Yahoo Finance Major backflip proves rent cap 'lunacy' won't save Australia: 'It is snake oil'
Landlords left their homes empty when rent caps were introduced in Argentina and this example proves they won't work in Australia either.
The sharp increase in the price of rent has been a defining issue in the cost-of-living crisis. But rent caps are not the answer and how landlords reacted when a mandate in Argentina was reversed is obvious proof it won't help here either.
The cost of rent has increased by 14.5 per cent over the last two years, according to the Australian Bureau of Statistics. This is while wages have risen by just 7.8 per cent.
The divergence between these growth rates is stark.
This has been termed, by some who love melodrama as a housing ‘crisis’ and has sparked some extreme policy calls, mainly from the economically inept Greens, for some form of cap on rents.
The pretext for capping rents is to help renters with their cost of living pressures if rent increases are lower than determined by the market.
At face value, it sounds attractive.
Helping renters by having laws that keep rents low might appear to be good politics.
But in economic terms, it is hopelessly wide of the mark.
It is snake oil.
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Why rent caps would not solve the housing crisis: 'Simple'
If rents are held artificially below the market level by government law and decree, the supply of dwellings on the market available for rent will fall.
This is because the investment returns for landlords would at the margin be uneconomic and as a result, they would not invest in build to rent dwellings.
Rent caps may also tempt some property owners to choose to ‘Airbnb’ their properties for short-term rental where the returns are likely to be greater than for a capped long-term lease.
This lowers the supply of dwellings for long-term rental, leading to shortages, albeit with lower-priced rents.
This is simple economics.
While the policies of the recently elected president of Argentina, Javier Milei, are unlikely to be a blueprint for too many policies in Australia, he abolished a system of rent caps on housing which was specifically designed to help with rental affordability.
According to an article in Newsweek, the rent controls saw one in seven landlords leave their properties empty and available for rent, because of the poor returns and costs associated with renting out the properties.
Supply simply dried up — no surprises there.
Since the repeal of the rent controls in Argentina at the end of 2023, the number of dwellings available for rent has almost doubled, according to Newsweek.
Supply stormed onto the market as landlords competed for tenants.
While the rental market in Australia could benefit from other reforms which are more to do with fixing and extending the duration of the lease, and ensuring repairs and maintenance are carried out promptly and effectively by the landlord, rent controls are economic lunacy.
Rental growth is already topping out
The good news for renters is that asking rents are already starting to ease.
According to data from SQM Research, Australian capital city asking rents actually fell 0.5 per cent in the 30 days to August 12. This was the weakest reading for the change in rents in four years.
It appears that the slowing in demand from a step down in the rate of immigration, plus a steady rental vacancy rate, is behind this tentative evidence of a cooling.
Importantly, it is occurring without any government imposed rent controls which if imposed may threaten to undermine the new supply of dwellings needed to improve rental affordability.
Just how severe is the rental crisis? A longer-run perspective
Amid what has been a sharp lift in rents over the past two years, some context on the longer-run change in rents, relative to incomes, is important and this too put the notion of rental caps into the policy garbage bin.
Looking at a few examples:
Over the past five years, rents have risen by 15 per cent, almost exactly the same increase in wages, meaning rental affordability has been broadly constant.
Note that rents were weak, falling in many instance in the period around 2020 to 2022.
No one seems to refer to that in the current ‘crisis’.
One excellent policy.
The silly Greens don't realise that a rent cap means a restricted supply of rental properties. https://t.co/pL1O7qlBNM— Stephen Koukoulas (@TheKouk) August 13, 2024
Over the past 10 years, the rise in rents had been 20 per cent while wages have risen 28 per cent meaning rental affordability is materially more favourable today than in 2014. This is great news for renters.
And even over a very long timeframe — 20 years — rents have risen by 85 per cent with wages growth of 82 per cent – basically it's a wash.
All of which suggests that the rental market is performing as one would hope — rents increasing at a pace with wages — no more, no less once the swings and roundabouts are washed out.
Rental caps would lead to chaos — a shortage of properties as landlords stepped away from the market that was, by government decree, uneconomical.
