Is your rent ever going to fall?

An entire generation of tenants is tearing its hair out. Across the rich world—from America to New Zealand—millions spend more than a third of their disposable income on rent. The squeeze extends from social democracies that prize strong tenancy rights to Anglophone countries that prefer homeownership—and it is mostly getting worse. The good news for anxious renters is that they are gaining a louder voice as their numbers swell. The bad news is that campaigners and politicians mostly focus on the wrong kinds of solutions to their woes.

The 20th century saw an astonishing rise in homeownership. In 1920 about 20% of Britons owned their own home; by 2000, 70% did. Many Anglophone countries followed a similar path. Even in countries less attached to the idea of owning, private renting became less common after a boom in social housing.

The story in the 21st century has been different. Rod Hick of Cardiff University in Wales calculates that in countries such as Britain, Denmark, Ireland, New Zealand and Spain, homeownership rates fell by ten percentage points in the decade or so to 2018. Data on renting are patchy. But figures from the oecd, a club of rich countries, show that there has been a shift towards renting in most wealthy countries since 2010 (see chart 1). A bigger private-rented sector is probably here to stay, predicts Peter Kemp of Britain’s Oxford University.

One of the most dramatic shifts has been in Britain. A fifth of the population now rent privately, up from a tenth in the early 2000s—an increase of more than 6m renters. It was a British bank, Halifax, that coined the term “generation rent” in 2011. But British millennials, born between 1981 and 1996, were not special. A sagging jobs market, high house prices, rising rents and tighter mortgage rules left many youngsters less able to afford a first property.

Employment and housing pressures have eased somewhat. Generation Z, which includes those born between 1997 and 2012, is now earning much more than millennials did at the same age. Cooling housing markets may be helping some millennials get their first set of keys, albeit often with the help of mum and dad. But others remain stuck. In Britain half of renters are now over 35. What was seen in many places as the sector for the young and footloose is increasingly home to families and the elderly. Politicians are beginning to fret about a coming wave of retired renters.

Rents have risen particularly sharply in the past three years, fuelled by workers returning to cities after the pandemic and by wages rising even as the supply of properties remains constrained. High interest rates have crimped already inadequate levels of building. Housing starts in Sweden were down by 50% in the first quarter of 2023. And lending rules remain tight.

Some tenants complain about insecurity and grotty conditions. But the biggest problem, particularly for those on low incomes, is affordability. The definition of “unaffordable” is open to debate, but the oecd and others commonly focus on housing that accounts for more than 30% of gross income or, alternatively, 40% of disposable income (ie, income after tax and social-security charges). In 2022 almost half of American households in the private-rental sector were being charged more than 30% of gross income, according to the Joint Centre for Housing Studies at Harvard University in America. That was the highest level on record—and up by 2m in three years. Across the rich world, rents at 40% or more of disposable income are common (see chart 2). And those data miss large black markets—where sublets do not comply with regulations—in countries such as Sweden and Germany.

High rents do not just lighten people’s wallets. A dysfunctional rental market can make it harder for those on low incomes to get good jobs. Stockholm’s metro is part of one of the best public-transport networks in the world. Yet one in five businesses says high costs and a shortage of affordable housing make it difficult to hire young workers. Lucas Persson, a 28-year-old who works at a think-tank, says many of his friends have considered leaving the city. Spotify, a Swedish music-streaming business, has called the broken rental market a barrier to expansion.

Many of those taking up the cause of renters choose to blame landlords—or as some activists call them, “social parasites”. The urge to control prices often follows. In 2022 the Scottish government introduced a rent freeze. Sadiq Khan, London’s mayor, has long wanted to do the same. Cities in France and Germany have tightened rent controls in response to rising unaffordability. The Australian Greens say a rent freeze would rein in “wealthy property moguls”.

In America there have long been rent controls for existing tenants in New York and San Francisco. In recent years Oregon and California have passed state-wide laws; since 2023 Michelle Wu, the mayor of Boston, has been trying to follow suit.

The appeal of all this to politicians is fairly obvious, says Professor Kemp. Landlords are unpopular (Joe Biden has reassured voters he will be “cracking down” on them). So, too, in many places is building houses. By contrast, rent controls often attract broad support: after all, who is against lower rents? Even better, they cost the government nothing upfront and can be set up at the stroke of a pen.

