In the wake of Australia's ongoing rental housing affordability crisis, policymakers have mooted a series of interventions, including a freeze on rents and various forms of rent controls.
Of course, we know that one political party particularly of a particular colour is pushing for rental freezes.
While this might seem attractive solutions to the immediate challenges faced by tenants, rent control policies have consistently failed across the globe.
Despite the best intentions, these policies often worsen the problems they seek to address.
Rent control: good intentions, bad outcomes
From New York to Paris, Stockholm to Berlin, various forms of rent control have been tried and failed.
The failures are varied but share a common thread: they distort housing markets and often worsen the challenges they were supposed to solve.
In New York City, two forms of rent control—'Rent Control' and 'Rent Stabilisation'—were introduced in the 1940s, leading to rents being kept significantly lower than market rates.
The resulting disincentive for landlords to maintain their properties led to an ageing, deteriorating housing stock.
Worse still, it created a two-tiered system where some tenants accessed artificially low rents while others, particularly newcomers, were subjected to steep market rates.
In Stockholm, a rigid rent control system led to a chronic housing shortage, with waiting times for a controlled rental apartment stretching into decades.
This system even resulted in the creation of a black market for rental contracts, deepening social divisions.
The inefficacy of rent control: Paris and Berlin
Paris, France's capital, experienced its share of rent control missteps with the 2015 'Encadrement des Loyers' policy.
This policy resulted in landlords selling properties rather than renting them out, due to restrictions on rental increase, thereby shrinking the rental stock and paradoxically intensifying demand, which led to increased rents.
The policy was repealed in 2017.
Berlin's attempt at a five-year rent freeze, the Mietendeckel policy of 2020, deterred investment in the housing sector and slowed new construction, exacerbating the city's housing shortage.
Landlords withdrew properties from the market, leading to a 60% decrease in advertised flats available.
In 2021, the policy was declared unconstitutional and landlords demanded rental back payments, exacerbating the affordability crisis.
Rent control and the housing market
Rent control's failure often lies in its distortion of the housing market.
Setting rents below market rates disincentivises property improvements and new development, leading to a shortage of quality rental properties.
San Francisco experienced a 15% reduction in the number of rental properties available after implementing rent control in 1994.
Furthermore, rent control often results in an inefficient allocation of housing.
With price mechanisms distorted, individuals may consume more housing than they need, as seen in New York, where large rent-controlled apartments are occupied by empty nesters, while young professionals and migrant workers struggle to find housing.
Rent control also tends to create a divide between 'insiders', who are lucky enough to secure a rent-controlled home, and 'outsiders', typically newcomers who face decreased housing availability and increased market rates.
Beware of unintended consequences
Overseas experience has shown that rent controls lead to:
- Decrease in the supply of rental housing: When landlords are unable to charge market rents, they have less incentive to maintain or improve their properties.
This can lead to a decrease in the quality of rental housing.
For example, landlords may be less likely to make repairs, or they may choose to rent out their properties in a less-than-desirable condition.
This can make it difficult for tenants to find quality housing at an affordable price.
- Increase in the cost of housing: Rent control can create a shortage of rental housing, which can drive up prices for everyone. This is because when there is less housing available, people are willing to pay more for it.
This can make it difficult for people who are not protected by rent control to find affordable housing.
- Decrease in mobility: Tenants who are protected by rent control may be less likely to move, even if they would prefer to.
This is because they may fear losing their rent-controlled apartment if they move.
This can make it difficult for people to find new jobs or to move to different neighbourhoods.
For example, a tenant who is offered a new job in a different city may be reluctant to move because they would lose their rent-controlled apartment.
In addition to these unintended consequences, rent control can also lead to other problems, such as:
- Increased discrimination: Landlords may be more likely to discriminate against tenants who are not protected by rent control. For example, they may be more likely to refuse to rent to families with children or to people with pets.
- Increased bureaucracy: Rent control can lead to a complex and burdensome bureaucracy. This is because there are often rules about who is eligible for rent control, how much rent can be charged, and how rent increases can be controlled. This can make it difficult for landlords and tenants to understand and comply with the rules.
The real solution: increasing supply
The global failure of rent control suggests that more effective solutions lie in addressing the root cause of high rents: a lack of supply.
Instead of artificially suppressing rents, the focus should be on easing zoning regulations, streamlining approval processes, and incentivising development to boost housing supply.
Innovative solutions such as the 'build-to-rent' model are showing promise in Melbourne, as large overseas superannuation and other international institutions construct developments designed for the rental market.
Of course, since build-to-rent is a commercial venture these new apartment towers will not provide affordable accommodation, with current experience suggesting accommodation in new build-to-rent buildings being 20% above market rates.
While Sydney has yet to fully embrace this model due to high development costs, there's a glimmer of hope with the new Minns Government indicating plans to streamline planning regulations for developers who offer reduced rents for low-cost developments.
Of course, encouraging Australian property investors to purchase properties to put on the rental market is another way of shifting the supply-demand ratio, however, currently, investors are leaving the market because they feel there is too much government interference at a time when they’re holding costs have increased due to rising mortgage costs and rising taxes.
While rent control may appear an attractive solution to housing affordability challenges for those that don’t understand how market forces work, the global track record of these policies suggests that they are no panacea.
In addressing Australia's housing affordability crisis, policymakers must shift their focus to supply-side solutions, with an emphasis on creating a regulatory environment that encourages more housing construction.
The lessons from rent control's worldwide failure are clear: the road to affordable housing is built on increased supply, not artificial price control.
