2023-07-02
Some economists reject The Greens proposal of a rent freeze, arguing it will have many negative consequences. However, real life is more complicated and there’s a strong case that rent controls are a positive solution, especially in a crisis situation such as renters face now.
By Rob Delves, Green Issue Co-editor
A rental freeze has emerged as a key difference between The Greens and Labor in their response to the housing crisis. Surveys suggest The Greens proposal enjoys majority support, though landlords oppose it (big surprise there!) and there’s criticism by Housing Economists of likely adverse side effects. So, how solid is the ground on which The Greens are building their case for a rent freeze and/or other forms of rent controls?
What are The Greens proposing?
In plans costed by the Parliamentary Budget Office, the Greens propose $69.4bn of spending over 10 years on doubling rent assistance ($43.6bn), creating a fund to incentivise states to freeze rent ($16bn), and building 225,000 publicly owned rental properties ($9.8bn). The rent freeze fund would double the $1.6bn given to states every year under the national housing and homelessness agreement on the condition that the jurisdiction freezes rents for two years and limits increases after that.
Nothing new here: Australian History includes a rent control story
During the Great Depression, calls for greater protection for renters resulted in policies such as rent controls at state level. Australia’s entry into the second world war ushered in a national approach. The Menzies government introduced rent control in 1939. Curtin’s wartime cabinet strengthened rent control in 1941, fixing rents at 1940 levels. Independent tribunals administered rent variations. Rent control left a lasting legacy. States took responsibility for rent control in 1948, implementing their own schemes. In Victoria, rent control sat alongside public housing, offering two strong forms of protection to renters from 1938 to the mid-1950s, when both were wound back in favour of home ownership. Despite this, some forms of rent control remained in force in Victoria until the 1980s.
In Melbourne, my parents benefitted enormously from this policy – from memory the rent on our small, very English two-storey semi-detached “three up-three down” suburban box was pegged at £3 per week for about five years in the 1950s. Apparently the sky didn’t fall in, but renters had a good time. My parents certainly did – it gave them financial certainty and the ability to afford a decent life on my father’s “slightly-above- average” wage of about £15 per week.
Who loves The Greens idea?
Nearly all renters, it would seem, because they know they’re being shafted in a situation of very tight supply of homes for rent in a largely unregulated market – or, to be more accurate, a market regulated by policy settings that enrich and empower landlords. In a recent article in The Sydney Morning Herald, a young woman named Ashley very eloquently explained the dire straits she and many other renters are in:
“I received my first-ever rental hike a month ago and was relieved it was only $40 per week. I know a lot of people have been getting extreme and disproportionate rental increases. However, I’m also worried that, should I need to ask for repairs to be made, my landlord could increase the rent again at the next renewal. All the power is in the landlords’ hand. They can, and they do have, the power to increase it by so much. And, really, the tenants have no control over that. We need rental caps. We need intervention right now.”
We should also know that Greens Housing Policy love also abounds from people like me and my peers who are personally housing-comfortable, but distressed by the insecure-unaffordable housing crisis our children and their friends currently face.
Who doesn’t like the idea?
Firstly, Labor, mainly because The Greens championing of renters’ rights is scaring them, though of course that isn’t how they phrase their opposition. The Prime Minister famously described The Greens proposal as not just “pixie dust, but “Absolute Pixie Dust.” Apparently it’s not within the federal government’s power to do such a fair and decent thing. Constitutionally very true, but the federal government has the money and the power to intervene, especially in times of crisis – and we’re clearly in a Housing Crisis situation now. Adam Bandt cites Scott Morrison’s decision during the Covid pandemic to seek a moratorium on evictions as evidence the federal government can use national cabinet to “collectively act to protect the interests of renters”.
Secondly Landlords, mainly because they won’t get to charge such excessive rents, though of course that isn’t how they phrase their opposition. In that same SMH article, a property investor with six homes rented out, explains his concerns as follows:
"What investors are going to do is find reasons to remove tenants from the property and then put it up to market rate. We need ways to encourage investors, not discourage investors. If they're going to do a rent freeze, a lot of investors — and especially mum-and-dad investors — they're going to lose their properties.
Scary stuff indeed. When we’ve been doorknocking, the question is occasionally put to us about the impact of a rent freeze on mum and dad landlords stretched by rising interest rates. The Greens don’t wish to frame this as a win-lose battle between renters and landlords, correctly pointing out that it’s an Inequality Issue – banks and very wealthy property investors ensuring they’re looked after at the expense of everyone else.
Thirdly, many Economists, mainly because they believe that controls have many negative consequences in any market, though some do acknowledge that Housing is a significantly different type of market. Often the suggestion of a rent freeze is dismissed out of hand, as if it is self-evidently economic nonsense, thus requiring no explanation. Those who do bother to explain their reasoning usually start with the fear that a rent freeze or other forms of limiting rent increases will discourage housing investors and inevitably lead to fewer homes being available to rent – a situation that will surely make the housing crisis worse.
Two related points these critics make are that landlords will have a reduced incentive to do repairs and improvements and renters will be discouraged from moving because they know they’ll face higher rents when they move into a new place. These longer tenancies can be considered a good thing in some ways, but only if that’s exactly what the renter wants. In many cases it will mean, over time, that people end up staying in housing that doesn't suit their needs. And if no-one else is moving, there's not a flow of new housing for people to move into.
The big question: do these economic criticisms stack up?
Not really – like most things in life, the reality is more complicated. I’m convinced that rent controls make good economic sense. This is especially true in a crisis situation (and we’re certainly there right now) and for the short or medium term. In the longer term, they shouldn’t be needed, as over the long decades of my lifetime the market has usually worked to provide enough homes and a variety of homes so that most renters could find a decent home at around the affordable level of 20% of their weekly earnings.
