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Rent control

Rent controls – good or bad?

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The National Cabinet meeting last week could not ignore the wave of experts advising them not to introduce harsh rent controls like rental caps or a freeze.

Most prominently when asked about rent controls, outgoing Reserve Bank Governor Philip Lowe said, “…giving people more money or capping prices doesn’t help with the balance of supply and demand in the market… In most cases rent controls reduce the incentive to add supply…”

Thankfully sanity prevailed. State governments (who have jurisdiction for housing policy) agreed to limit rent increases to once per year. This is already in place in Victoria.

But what about people struggling to find a home or pay the rent? The plight of many to find rental accommodation is acute and heartbreaking. The remedy advocated most prominently by the Greens is to freeze rents. They are also holding the Federal Government’s bill for more housing to ransom over it.

More impartial experts, including Governor Lowe, favour the solution of more housing to create a longer term and sustainable solution.

It takes a long time to build the number of homes we need. Especially with the notoriously slow and opaque Victorian town planning process. Over the next few weeks, the Victorian Premier will make a broad housing policy announcement which will include everything from fast tracking town planning approvals (pushing for higher inner-city density) to more social and affordable housing.

It has been hinted that Premier Andrews may also tweak rental rules. With the national cabinet’s decision now aligning the states on a broad rental policy, any additional rent restriction would push residential developers interstate, and further retard new housing supply in Victoria.

Rent controls may feel like the right thing to do to help people in desperate need. However, it would set off a tsunami of investor sales, translating into a rental accommodation shortage and higher market rents. One of the very few reasons a Victorian renter can be asked to move out of their home (if they are not in a fixed term lease) is because the owner is selling. Further rent controls would cause a flood of eviction notices to renters in an already constrained rental market.

Consequently, further rent controls like a rent freeze would be catastrophic for renters.

So what now for apartment investors and renters? Here is the state of play.

  • Rents have recovered from the covid losses and will keep rising for the next few years.
  • The cost of construction makes many large-scale residential projects unviable.
  • Competition for construction labour is expensive given the ongoing government infrastructure projects.
  • Town planning for new project remains slow and expensive (even with State Government intervention)
  • Immigration to Australia is high and will remain so with Melbourne and Sydney attracting the lion’s share.

So demand will remain high and supply will be slow. Unfortunately, there is no short-term solution. Both rent and sale prices for investment apartments are likely to rise over the next one or two years under the weight of demand as it out strips supply.

Government housing policy or tinkering is often about votes. It also often comes in the form of feel good patches. Over a number of years the government have tweaked things like foreign investors surcharges, land tax, first home guarantee (state and federal) , first home buyer grants, stamp duty, planning and design like better apartment design guidelines, plus many other levers. These policies layer over each other and mix with general economic fluctuations making the overall impact impossible to determine. Eventually it plays out like it is now with renters feeling the brunt of unintended consequence. This constant policy change disrupts the delicate balance of the apartment and housing market generally.

In response, the Government reaction is to introduce more policy to fix it. Perhaps the answer is to do less. In a stable and predictable policy landscape, we have a sophisticated property development profession, that can forecast and respond to the dynamics of each housing sector. For decades this has ensured future demands of buyers and renters are met. While it will occasionally over or under shoot the market, it adjusts quickly and any losses are to the private sector and not the public purse.

The constant tweaking creates an uncertainty of the future policy landscape which just might be more problematic than the changes themselves.

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