Nerida Conisbee: rent control isn’t the answer to the rental crisis

There are almost twice as many people under rental stress than those experiencing mortgage stress, with ‘stress’ defined as spending more than 30 per cent of household income on rental or mortgage payments.

In the most recent Census of Population and Housing conducted in 2021, there were 915,000 households spending more than 30 per cent of their income on rental payments.

This compares to 469,000 households spending more than 30 per cent of their income on mortgage payments. And although interest rates rises are causing challenges for many mortgage holders, the accelerated pace of rental increases are a bigger problem.

Over the past year, advertised rents in Australia have risen 17.1 per cent, the biggest jump ever recorded.

While advertised rents are soaring higher compared to current rental agreements, we know from history that these will soon follow.

And unlike house prices, these increases are set to continue. Already we can see that the pace of growth is accelerating.

Fundamentally we have a rental housing shortage. There are too few homes in places where people want to, or need to, live.

To introduce a policy that makes that shortage worse seems like madness but that is exactly what is currently being proposed.

Rent control is back on the political agenda. While it seems like an easy solution, this short-term solution leads to long-term pain that is very difficult to undo.

The reason that forcing rent control is problematic is that it discourages investment in housing. Consider someone who is looking to invest their money.

There are a lot of different options – from the share market, the housing market, gold, cash, bonds, Bitcoin and the list goes on.

While people have different investment strategies, generally they want some sort of return.

Capping the return on housing makes it less attractive as an investment option and would lead to other investments becoming more attractive.

For those who are prepared to hold on to housing as investments, there is less money available for repairs and maintenance.

Fewer rental properties that are more rundown is the outcome and this flows through to desirability of suburbs where rent control is in place.

The negative impacts of rent control are not just theoretical but are exactly how things have played out whenever rent control has been put in place anywhere around the world.

In the mid 1990s, rent control in San Francisco resulted in a 15 per cent decline in rental properties and a further 5 per cent increase in rental levels.

Controls put in place in Berlin more recently in 2020 have now resulted in a halving of rental properties available while rents in nearby cities have skyrocketed as people have had to move further out to find accommodation.

The solution to fixing affordability for renters is providing enough housing for the people in places that people want to live.

It is a market failure that not enough homes are created, a market failure that will worsen this year as construction costs continue to rise.

This inability to provide enough housing isn’t just bad news for renters and first home buyers but ultimately Australia’s economic growth.

Supply restrictions in the US in just three major cities has been estimated to lower overall GDP by 4 per cent.

Unlike rent control, ensuring adequate supply of housing is difficult, time consuming and frequently politically unpopular.

Existing residents of desirable areas tend to not like higher densities in their suburbs. Streamlining planning processes is often difficult and ensuring adequate infrastructure in both new and infill areas is expensive.

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Nerida Conisbee

Nerida Conisbee is the Chief Economist at Ray White.