In an endeavour to address Australia's rental housing affordability crisis, there have been calls for a freezeon rents, caps on rental increases and various other forms of rent controls. While these sorts of old ideassound like quick and workable solutions to the real distress tenants are currently experiencing, rentcontrols have a worldwide track record of failure.
Numerous cities across the world have dabbled with such ideas and no matter how well-intentioned andsensible rent controls might sound, these policies have routinely failed, achieving the opposite of whatpoliticians intended and exacerbating the very issues they set out to resolve.
In this article, we look at the outcomes of different sorts of rent controls internationally and examinepotential solutions to Australia's rental supply crisis.
New York: Outcome-Inequality prevails
A primary instance of rent control failure is in New York City. Since the 1940s, New York has implementedtwo forms of rent control: 'Rent Control' and 'Rent Stabilisation.' Under these measures, annual rentincreases are restricted, often resulting in rents significantly lower than market rates.
However, the result has been a disincentive for landlords to maintain or improve their properties. Thelimited returns on their investments do not justify the cost of significant renovations. This has led to anageing and deteriorating housing stock. Furthermore, it has created a two-tiered system, with sometenants having access to artificially low rents and others, particularly newcomers, forced to pay steepmarket rates. This inequality is stark evidence of rent control's inability to deliver fair access to affordablehousing.
Sweden: Outcome-Chronic housing shortage
Stockholm, Sweden, provides another example. The city has a rigid rent control system with thecommendable aim of ensuring everyone has accessto affordable housing. Yet the result has beencounterproductive. The system has led to a chronic housing shortage, with waiting lists for a controlledrental apartment stretching into decades. It has also birthed a black market for rental contracts, leadingto further inequity and social division.
Paris-Fewer rentals and intensified demand
In France, a more recent attempt at rent control took place in 2015, when Paris introduced the'Encadrement des loyers' (Rent regulation) policy. Unfortunately, thisalso resulted in unintended sideeffects. As landlords were not permitted to increase rents above a specified index, many chose to sell theirproperties rather than lease them. This led to a decrease in available rental stock and, paradoxically,increasedrents due to intensified demand. This policy was subsequently repealed in 2017 due to itsinefficacy.
Berlin-Exacerbated housing shortages
Similarly, Berlin's recent experiment with a five-year rent freeze, introduced in 2020, had negativeconsequences. Designed to alleviate housing affordability issues, the policy instead deterred investmentin the housing sector, leading to a slowing in new construction and exacerbating the city's housingshortage. In 2021, Germany's federal constitutionalcourt overturned the rent cap, deeming itunconstitutional, highlighting the legal complexities rent control measures can present.
So why does rent control consistently fail?
Firstly, it distorts the housing market. By setting rents below market rates,it disincentivises both propertyimprovements and new development. This leads to a shortage of quality rental properties, as seen in NewYork and Berlin.
Secondly, rent control often leads to an inefficient allocation of housing. Without the price mechanism toallocate resources, people may consume more housing than needed, as seen with 'empty-nesters'occupying large rent-controlled apartments in New York City. On the other side, those desperate forhousing, like young professionals or migrant workers, are left out in the cold.
Thirdly, rent control tends to create a divide between 'insiders'–those lucky enough to secure a rent-controlled home–and 'outsiders'–typically newcomers who bear the brunt of decreased housingavailability and increased market rates. This has been evident in Stockholm and New York City.
Lastly, it often overlooks more effective solutions. Experts argue that the root cause of Australia's highrents is a lack of supply. Rather than artificially suppressing rents, the focus should be on easing zoningregulations, streamlining approval processes, and incentivising development to boost housing supply.
The solution isbuildingmore homes
While the idea of rent control breeds policies born of good intentions, the international evidencedemonstrates consistent failure. Rent control does not merely fall short of its objectives; it oftenexacerbates the problems it intends to solve, from deteriorating housing conditions to marketinefficiencies and social inequities.
In the battle for affordable housing, Australia's policymakers need to refocus on supply-side solutions.Rent control, is simply not the panacea it appears to be.