Australian renters are struggling.
Rapidly rising rents have turbocharged the cost-of-living crunch, with the impact concentrated on low-income households.
CEDA estimates that renters among the poorest fifth of Australian households could be paying an average of 44 per cent of their disposable income on rents this year. It’s therefore not surprising to see rent control make a return to the policy spotlight.
During the COVID-19 pandemic several states tried to pass rent freezes, with mixed results.
Rent controls do benefit tenants in the short-term. In the long term, however, the costs of rent control outweigh the benefits as it discourages housing supply, fuels housing deterioration, limits housing mobility and drives misallocation between tenants and rental housing.
As with other goods and services, supply and demand drives the rental market. But rent control artificially pushes the price of rent below what would have otherwise prevailed. This increases demand for rentals while discouraging supply.
Current tenants will benefit from the lower rental prices, but owners will receive less rental income and it will be harder for people looking to rent to find a home.
The longer-term consequences of rent control are more pervasive, and point to the unintended costs of well-intentioned policy.
Existing tenants may remain in bigger or better-located housing even if their circumstances change. This makes it harder for new tenants to find accommodation. It also discourages people from moving house to take up a better job elsewhere, with adverse consequences for the labour market.
Rent control also undermines the future supply of rental accommodation. By reducing returns, it discourages developers from building more housing, making the shortage of rental accommodation more acute.
When owners can’t recoup operational costs through rents, they may decide to invest less in maintenance and amenity improvements. This reduces tenants’ quality of life.
The unfortunate result is that rent control can constrain the availability and quality of rental housing, hurting those it was originally intended to help.
What does the evidence say?
Internationally, cross-country analysis by the OECD has found that strict rent control inhibits construction of new housing and discourages maintenance of existing housing. In San Francisco, it was found that rent control limited renters’ mobility by 20 per cent and reduced the supply of existing rental housing by 15 per cent. Although substantial benefits were accrued to incumbent tenants in the short-term, the lost rental supply drove up rental prices in the long-run.
Cross-country analysis also links tighter rent control with less responsive new housing supply. In Sweden, very strict rent control lowered the supply of rental dwellings in some locations, discouraged mobility and led to waiting times of up to 10 years for rental housing.
But less stringent approaches can deliver better outcomes. A 2014 paper that compared rental regulation across several European countries found the German system of capping rent increases using a local reference rent – while leaving initial rents largely unregulated – had struck a good balance that did not form a barrier to investment.
In light of this evidence, CEDA opposes across-the-board rental caps. There are better ways to assist struggling renters.
To provide immediate relief, we support plans to ban no-grounds evictions and limiting rent increases for sitting tenants in line with increases in the local market. These measures can deliver greater financial and tenure security for renters without compromising housing supply.
For the long-term, governments should adopt measures to boost housing supply, while ensuring rental rules protect struggling tenants without distorting prices. This includes: planning and zoning deregulation to encourage the supply of private housing investment (largely a responsibility of the states and local governments); continuing to invest in social housing through quality partnerships with public, private and community developers; and providing greater security of tenure for renters and supporting low-income households through better targeting of Commonwealth Rent Assistance.
Read more about these proposals in CEDA’s submission to the Senate Community Affairs References Committee’s Inquiry into the worsening rental crisis in Australia.