When Governments reach for a “feel good” property policy, they risk unbalancing the property investment supply chain.
The supply chain dynamics for most products or services are complex. Property investment is a great example. It has many stages, players and advisors and can take anywhere from 3 to 10 years to complete, meaning stability in the landscape is key to its success. The stages include;
Planning > Development > Finance > Construction > Finance (again) > Sale > Leasing > Management > Resales
When any of these stages is impacted, it sends ripples up and down the supply chain. Gradual shifts in markets are a normal and accepted risk. Even more sudden shifts, like though Covid can be absorbed. However, when governments intervene in significant or unexpected ways it sends shock waves through the supply chain that can take years to play out and often has unintended consequences.
The recent proposal by the Federal Greens Party to freeze residential rents nationally for two years with an ongoing cap, is a great example. It is a headline catching policy that is unlikely to get any traction. I am sure wiser heads will prevail but imagine the disruption this would have to the property investment supply chain. Private investors would sell and planned new apartment developments would stop.
Consequently, the supply of rental property would evaporate. People would find it even more difficult to find a home to rent, and over time, real rents would actually sky-rocket (despite the restrictions). Potentially a black market of cash or contra would emerge.
Everyone understands the importance of housing and support it at every chance, but such an outcome is not what the Greens want. The best plan to help renters is to support markets gradually to allow them to be creative and agile in meeting demand.
Other examples of government intervention were the proposed changes to negative gearing during the 2019 Federal Election. Just the prospect of the change created market tremors.
Changes are often necessary to rectify fundamental shortcomings (like removal of stamp duty) but they need to be very carefully thought through and introduced gradually. Markets need plenty of warning to allow every player along the delicately balanced supply chain to prepare and adjust.