Rent controls only increase problems in the rental market
A recent study by CBRE shows that Minister Hugo de Jonge’s plans to regulate rents in the Dutch rental housing sector will not lead to more affordable rental housing. In actual practice, rent controls will lead to a decrease in the number of affordable rentals within the existing housing stock and a decrease in investors’ willingness to finance new projects, while creating waiting lists for regulated tenancies and significantly forcing up the price of new builds in the rental sector. These are the latest findings of CBRE Nederland – part of the listed company CBRE Group, the world’s largest real estate consultancy – based on a thorough analysis of this future legislation.
Effects of rent controls
Housing minister Hugo de Jonge wants to raise the upper limit of the regulated rental housing market. The proposed legislation involves extending the points-based system currently used for the regulated market to 187 points. This means rents of up to about €1000 a month. Currently the upper limit of the points system is 141 points, and the maximum price in the regulated rental sector is €763. The proposed amendments to rent controls will result in some 47% of rental units that currently fall within the private rental sector falling within the regulated sector as of 2024. Initial rent for these properties – the rent that applies to new rental contracts – will be determined on the basis of a housing valuation system (WWS points system). In 75% of all municipalities this will cause a decrease in the price of these rental units. In the most extreme cases, like Amsterdam, and especially for housing units that are not energy efficient, this could lead to a 52% drop in rent.
The expected decline of rental income will cause many owners of rental property to reconsider whether they want to keep these units in the rental sector. Private investors and private equity investors in particular are expected to sell these housing units to buyers on the private housing market. This will result in a portion of our current housing stock being transferred from renters to buyers. The number of rental units will, according to a rough estimate, then decrease by between 50,000 to 100,000.
Withdrawing housing units from the regulated rental sector, along with a declining development pipeline, will have the effect of decreasing the number of rental units under rent controls, which means renters will be increasingly forced to look in the private rental sector. Because the scarcity of units in the private rental sector will significantly increase under these plans, market forces will possibly cause those rents to rise even more, especially in highly urbanised areas.
Decline in new builds
New-build homes will also be affected. Uncertainties about investment returns raised by the Minister’s announced plans are causing many developments to be put on hold. This will lead first of all to significant delays, which in the longer term will mean a decline in the number of new-build homes over the coming two to three years. In terms of structural change, based on what is now known about the new rent controls, fewer smaller housing units up to 60-70 sq. m. will be built in the rental sector. These are units that, based on the current regulations, will not fall under the private sector and for that reason cannot be financed by investors seeking to generate income. But this is exactly the type of housing there is a high demand for among starters.
Although CBRE believes the primary solution lies in a thorough re-examination of the proposed rent controls, given the political mood, this does not look like a viable option. In order to achieve a better balance between affordable housing and attractive investment, we have to look in particular at a substantial increase in the number of WWS points awarded for sustainable energy labels.
This would bring consideration of basic living expenses, both rent and energy charges, into the discussion on affordability. Raising the number of points for better energy labels would create more space for investors to invest in sustainable new-build homes. It would contribute to much-needed growth in rental housing stock, which in the long run would ensure prices in the rental sector enter calmer waters on their own. Another benefit is that this adjustment would act as an additional incentive for landlords with energy-inefficient units. They will be more likely to invest in the energy efficiency of their portfolio more quickly. Significant improvements in existing rental housing stock will, in turn, push us closer towards targets of energy neutrality, and help tenants by making rents more affordable.
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CBRE Group, Inc. (NYSE:CBRE), a Fortune 500 and S&P 500 company with headquarters in Dallas, is the world’s largest commercial real estate services and investment firm (based on 2020 revenue). The company employs more than 100,000 people worldwide and provides services in over 100 countries. CBRE offers strategic advice and guidance in property sales and leasing; corporate services; property, facilities and project management; appraisal and valuation; development services; investment management; and research and consulting. Please visit our websites at www.cbre.nl and www.cbre.com.