An important caveat is that many of these long decades had a key ingredient that’s gone missing in the 21st Century – public housing. A strong public housing sector helps ensure that there is a sufficient supply of properties for rent, so private landlords can’t take advantage of an acute shortage. As well as putting pressure on private landlords to keep rents at a reasonable level, having lots of public sector houses available also reduces the private landlord-tenant power imbalance (which is at extreme levels now) and makes landlords lift their standards because of the competition coming from this public alternative.
Let’s look at several facts and arguments that cast doubt on the claim that rent freezes and other controls inevitably fail because of consequences such as discouraging property investors and making rental shortages even worse.
1. WHAT’S DISPUTED AND WHAT’S NOT: While the virtues and vices of various forms of rent control are disputed, what’s surely not in dispute is that the private market has failed to deliver affordable housing, especially for lower income people. Moreover, also undisputed is that a home is different from other goods and services, because an affordable and secure home is the essential basis for building a decent life and therefore being able to contribute to your community. So as well as delivering huge benefits for individuals, it delivers huge economic and health benefits to the nation.
2. WE ALREADY HAVE RENT CONTROLS: In fact, they’re an important plank in The Greens’ case for a rent freeze. As Adam Bandt has pointed out: “Many state governments already limit rent rises to once a year, and if they simply extended that to two years, there would be a two-year rent freeze.” However, most states have very modest regulations, mainly about how often rents can be raised. The ACT is the only place in Australia that has a limit on how high rents can be increased, and that limit is the CPI times 1.1. So, if the CPI is 5 per cent, you can increase the rent that year by 5.5 per cent. For a house currently let at $400 per week, it would work out as follows: 5% of $400 is $20, plus the 1.1 or 10%, which is $2, meaning a maximum annual increase of $22.
3. MANY COUNTRIES LOVE THEM: Various forms of rent controls have been bog-standard practice for yonks in many countries. In Germany, where more than half of the households rent, price control policies have existed since the 1920s. The current system, known as Mietpreisbremse or “the rent price brake”, was introduced in 2015 and stipulates that the rent for a property cannot be more than 10% higher than the local market rate, which is set out in an index. Other countries such as Ireland, Scotland and Spain cap rent increases in certain locations where there are tight markets. In Canada most provinces set the annual percentage that rents can be increased that year.
4. YOU SHOW ME YOURS AND I’LL SHOW YOU MINE: Opponents of rent controls cite case studies that show things such as “in country x, a rent freeze led to a 15% reduction in housing supply.” Supporters of rent controls then respond with examples such as Berlin, where a rent freeze existed from 2109 to 2021, saving renters billions, while Berlin’s housing supply actually improved compared to other German cities. It’s a classic case of having a pre-set opinion, then searching for evidence to back it up.
Max Chandler-Mather often uses the successful example of a rent freeze in the US state of New Jersey. However, his critics counter that this actually had negative consequences, because to the fact that quite a few landlords responded by sub-dividing large homes into two or even three flats. I’d ask why this is supposed to constitute a self-evidently negative response – it increases the number and variety of homes available for rent, which I’d say is self-evidently a good thing.
Critics also argue that it’s obvious landlords will spend less on repairs and home improvements. Again, why “obviously”? In situations where rents are controlled, it’s normal that a landlord can increase the rent if they undertake major repairs or renovations – which sounds like an incentive to me.
In summary, it appears that in some places and times, rent controls do produce negative consequences, while in others they appear to benefit tenants in important ways, without any obvious downsides. It’s nonsense to reject this solution outright because it will automatically and always do more harm than good. Real life is far more complicated – we’re currently in an emergency situation for renters and therefore mere tinkering solutions simply don’t cut it.
5. IN THE END, WHOSE SIDE ARE YOU ON? Finally, what do we say about the fact that at least some landlords will be disadvantaged by rent controls? I defer to the wisdom of the best Housing Economist I’ve come across, Cameron Murray from Sydney University:
“The political calculation, at the end of the day, comes down to: Are the 17 per cent of people who are landlords more important than the 33 per cent who are renters? That's the political trade-off that we're facing."
He’s one of the few who gets the point that Richard Deniss hammers relentlessly – most issues in Economics are rightly matters of democratic choices rather than received scientific truths. Although some small investors may suffer financially from a rent freeze, vastly more renters are suffering right now. If push comes to shove, unlike a struggling renter, a hard-pressed landlord can sell their investment home and still have a secure place to live – and in that selling, benefit hugely from property inflation, plus the absurdly generous Capital Gains Tax Discount. In fact, in our distorted housing situation, those gifts from Neoliberal Heaven, rather than the weekly rent, are often the main attraction for property investors.
So, In Conclusion…
There’s widespread agreement, at least in progressive circles, that a huge, generously-funded program of building public housing is the best solution to the housing affordability crisis. However, in the long years while this essential big build is being done, a short-medium term rental freeze, or other forms of rent control, make good sense – as long as they don’t extend for many years, when negative consequences are perhaps more likely to appear.
A strong public housing sector has another important benefit. It functions in the same way as a Public Sector Job Guarantee would put pressure on private employers to provide decent pay and conditions for their employees – they know they’ll lose these workers to the public alternative if they don’t do the fair thing. This of course requires that the public housing sector is available to a very large number of people and a wide range of people, so it is much more than a residual option for the most disadvantaged. After more than 30 years of neglect, we’ve got a hell of a lot of building to get to this stage.
Header photo: Heritage house and apartment blocks in East Perth. Credit: Calistemon (Wikimedia Commons)
[Opinions expressed are those of the author and not official policy of Greens WA]