How effective is rental control in Australia's residential market?

Asking rents rose 14.9% in the year to September.

Vacancy rates in Australia’s residential market was at 0.9% as of August 2022 and asking rents grew 14.9% over the year to September (SQM Research). 

According to JLL, with new development remaining low, renters have little relief in sight, and rents are likely to continue rising. As such, the topic of rental control has come to the fore in Australia.

Here’s more from JLL:

Rental control usually takes two forms.

1. Rental brake: when the administering public authority fixes the permitted rental rate escalations for a certain period or indefinitely
2. Rental freeze: when the authority permits no movement in rental rates for a certain period.

The question arises: does rental control really work?

From observations in Berlin and San Francisco, rental control was indeed effective at restricting the price movement of asking rental rates in both cases. Nevertheless, in both cities, there were sizeable non-intended side effects that undermined the success of the rent control policy, most particularly a reduction in the level of low-cost rental accommodation available.

Berlin introduced a rental brake in 2015 and a freeze in 2020, resulting in lower rental growth relative to non-regulated areas (see Hahn et al., 2022). However, once the policy took effect, the number of weekly advertised rental units halved from 600 to 300. There was also a substitution effect to nearby satellite cities such as Potsdam that saw significant rental escalation.

In San Francisco, rental control has existed since 1979 to cap rental growth at 7% p.a. Diamond et al. 2019 found that landlords responded by removing stock from the rental market and the available housing supply fell by around 15% since the introduction of the policy.

Two main reasons explained the drop in affordable advertised rental stock. It either fell due to investors selling investment properties or repositioning a property to a higher quality.

Where landlords facing restricted returns chose to sell their property, it was often purchased by an owner-occupier, which is typically a smaller household compared to rental households. This means average household size falls, and more stock is required to accommodate a given population.

Conversely, when a landlord chooses not to sell a property, they often opt to re-develop or refurbish it to increase returns. This has the initial impact of temporarily removing the property from the market during refurbishment. But, once refurbished and available at a higher price, it pushes more low-income renters out of the rental market due to a scarcity of lower-priced stock. Indeed, in San Francisco, the number of tenants living in stock under rent controls has fallen by 25% since the policy was at a peak.

Another adverse impact in San Francisco was that tenants under rent control were 10%-20% more likely to stay at an address. While this may appear beneficial, inertia may mean a mismatch between the property and the renter’s changing needs. Marriage, work, and children that typically instigate migration are ignored, so renters ultimately find themselves living in a less-than-ideal location or housing type over time.

The overall effectiveness of rental controls is best when mixed and Australian policymakers should be cautious about turning to such policies to address current rental problems. While it may well control prices, if it restricts the availability of affordable rental stock, it could well exacerbate and not alleviate pressures. 

We believe the focus would be much better on policies that boost supply, including temporarily incentivising vacant and short-stay stock into the rental market, plus policies that help boost apartment (particularly build-to-rent) construction longer-term.