The sharp rise in rents is a key problem in the cost of living crisis. But rent caps are not a solution, and landlords’ reaction to the repeal of a corresponding regulation in Argentina is clear evidence that they do not help here either.
According to the Australian Bureau of Statistics, rents have increased by 14.5 percent in the last two years. Wages, on the other hand, have only increased by 7.8 percent.
The differences between these growth rates are striking.
Some melodrama lovers call this a “housing crisis” and have triggered extreme political demands for some kind of rent cap, especially from the economically incompetent Greens.
The pretext for capping rents is to help tenants cope with their cost of living pressures when rent increases are lower than the market dictates.
At first glance it sounds attractive.
Helping tenants through laws that keep rents low may seem like a sensible policy at first glance.
But from an economic point of view, this is a hopeless step away from the goal.
It’s snake oil.
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When rents are kept artificially below market levels through government laws and regulations, the supply of housing available for rent on the market decreases.
This is because the return on investment would be almost uneconomical for landlords and therefore they would not invest in rental apartments.
Rent caps could also tempt some property owners to rent out their properties on a short-term basis via Airbnb, as this would generate higher returns than capped long-term rentals.
This reduces the supply of apartments for long-term rental and leads to shortages, albeit at cheaper rents.
This is simple economics.
While the policies of Argentina’s recently elected President Javier Milei can hardly serve as a blueprint for many measures in Australia, he did abolish a system of rent caps on homes that was specifically designed to make rents more affordable.
According to an article in Newsweek, rent control has resulted in one in seven landlords leaving their properties vacant and offering them for rent because the returns are too low and renting is too expensive.
The supply has simply dried up – that’s no surprise.
Since the lifting of rent control in Argentina at the end of 2023, the number of apartments available for rent has almost doubled, according to Newsweek.
Supply stormed the market as landlords competed for tenants.
While the Australian rental market could benefit from other reforms that are more concerned with setting and extending the length of the lease and ensuring that repairs and maintenance are carried out promptly and effectively by the landlord, rent controls are economic madness.
Rent growth has already passed its peak
The good news for tenants is that the rents being asked are already starting to fall.
According to data from SQM Research, rents in Australia’s capital cities actually fell by 0.5 percent in the 30 days to August 12. This was the weakest rent change in four years.
It appears that this first indication of a slowdown is due to weakening demand due to declining immigration rates and a stable rental vacancy rate.
Importantly, this process takes place without government-imposed rent controls, which, if introduced, could jeopardise the supply of new housing needed to improve rental affordability.
How serious is the rental crisis? A longer-term perspective
Given the sharp rise in rents over the past two years, it is important to put longer-term changes in rents relative to incomes into context. This too relegates the idea of a rent cap to the political dustbin.
Let’s look at some examples:
Over the past five years, rents have risen by 15 percent, almost as much as wages, so rent affordability has remained largely constant.
Note that rents were weak and in many cases fell between 2020 and 2022.
In the current “crisis” no one seems to refer to this.
Over the past ten years, rents have risen by 20 percent, while wages have increased by 28 percent. This means that rents are much cheaper today than they were in 2014. This is good news for tenants.
And even over a very long period of time – 20 years – rents have risen by 85 percent while wages have grown by 82 percent – it’s basically a zero-sum game.
All of this suggests that the rental market is developing as hoped – rents are rising in line with wages – no more, no less, once the ups and downs are over.
Rent caps would lead to chaos – to a shortage of housing supply, as landlords would withdraw from the market, which the government has decided is uneconomical.
