords choose to make their houses or apartments available for short stays. This then means there’s less stock for the locals, thus contributing to a further acceleration of rental prices.
Between 2010 and the first quarter of 2021, rents increased by 15.3% in the European Union, according to Eurostat.
Separate data gathered by Europe’s statistics office showed that, in 2020, the estimated average rent levels for apartments was the highest in Dublin, followed by Copenhagen, then Paris, Luxembourg and Stockholm.
Colm Lauder, head of real estate at investment bank Goodbody, told CNBC that he expects rental prices to keep rising. He said: “In Ireland, we are concerned that [rent] controls will stop capital coming through.”
A vicious cycle
Property investors see a significant downside in rent controls in that they cap returns. In the case of Ireland, rent increases in certain areas are limited at 4% per year.
“If they can’t get [returns] then they will look elsewhere,” Lauder said.
Private investment plays a crucial role in supporting the housing market, by promoting construction and refurbishment. If investors find higher returns in other nations, they are likely to shift their funds there and supply will remain limited in that initial market.
However, not everybody agrees with this view.
Barbara Steenbergen, a member of the International Union of Tenants and former lawmaker for the German region of Cologne, told CNBC: “We are of course pro rent controls if it’s part of a comprehensive housing package.”
She highlighted how important rent controls are for low and middle-income families, noting that in Berlin, for example, rent increases have gone up exponentially, but salaries have not.
This divide is a “threat to social peace,” she said, while adding that she has not seen investment fleeing in any market that has rent controls. One of the challenges is that investors focus on luxury buildings and less on affordable and social housing, she said.
Ultimately, the solution may lay with the root of the problem.
“What I think needs to be done is increasing supply,” Vrieselaar said.
In a statement published in 2018, the European Central Bank noted that “housing completions in the euro area have remained substantially below their average level since the start of monetary union” in 1999. In addition, the ECB also said that the lack of building permits and labor shortages have been a constraint in improving supply.
But Vrieselaar suggested that governments should change the way they tax the sector, so they can better tackle the housing crisis. Essentially, he believes that the Netherlands should tax people’s wealth more, including their second and third homes and lower the burden on people’s incomes so tenants have more room to spend on their rent.