A general view of housing in Brixton on January 30, 2013. Photograph: Getty Images.
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We need rent controls to solve London's housing crisis

Too many essential workers are being priced out of the capital. Rent controls could address the uncertainty and unaffordability they face.

In an unusual break from the disagreement, dissent and bickering that pervades politics, consensus has broken out amongst policy makers in the capital: London is in the midst of a housing crisis.

The facts are stark. Private rents in London have risen nine per cent since December 2011. Property price growth has returned to pre-2008 levels and is on the brink of exceeding it.Higher rents make it difficult to save a deposit, and rapid house price growth pushes the size of that deposit further and further out of reach. Indeed, those two factors combined mean that the projected average age by which a young person will be able to buy their first home in London is now 52. Sixty six per cent of first home buyers are supported by the bank of Mum and Dad in order to afford a deposit.

London has reached the point where the cost of housing is affecting productivity growth. We are on the cusp of having to bus in cleaners, retails workers and hospitality staff from the Shires because those on low incomes cannot afford London rents. Londoners on average already spend more than half of their income on paying their rent or mortgage. Not only does that disincentivise the best and brightest teachers and nurses from living in London, it also significantly reduces the disposable income of those with the highest propensity to spend, threatening the future of the retail sector in particular and the economic recovery in general.

London clearly needs to build more homes. A report by London Councils found we have 283,000 too few homes in London now, and we will need a further 526,000 by 2021 to cope with a growing population. But building hundreds of thousands of homes will not happen in the very short- term; meanwhile, Londoners are struggling to pay their rent.  With the monthly rent for a one-bedroom flat in Wandsworth sitting well above £1,100, it has become patently obvious that London needs some form of rent control.

But let me be clear about what I mean when I talk about rent control. I don’t mean the old-school "first generation" rent control that was introduced in the UK during the Great War, which prevents any increase in rents, diminishes investment returns in real-terms over time, and discourages people from becoming landlords. I don’t mean the type of rent control that keeps rents so low that they are not enough to pay for the proper maintenance of a home in a liveable condition. I mean rent controls that nod to the market but allow for the realities of what it is to have a home to live in; the type that are espoused by those who could hardly be called left-wing ideologues, including Angela Merkel and Michael Bloomberg.

Currently in London, a family can move into a home at an expensive but affordable rent. The landlord cannot evict them (except for non-payment of rent) for six months. But after a year that landlord can raise the rent as high as he or she would like to; the rent could be doubled without any notice to the tenant family, putting it completely out of the range of affordability. The family is obliged, then, to move house, move their childrens’ school, probably move to a different part of London, and pay another round of letting fees, bonds and two-months-rent-in-advance. The other option is to seek the landlord’s permission to sublet one of their bedrooms to another family, adding one more to the 207,000 London households already living in overcrowded conditions.

There is an alternative. Take, for example, the German system of rent controls. Renters have indefinite tenancies; a tenant can only be evicted for non payment of rent (over a number of months), damage to the property, unauthorised subletting, or to allow the landlord or a member of his or her family to live in the home or to sell the home. It is in the interests of a landlord to retain their current tenant because the costs of letting agents are borne by the landlord.  The initial rent is set by the market, but cannot be more than 20 per cent higher than similar properties in the area. Rents can be raised according to inflation or due to an increase in the landlord’s costs, but by no more than 20 per cent in any three-year period.  Further, proper maintenance of the property by the landlord is incentivised; a tenant only pays 100 per cent of the rent if the home is in 100 per cent good condition. Perhaps a system like Germany’s is exactly what London needs to address the uncertainty and unaffordability faced by tenants in our private rented sector.

A common criticism of rent controls is that they discourage investment in the private rented sector. But British history since the deregulation of the rental market in the late 80s has shown that argument to be flawed; 89 per cent of landlords are individuals or couples, not builders or developers. In general, they buy pre-existing properties as an investment or nest egg.  They aren’t the part of the housing market that builds new homes in London, though they do compete against first homebuyers for existing properties. The fact that more rental accommodation has not been built in London, with its high rent prices, shows the inelasticity of housing supply in London which has more to do with cautious developers, the planning process, and a scarcity of developable land than it does with rent prices.  

