George Osborne would do well to read more of John Maynard Keynes, and in particular his General Theory of Employment Interest and Money published in 1935. Unlike Osborne and Cameron, Keynes (a capitalist economist and a Liberal) learned lessons from the Great Depression and was determined never to see it repeated.
One of JMK’s well-known sayings – ‘When the facts change, I change my mind. What do you do, sir?’ – was uttered after he was criticised for changing his position on monetary policy during the Great Depression. It applies well now to Osborne’s repetition of the Great Depression mistake (and indeed Japan’s more recently) of cutting demand in a recession.
But it might equally be applied to private rented sector rents and the policy of slashing the Local Housing Allowance for private tenants. Minister after minister, from Cameron down, trotted out the line that cutting benefits would reduce rents, that the HB sector was holding rents up high, and that the free market would respond to HB cuts, effectively lowering demand, by lowering price. Iain Duncan Smith frequently said that the fact that his department was responsible for 40 per cent of the private rental market was ‘staggering’ and that the aim of the reforms was ‘to drive down market rents’.
Logical thinkers came to different conclusions. With current levels of excessive demand, tenants forced to move by cuts in their HB payments would be easily replaced by new tenants able to pay market rents. There would be no price reduction in more costly areas. However, the displaced tenants would be looking for homes in lower rent areas, boosting demand and competition for the cheaper homes that come on the market. Rents in those areas would be likely to rise. The problem would be compounded by a proportion of landlords taking family homes off the market to make them available instead to the growing number of single people who would only receive the shared accommodation HB rate in future. Letting to 4 or 5 singles was likely to be more lucrative than letting to a single family.
The anecdotal evidence is that sharing and overcrowding are increasing as people, and especially larger families, try to find cheaper – which often means smaller – accommodation. Harder evidence, from agents and landlords, shows that rents continue to rise above inflation.
Nor are there any signs of rents turning down in the future. The head of research at Savills recently concluded “High rent rises are not confined to the prime market and, as more aspiring buyers are frozen out of home ownership, demand for private rented stock in the country as a whole can only grow. Our prognosis for the private rented sector as a whole remains extremely bullish.”
Even if the government believed its little bit of idiot economics when it started the policy, surely the evidence is accumulating that they are just wrong, rents will not fall and people will be put through endless misery because of it.
The facts have changed. But does Iain Duncan Smith have the bottle to change his mind as JMK suggests he should?