With the prices of rent skyrocketing nationwide, rental caps and freezes have been a hot topic of debate, with proponents arguing that they will curb rising rents and provide relief to tenants.
However, experts have strongly warned against the implementation of such measures, contending that rental caps are not only ineffective in addressing the root causes of the rental affordability crisis but may also exacerbate the very issue they seek to solve.
“For many suppliers of rental accommodation, the latest poorly considered legislation will be the last straw,” said Simon Pressley (pictured above left), head of research at buyers agency Propertyology. “Many will sell, thereby dragging the already record low level of supply deeper into the mire.”
“It is never acceptable to restrain anyone’s ability to earn an income. The pressure on rent prices is entirely due to consistently discouraging property investment participation. Now more than ever, governments need to be supporting rental suppliers and coming up with initiatives to produce more, not less supply.”
Pitting renters against landlords
With rent increasing 11.5% annually to July according to Mozo, there is no question that renters are doing it tough.
And it’s happened across the board, with rental value increases in more than nine in 10 house and unit markets across Australia over the 2022-23 financial year.
To remedy this, the Victorian government has proposed some rental control measures. These include freezing rents for two years and capping the annual size of rental increases, according to the according to the Australian Financial Review.
Now other jurisdictions like the ACT are looking to implement similar measures and the Greens have even proposed a national bill that promises to cut rents and establish an independent body to set rent controls among other measures.
Aidan Hartley (pictured above right), mortgage broker and owner at Blue Owl Finance, said he understood why renters were pushing for rental freezes and caps, but urged them to consider the implications for when they try to enter the property market.
“It’s possible that at some point in the near future they will become homeowners or investors themselves, so it can be short-sighted for those to want to back it,” Hartley said.
“A mere 2% rise in rental income won’t anywhere near cover the likely increase in council rates, water rates, insurances, body corporate, maintenance and so on, so basically an investor’s income is fast diminishing each year.”
Pressley said he was “increasingly fearful” for how this might end. “The actions of political plonkers continue to force more Australians into makeshift shelters, they discourage good people to adopt aspirational attitudes and their actions have created considerable tension within the community.”
Will rental freezes cause an investor sell-off?
The fear among rental freeze opponents is that these measures could create an investor sell-off.
With investor interest rates jumping from 2.50% to 6.50% and expected to climb further, the cost to hold that property has already drastically increased.
“Let’s say the investor has $1 million in debt against the property, that interest rate rise has meant it now costs them an extra $40,000 per year to make the same repayments. The opposing rental income may have gone up, say, $150 a week, so an increased income of $7,800 a year,” Hartley said.
“You can see that the cost of holding property has increased exponentially against the rental rises.”
Many investors also hold owner occupier debt that has also increased.
In Victoria, more than 70% of property investors own only one rental property, with 43% of that group earning less than $100,000 annually according to ATO data.
“As soon as they start struggling, are they going to sell the home or their investment? Of course, they will sell their investment,” Hartley said.
For Pressley and Hartley, the equation is simple: investors provide 92% of rental supply, so if you take out investors, you take out rental properties.
Pressley said the latest measures were just part of a “suite of policies” that had “discouraged everyday Aussies” from investing in real estate.
“Tighter credit policies, higher property taxes, restrictions of fundamental asset owners’ rights, soaring expenses and now limiting their income,” Pressley said.
Consequently, instead of rental supply keeping pace with the demand of an increase in population of 2.7 million over the last eight years, the total volume of rental properties advertised for rent has plummeted from 73,047 in June 2015 to 39,716 in June 2023.
“It’s a national disgrace,” said Pressley.
Examples of rental freezes
An important thing to remember about the current debate is that the initiatives that are being proposed are not new.
Looking back through history, Pressley said there were plenty of examples that showed the failures of rental control.
Hartley pointed to an example in Berlin, Germany, whose government implemented a similar initiative only to be quickly ruled as illegal by the courts.
“There is now a complete 180 back-flip, and the landlords there are actually now entitled to demand back payments from tenants,” Hartley said.
Australia also introduced rent control during World War II with the Menzies government passing legislation in 1939. This was strengthened by the Curtin government’s cabinet in 1941, which fixed rents at 1940 levels.
“The consequence was a decade of the highest rates of homelessness and desperation in this country’s history,” Pressley said.
Pressley said last year, Ireland introduced a rent freeze leading to a “big critical mass” of investors selling, tenants became homeless, and serious civil unrest unfolded.
“The UK Labor government had also campaigned for rent freezes for a few years until recently acknowledging their error,” said Pressley.
“Governments are skilled at standing on podiums, throwing around big figures and pretending that their heart is in the right place. Yet the fact is that the size of the government-funded rental pool is a piddly 300,000 out of 3.2 million nationwide.”
“Three decades ago, they owned 400,000 rental homes, so they’ve sold off 100,000. If the federal and state governments truly cared, they would stump up more funding to subsidise rent costs for low income-earners and set about encouraging investors to increase the size of the rental pool.”
Hartley said he had heard anecdotally that many in the industry disapproved of the proposed measures at both state and federal level and he urged brokers to consider formally disputing the issue.
“Those who wish to have their voice hear, can do so by writing to the Senate Community Affairs References Committee,” Hartley said.
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