To encourage investment in new homes (rather than locking up investment equity in pre-existing houses), there could be concessions to rent controls on new developments. Maybe rent controls should not apply to any new property built after 1 January 2014. Or maybe they should not apply to the first tenant of any new development; that will have the added benefit of encouraging longer term leases by property developers.

We need to start getting serious about how to address the housing crisis in London, because it’s not just those on minimum wage or housing benefit that are struggling to afford to live here. Teachers, civil servants, retailers and service workers essential to the running of our city are all threatened by the crisis. Though not a silver bullet that will singlehandedly solve the crisis, we should think about how rent controls – done sensibly – can be part of a comprehensive plan to ensure that all Londoners can afford a home in our city.

David Lammy is Labour MP for Tottenham

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We're racing towards another private debt crisis - so why did no one see it coming?

The Office for Budget Responsibility failed to foresee the rise in household debt. 

This is a call for a public inquiry on the current situation regarding private debt.

For almost a decade now, since 2007, we have been living a lie. And that lie is preparing to wreak havoc on our economy. If we do not create some kind of impartial forum to discuss what is actually happening, the results might well prove disastrous. 

The lie I am referring to is the idea that the financial crisis of 2008, and subsequent “Great Recession,” were caused by profligate government spending and subsequent public debt. The exact opposite is in fact the case. The crash happened because of dangerously high levels of private debt (a mortgage crisis specifically). And - this is the part we are not supposed to talk about—there is an inverse relation between public and private debt levels.

If the public sector reduces its debt, overall private sector debt goes up. That's what happened in the years leading up to 2008. Now austerity is making it happening again. And if we don't do something about it, the results will, inevitably, be another catastrophe.

The winners and losers of debt

These graphs show the relationship between public and private debt. They are both forecasts from the Office for Budget Responsibility, produced in 2015 and 2017. 

This is what the OBR was projecting what would happen around now back in 2015:

This year the OBR completely changed its forecast. This is how it now projects things are likely to turn out:

First, notice how both diagrams are symmetrical. What happens on top (that part of the economy that is in surplus) precisely mirrors what happens in the bottom (that part of the economy that is in deficit). This is called an “accounting identity.”

As in any ledger sheet, credits and debits have to match. The easiest way to understand this is to imagine there are just two actors, government, and the private sector. If the government borrows £100, and spends it, then the government has a debt of £100. But by spending, it has injected £100 more pounds into the private economy. In other words, -£100 for the government, +£100 for everyone else in the diagram. 

Similarly, if the government taxes someone for £100 , then the government is £100 richer but there’s £100 subtracted from the private economy (+£100 for government, -£100 for everybody else on the diagram).

So what implications does this kind of bookkeeping have for the overall economy? It means that if the government goes into surplus, then everyone else has to go into debt.

We tend to think of money as if it is a bunch of poker chips already lying around, but that’s not how it really works. Money has to be created. And money is created when banks make loans. Either the government borrows money and injects it into the economy, or private citizens borrow money from banks. Those banks don’t take the money from people’s savings or anywhere else, they just make it up. Anyone can write an IOU. But only banks are allowed to issue IOUs that the government will accept in payment for taxes. (In other words, there actually is a magic money tree. But only banks are allowed to use it.)

There are other factors. The UK has a huge trade deficit (blue), and that means the government (yellow) also has to run a deficit (print money, or more accurately, get banks to do it) to inject into the economy to pay for all those Chinese trainers, American iPads, and German cars. The total amount of money can also fluctuate. But the real point here is, the less the government is in debt, the more everyone else must be. Austerity measures will necessarily lead to rising levels of private debt. And this is exactly what has happened.

Now, if this seems to have very little to do with the way politicians talk about such matters, there's a simple reason: most politicians don’t actually know any of this. A recent survey showed 90 per cent of MPs don't even understand where money comes from (they think it's issued by the Royal Mint). In reality, debt is money. If no one owed anyone anything at all there would be no money and the economy would grind to a halt.

