Is a rent price freeze the answer to Australia’s rental woes?

The Queensland Premier, Annastacia Palaszczuk, says her government is looking at introducing measures around how often rental prices can increase.

After initially revealing her government is ‘very seriously’ looking at introducing caps on rental price increases, the Premier on Wednesday backed down, instead pointing to limits on how often rents can be increased.

The move follows extraordinary increases in rents in Queensland, including rises of 80% in the mining city of Gladstone, 51% in Noosa and 33% on the Gold Coast over the past five years.

Unsurprisingly, Palaszczuk’s idea has copped a huge backlash from the property industry and other vested interests.

Yet, other states are likely to consider Palaszczuk’s measures and many others with the nationwide rental crisis expected to deepen this year.

How bad is the crisis?

Last month, rents across the country rose 10.1% year-on-year. That’s way above the annual inflation rate of 7.4% and wages growth of 3.3%. And it’s also well above the annualised rental increases of less than 1% experienced during the Covid period.

Capital cities are even worse off, with rental increases of 11.1% year-on-year. Brisbane has had the highest annual increases of 12.7%, closely followed by Perth at 12.3% and Adelaide at 12.2%.

Rental vacancy rates across Australia have dropped to 1.6%, with capital cities lower at 1.4%. These are some of the lowest vacancy rates in the country’s history. To put them in context, a vacancy rate below 3% is considered a ‘tight market’.

Causes of the crisis

At first glance, it seems strange that rental vacancies started plummeting during 2020 when Covid had shut down large parts of Australia and stopped overseas migration.

But a key cause for the drop in rental vacancies has been a sharp fall in the supply of housing. For instance, over the past year, 187,000 new houses and units have been approved, when around 220,000 is needed to meet demand.

The question is: why can’t we build more houses for rent?

There are several factors:

1. Labor shortages, increasing costs and fixed price contracts mean many builders are struggling, and some have hit the wall.

According to consultant, Michael Matusik, the costs to build a new dwelling have risen 17% to $415,000 over the past 12 months.

The build cost excludes the cost of land. That increase compares with a 4.3% rise in construction costs over the past decade. Builders’ troubles have led to less supply.

2. A significant portion of long-term rental housing has been diverted to short-term rentals.

The ‘Airbnb’ phenomenon accelerated during Covid when demand for short-term rentals picked up as domestic travel spiked. That phenomenon hasn’t normalized and there are an estimated 200,000 houses and units that are now short-term rentals. It’s crunched the long-term rental market.

3. NIMBYs. The ‘not in my backyard’ brigade are alive and well in Australia and make it hard for councils and state governments to increase the supply of housing.

Recently in New South Wales, the state government has had to override councils and fast-track approvals for developments which had stalled for months and years.

4. Political will. Housing supply shortages have been an issue for some time, and it must be asked how incentivized federal and state governments really are to increase supply. After all, state governments and councils get large amounts of stamp duty and land tax revenues which depend on a buoyant housing market. More supply and falling house prices would mean less revenue in their pockets.

Falling housing supply is one issue. Yet, at the same time, there’s also been a spike in demand. Interestingly, during Covid, rental demand went up as there was a decrease in people per household.

How did this happen? It turns out the extended work-from-home period in 2019-2021 led to households splitting up, whether it be housemates or relationships/marriages.

Another recent factor behind increased rental demand has been the huge comeback of net migration to Australia. Net migration totalled close to 400,000 people last year. That reflected a partial ‘catch-up’ in migrant flows after the Covid period when net migration turned negative for the first time since 1946 and Australia’s population growth plummeted to its lowest level in more than 100 years.

However, the extraordinary rises in net migration seen last year, won’t ease up much with 375,000 expected this year and 275,000 in 2024.

Many new migrants will need rental housing, and let’s hope they can find it as the supply/demand imbalances in rental housing aren’t expected to improve any time soon.

Possible solutions

The rental crisis is already a hot-button political issue in Queensland. It’s likely to intensify in other states too. Don’t be surprised to see the issue regularly at the top of television news programs and politicians pledging to do more by announcing things such as housing summits to address the issue.

The key is they’ll be forced to act, and whenever politicians look to get an issue off the front page news, they normally reach for short-term fixes.

What are some of the things they could do?

Increasing rental housing is the obvious one. But that would take years and won’t ease the issues of today. Already, the Federal Government has promised to set up a $10 billion future fund to build 30,000 low-cost houses, including 10,000 affordable dwellings for frontline works who can’t afford to live in the suburbs they service.

Building 6,000 homes a year over five years won’t move the needle on rental supply much given the current annual housing approval shortfall is about 33,000.

There are other short-term measures that governments are likely to consider. The rental price increase caps being discussed in Queensland is one idea that could be adopted by other states.

Another is the more extreme measure of rental price freezes. Rent controls aren’t new to Australia. I’ve mentioned in a previous article that state governments had both house and rental price controls from 1942 to 1949. The idea was to make housing and renting affordable for returning World War Two soldiers.

Rent control has also been tried in other countries. In Germany, where more than half the households rent, price restrictions have been in place since the 1920s. There, rents can’t go more than 10% higher than the local market rate.

In Canada, provinces regulate the amount that rents can increase each year. While in countries such as Spain and Ireland, rent increases are capped in areas where supply is tight.

The problem with such a measure is that it can deter investors from purchasing properties, thereby reducing the potential supply of rental housing.

Lastly, governments may act to regulate short-term rentals to increase the supply of long-term rental housing. They might see this as an attractive option, though it won’t be easy. That’s because there are no laws that distinguish between short-term and long-term renting. Also, regulations are spread across state and local governments.

Complicating matters further is that a blanket law or regulation would be messy given the differing needs of cities and regions.

That said, there are plenty of cities around the world which regulate Airbnbs and other short-term rental accommodation. New York and San Francisco only allow rentals of less than 30 days if the property owner is present. Amsterdam charges landlords a ‘tourist tax’ on rentals.