Rent freezes a hot topic but do they work?

Rent caps, or rent freezes, have burst onto the national political stage and may even be the catalyst for an early election.

Though rent freezes have emerged as one of the most contentious points in the national debate around resolving the housing and rental crisis, they have been tried around the world.

But does rent control work?

Since The Greens held the Federal Government’s signature housing policy to ransom with its demand for rent price caps or freezes, and the Victorian Government said it was looking into the option, there has been a chorus of objection from industry and beyond.

Led by the Real Estate Institutes around Australia, with support from as high up as the Reserve Bank of Australia (RBA) Governor, Philip Lowe, criticism of the proposals aimed at easing pressure on stressed renters has been plentiful.

The motivation behind enforced rent limitations is obvious.

Research has shown that the national average of asking rents has increased by 11 per cent in the last 12 months. Renters in Sydney have seen the median average weekly rent for new tenancies soar by 20 per cent over the past year to $650 per week.  

Landlords hit by higher interest rates are passing on the added to cost to tenants. Nineteen out of every 20 new tenancies are commanding a higher rent than the previous lease.

While the rent freeze policy is designed to alleviate financial stress on renters, crucial questions remain about the impact on landlords.  

As well as examining how rent control measures had worked overseas, API Magazine spoke to leading academics to determine who was right; those demanding rent freezes to alleviate rental stress or industry and landlords who say the cure would be worse than the ailment.

Rent freeze short and long term results vary

Central Queensland University’s Senior Lecturer – Property, Dr Stephen Boyd, said the current situation demanded a policy response and rental control mechanisms may have a part to play even if they present longer term issues.

“In the regions, landlords have benefitted from both median rents and house prices increasing since the emergence of the pandemic.

“In one popular regional city, three-bedroom house rents have jumped 40 per cent with the value of their investment following closely at 30 per cent from the 2019 medians. For the young person aspiring to own a home, they have lost savings to cover rent and the goal posts have moved even further away.

“For these reasons it appears only responsible that authorities intervene, and some form of rental freeze and cap is the current popular choice for some political parties.

“They could rightly show that price intervention in some goods and services has worked, and it could immediately reduce cost of living pressure.

“Through the right rent control mechanism, excessive rent increases may be prevented, keeping more tenants in the communities they value, with their network of friends and family, proximity to a job, or children enrolled in local schools.”

But it wasn’t all one-way traffic

“As found in studies from the US, the cost of providing that benefit to the tenants is very large.

“In reviewing the international studies, our Australian Housing and Urban Research Institute (AHURI) found ‘rent control appears to help affordability in the short run for current tenants, but in the long-run decreases affordability, fuels gentrification and creates negative externalities on the surrounding neighbourhood’.”

Right now landlords are doing the heavy lifting, providing 78 times more accommodation than state and territory housing providers.

- Mike Mortlock, Managing Director, MCG Quantity Surveyors

Bilgehan Karabay, Associate Professor, Economics at RMIT, if it is possible to enforce rent caps, they may benefit renters but only in the short run.

“An effective rent cap opens the door for rationing in the rental market.

“Leaving aside the enforceability issue, one needs to separate the short- and long-term effects of rent caps.

“In the short run, the supply side implications of rent caps would be limited, meaning that the number of rental places will not change much, thus, rent caps tend to lower rents and reduce displacement of tenants, which is beneficial especially for those that derive important benefits from their neighbourhood.

“In contrast, in the long run, landlords will have time to adjust themselves, which will result in a reduction in rental housing supply, which tends to raise rents over the long run, implying that rent caps act as a transfer from future renters to current renters.

“Due to this limited supply, rent caps also decrease mobility and this in turn causes a mismatch between tenants and rental properties, i.e., single person living in a family-sized apartment.

“Lastly, research shows that once rent caps are removed, the value of properties in neighbouring suburbs increases, suggesting that rent caps might have negative spillover effects.”

RBA Governor Lowe, making his last appearance before the House of Representatives’ economics committee on Tuesday, concurred that rent freezes shaped as a short-term panacea.

He argued that supply was the key to resolving the housing crisis and rent caps or freezes would only serve as a disincentive for the construction of more houses.

The Greens said research conducted by the Parliamentary Library found that a rent freeze starting in July 2022 would have saved renters “more than $3 billion in the last 12 months alone”.

With rents predicted to rise another 10 per cent over the next year, their analysis found “renters will be in for another $4.9 billion in increases over the next year, totalling an estimated $8.06 billion in increases over the next two years”.

As the chart below show, renters will be hoping interest rates have peaked given the strong correlation between higher rates and higher rents.

Mike Mortlock, Managing Director, MCG Quantity Surveyors, said investors play an important role in housing the 31 per cent of the nation that are renters.

“We have a rental affordability crisis at a time where investors are finding it harder to bridge the gap, yet policy makers are continually blundering around the margins disincentivising them - it's no wonder investors are leaving the market.

“Not everyone will own a home, and an investment property selling does not always result in a first home buyer buying - I've seen a number of properties left vacant for lengthy periods due to onerous rental conditions and other disincentives.

“Right now landlords are doing the heavy lifting, providing 78 times more accommodation than state and territory housing providers.

“We can have the discussion about expanding public housing but in the short term investors are part of the solution.

“They're mostly single property owners on modest incomes trying to provide financial security for themselves and fund a retirement that disqualifies them from being a recipient of the age pension, which is expected to cost $72 billion in 2025–26.”

How have rent caps worked internationally?

Scotland implemented a rent freeze in September 2022, and in April 2023 moved to a rent cap of 3 per cent. For years, most Canadian provinces have had rent caps - called ‘guidelines’ there - that limit rent increases to a certain percentage rate set by the government. 

Ireland has a system of ‘rent pressure zones’, if a local government area records increases in median rents above a certain threshold for successive quarters, a cap kicks in, currently 2 per cent, and not more than once in 12 months.

Much of the empirical evidence on the effectiveness of rent control comes from large US cities, where rent control regulations have been in place for decades.

San Francisco has had rent controls in place for the last 42 years on properties built before 1980, while in New York City, rent control policies have been a feature of the housing market since the 1940s

In both cities, rent controls were found to reduce displacement of tenants and retain ethnic diversity.

However, it also resulted in landlords lacking the incentive to maintain or upgrade their properties due to the limited returns on their investments. This has led to an ageing and deteriorating housing stock, with an inequitable two-tiered system of affordability emerging.

Stewart Bunn, Chief Communications Officer of First National Real Estate, said rent controls have a worldwide track record of failure. Germany, France and Sweden had all encountered issues with the policy, he said.

In Sweden, where a rigid rent control system aimed at ensuring everyone had access to affordable housing was implemented, the city ended up facing a chronic shortage of homes, he said.

“The waiting list for a controlled rental apartment now stretches into decades, with a thriving black market for rental contracts exacerbating social inequities.

“Paris, in its recent attempt at rent control in 2015, landlords opted to sell their properties rather than lease them due to the restriction on rent increases, decreasing the available rental stock, paradoxically leading to increased rents due to higher demand.

“Even Berlin’s five-year rent freeze, introduced in 2020 to combat housing affordability issues, inadvertently deterred investment in the housing sector.

“This led to a slowing down of new construction and worsened the city’s housing shortage.”

In 2021, Germany’s federal constitutional court overturned the rent cap, highlighting the legal complexities that rent control measures can entail.