But of course debt has to be owed to someone. These charts show who owes what to whom.

The crisis in private debt

Bearing all this in mind, let's look at those diagrams again - keeping our eye particularly on the dark blue that represents household debt. In the first, 2015 version, the OBR duly noted that there was a substantial build-up of household debt in the years leading up to the crash of 2008. This is significant because it was the first time in British history that total household debts were higher than total household savings, and therefore the household sector itself was in deficit territory. (Corporations, at the same time, were raking in enormous profits.) But it also predicted this wouldn't happen again.

True, the OBR observed, austerity and the reduction of government deficits meant private debt levels would have to go up. However, the OBR economists insisted this wouldn't be a problem because the burden would fall not on households but on corporations. Business-friendly Tory policies would, they insisted, inspire a boom in corporate expansion, which would mean frenzied corporate borrowing (that huge red bulge below the line in the first diagram, which was supposed to eventually replace government deficits entirely). Ordinary households would have little or nothing to worry about.

This was total fantasy. No such frenzied boom took place.

In the second diagram, two years later, the OBR is forced to acknowledge this. Corporations are just raking in the profits and sitting on them. The household sector, on the other hand, is a rolling catastrophe. Austerity has meant falling wages, less government spending on social services (or anything else), and higher de facto taxes. This puts the squeeze on household budgets and people are forced to borrow. As a result, not only are households in overall deficit for the second time in British history, the situation is actually worse than it was in the years leading up to 2008.

And remember: it was a mortgage crisis that set off the 2008 crash, which almost destroyed the world economy and plunged millions into penury. Not a crisis in public debt. A crisis in private debt.

An inquiry

In 2015, around the time the original OBR predictions came out, I wrote an essay in the Guardian predicting that austerity and budget-balancing would create a disastrous crisis in private debt. Now it's so clearly, unmistakably, happening that even the OBR cannot deny it.

I believe the time has come for there be a public investigation - a formal public inquiry, in fact - into how this could be allowed to happen. After the 2008 crash, at least the economists in Treasury and the Bank of England could plausibly claim they hadn't completely understood the relation between private debt and financial instability. Now they simply have no excuse.

What on earth is an institution called the “Office for Budget Responsibility” credulously imagining corporate borrowing binges in order to suggest the government will balance the budget to no ill effects? How responsible is that? Even the second chart is extremely odd. Up to 2017, the top and bottom of the diagram are exact mirrors of one another, as they ought to be. However, in the projected future after 2017, the section below the line is much smaller than the section above, apparently seriously understating the amount both of future government, and future private, debt. In other words, the numbers don't add up.

The OBR told the New Statesman ​that it was not aware of any errors in its 2015 forecast for corporate sector net lending, and that the forecast was based on the available data. It said the forecast for business investment has been revised down because of the uncertainty created by Brexit. 

Still, if the “Office of Budget Responsibility” was true to its name, it should be sounding off the alarm bells right about now. So far all we've got is one mention of private debt and a mild warning about the rise of personal debt from the Bank of England, which did not however connect the problem to austerity, and one fairly strong statement from a maverick columnist in the Daily Mail. Otherwise, silence. 

The only plausible explanation is that institutions like the Treasury, OBR, and to a degree as well the Bank of England can't, by definition, warn against the dangers of austerity, however alarming the situation, because they have been set up the way they have in order to justify austerity. It's important to emphasise that most professional economists have never supported Conservative policies in this regard. The policy was adopted because it was convenient to politicians; institutions were set up in order to support it; economists were hired in order to come up with arguments for austerity, rather than to judge whether it would be a good idea. At present, this situation has led us to the brink of disaster.

The last time there was a financial crash, the Queen famously asked: why was no one able to foresee this? We now have the tools. Perhaps the most important task for a public inquiry will be to finally ask: what is the real purpose of the institutions that are supposed to foresee such matters, to what degree have they been politicised, and what would it take to turn them back into institutions that can at least inform us if we're staring into the lights of an oncoming train?