Economists object. Rent controls first became popular in the aftermath of two world wars—a time when tenants were a large voting block. Milton Friedman attacked controls in an essay in 1946, warning that they would result in the “haphazard and arbitrary allocation of space, inefficient use of space, [and] retardation of new construction”. Liberal economists regard controls as a zombie policy.

No city today better demonstrates the distortions Friedman warned of than Stockholm. On paper Sweden’s system of rent controls, the hyresreglering, is the strictest in the world. A powerful tenants’ union negotiates with landlords, holding rents as much as 50% below the market. In practice lots of people lose out. Swedes must join waiting lists for a rent-controlled apartment: in central Stockholm the average wait is 20 years; across the city it is about half that. Many who reach the front of the queue are in their 50s and own a home. Young Swedes often have to put up with expensive sublets agreed to under the table, laments Mr Persson.

Those lucky enough to have a flat refuse to move. Families come up with ingenious ways of passing contracts to distant relatives. If a couple is so bold as to want more space for children, they must engineer a complex chain of swaps. Or resort to bribes. In 2021 a court case revealed that a woman paid SKr2.4m, or $220,000, for a black-market contract for an apartment in Ostermalm, a posh part of Stockholm.

“The queue system allocates scarce apartments to wealthy, upper-middle class Swedes while those who need them live in shitty, uncertain accommodation outside the city,” says Brett Christophers, a geographer at Uppsala University in Sweden. Swedes like to think their approach is fair and progressive. But immigrants fare worst of all because they find the system hardest to navigate, according to Fredrik Kopsch of Lund University, also in Sweden.

Not all forms of rent control are equally harmful—and their impact depends on where and how they are implemented. One reason the idea never dies is that proponents keep adapting it. The most destructive policies see rents artificially capped or frozen at a fixed level. Most governments have long since abandoned these. But every so often one is mad enough to try again, such as the authorities in Berlin in 2020 and Scotland in 2022.

More common now are controls that seek to limit rent increases within tenancies, for instance to a fixed percentage above inflation. The idea behind these is that landlords and tenants do not always have equal bargaining power, so in theory landlords can gouge tenants by taking advantage of high moving costs. Yet if such policies create a wedge between controlled and market rents, they will still encourage landlords not to invest in their properties and tenants not to move.

In Boston Ms Wu proposed an annual cap on increases of cpi plus 6%—a level few landlords would try to exceed. But the problem is that once politicians have control over rental prices, they are tempted to keep bearing down on them, which gums up the market. In Germany recent clampdowns have done exactly that, according to Stefan Kofner of the country’s Görlitz University. In Sweden the cost of rent-controlled apartments fell far below market rents long ago.

Price controls can act like a ratchet: easy to tighten but very hard to relax. Sweden’s parliament has debated reforms for years; in 2021 a modest proposal helped cause a government to fall. If the concern is protecting tenants from gouging, Anglophone countries should improve tenants’ ability to appeal against above-market increases or challenge bad behaviour.

Rent controls are most damaging when supply is constrained and demand is high, squeezing those searching for somewhere to live. The hyresreglering is failing partly because wealthy municipalities around the city have increasingly resisted new building, says Mr Kopsch. American lefties talk dreamily of Vienna, where 80% of the city’s inhabitants live in rent-controlled apartment blocks. Last year the New York Times even dubbed it a “Renters’ Utopia”. But that city’s planning laws have long made it easy to keep adding apartment blocks and, in any case, its population has barely increased since the second world war. Seeing Vienna-style rent controls as the answer to problems in Manhattan misses the point.

The foundations of change

One city provides a good model for helping renters, however. Frustratingly, its lessons are being ignored. In 2016 Auckland in New Zealand, which had some of the least affordable housing in the world, passed a law allowing more dense development on three-quarters of residential land. Lawmakers particularly wanted to encourage more apartments within walking distance of the city centre, public transport or commercial areas.

A housing boom followed—adding 44,000 homes in seven years, equivalent to around 8% of current stock. A new study by Ryan Greenaway-McGrevy of the University of Auckland estimates that the extra homes have held rents almost 30% below where they otherwise would have been. In 2021 Jacinda Ardern, New Zealand’s then prime minister, passed a law nudging other cities to follow Auckland’s lead. But progress has stalled. All around the world, the only way renters will get a better deal is for cities to enable more building. In Stockholm, Mr Persson is not optimistic. In a few years he hopes to get a rent-controlled flat in Rinkeby-Kista, a suburb struggling with crime that is 12km outside of the city.