Currently, nearly a third of Australian households are renters in a housing market that does not offer living space at a reasonable cost. Rent increases are exceeding the rate of increases in wages and inflation (CPI) requiring renters to devote an increasing share of their income to shelter costs.
The housing crisis is caused by shortage conditions. Most of the public discourse related to resolving this crisis is focused on increasing the supply of market and/or social housing. However, at a minimum this remedy will take years.
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On the other hand, limiting allowable rent increases to reasonable levels would provide some relief to a mass of sitting tenants, and would not place additional burdens on the public budget.
In Europe, rent controls are widespread. They are also in effect in New York City, the larger cities of California, and several Canadian provinces. In Australia, only ACT has adopted rent controls. Some Australian laws regulate the frequency of rent increases, but not the amounts of rent increases.
What is rent control?
Commonly, rent control laws regulate increases over the rent level in effect when the law was adopted and, critically, they only allow evictions for just cause. Some laws allow owners to reset rents at market levels when tenants move out (“vacancy decontrol”). Other laws exempt units with rents above a designated level. In some cases, units in small buildings (for example less than four units) or owner-occupied properties with only a few units are exempt from rent control.
Annual increase amounts vary among rent control laws. For example, the ACT law ties allowable rent increases to the increase in the rent index. Despite this variety, outcomes of particular types of rent regulations, such as prolonged rent freezes, are often generalised, as if they applied universally.
Rent controls are regularly portrayed as a (1) distortion of the market that will lead to (2) declines in rental construction, (3) losses in rental units, and (4) reductions in maintenance. These claims may appear intuitive but lack empirical support:
- Typically, rent controls tie annual allowable rent increases to the rate of inflation (the CPI). In effect, they mandate a return to historical rent increase patterns in which the CPI for all items and rents increase at comparable rates.
- The amount of new construction of rental units depends on a combination of factors, including (a) zoning and allowable densities for new construction, (b) interest rates, and (c) market rents for new units.
- Changes in the number of rental offerings of existing and new dwelling units are impacted by the yields that are available from offering units for sale rather than renting.
- Operating costs of rental units (management, maintenance, utilities, and taxes) typically amount to only about one-third of rental income. Therefore, the bulk of rental increases provide for growth in operating income.
Critical learnings from experience
Vacancy decontrols undermine overall housing affordability
Under rent laws with vacancy decontrols, tenants are protected from excessive rent increases after they move into a unit, but the overall affordability of the market is not maintained because landlords are permitted reset at market levels at the commencement of each tenancy. In US cities with rent regulations that include vacancy decontrol, the overall increases in rents have far exceeded the increases in the CPI.
Adjustments are needed for low or high rent increases before regulation
California laws have commonly allowed additional rent increases for owners whose rent increases have been very low prior to the adoption of the rent law. Some rent laws limit allowable rents to a set percentage above what they were on a specified date before the law was adopted, restricting owners who have imposed large increases before the regulations were adopted.
Rent registration is essential
Commonly, under rent laws owners are required to annually register rent levels and record changes in tenancies. This step allows policy makers to track compliance with the law, the lengths of tenancies, and the overall impacts of the rent increase regulations.
Setting rents based on comparability is impractical
In some countries, laws provide for a calculation of allowable rents based on comparability rather than actual rents. This is a burdensome process dependent on imperfect formulas which require resetting of established rent levels, rather than just regulating increases.
Rent ceilings should not depend on fluctuations in mortgage rates
Current owners of rental units have noted that, due to recent increases in interest rates, their mortgage payments have increased. That is why, according to them, rent increases are justified. However, rent regulations have not and should not provide for adjustments in rent ceilings based on upward or downward fluctuations in mortgage interest rates.
The benefits and risks associated with real estate investments are taken on by purchasers. Besides, investors in rental properties substantially benefit from the ability to leverage their purchases with mortgage financing. This enables them to realise growth in the whole value of their property, while only investing cash equal to a fraction of the property value.