Are rent freezes a viable solution for housing stress?
While rent freezes may appear beneficial for renters, addressing the root cause of housing stress requires an approach that goes beyond short-term solutions
Mandated rent freezes – one of the rental crisis solutions proposed in the Australian Green Party's legislation in the Federal Parliament – seek to address the urgent needs of renters. The solution involves introducing an immediate two-year emergency freeze on rent followed by a rent cap.
This means that regardless of market fluctuations and rising interest rates, tenants could find solace in knowing their rent payments will remain relatively stable and stress less about their financial situation. But what about the impact on landlords?
How much have rents gone up?
“Rent increases have been getting much larger and more common,” explained Dr Chris Martin, Senior Research Fellow in the City Futures Research Centre at UNSW Sydney.
Research has shown that the national average of asking rents has increased by 11 per cent in the last 12 months. Renters in Sydney have seen the median average weekly rent for new tenancies soar by 20 per cent over the past year to $650 per week.
“When properties are re-let, a new tenancy commences, and 95 per cent are getting a higher rent than for the previous tenancy.
“Most are going for at least 10 per cent more than previously let. About 75 per cent of properties with existing tenancies have recorded rent increases over the past 12 months, and about 25 per cent are getting increases of more than 10 per cent,” said Dr Martin.
With statistics such as these, he said a rent freeze, and a subsequent rent cap, would protect existing tenants from rents rising to similar levels.
Dr Martin explained that when landlords increase rent prices, it signals to them that they can earn more money, which encourages them to provide more rental properties like newly built homes or underused properties; however, this currently leads to existing tenants being pushed out and looking for cheaper options or becoming homeless.
By regulating rent increases for current tenants, he said the focus could shift to creating new rental properties, ensuring a sustainable expansion of the rental market while meeting the immediate needs of tenants facing housing instability.
“The goal is to expand the rental market by increasing available housing options. That price signal is currently going into the existing stock; as landlords increase rent prices, tenants are being pushed out of their existing homes. That brings the property to the market but also means there’s another tenant looking for a lower-cost rental property or is being made homeless,” said Dr Martin.
This approach aims to ensure that the rental market expands in a sustainable manner while simultaneously addressing the immediate needs of tenants facing displacement and housing instability. “By regulating rent increases for existing tenants, the price signal from the new tenancy market is directed into sources of genuine new supply,” added Dr Martin.
Rent freeze policy pitfalls
While the rent freeze policy is designed to alleviate financial stress on renters, crucial questions remain about the impact on landlords. With interest rates on the rise and mortgage repayments increasing, the policy could have serious implications for homeowners.
Dr Peter Swan, a Professor in the School of Banking and Finance at UNSW Business School, said the rental crisis would become “far worse for tenants and landlords” if the policy came into force.
“While it is true that tenants who are not evicted may gain temporarily, tenants as a whole lose as rental accommodation is withdrawn, fewer new places are provided, and maintenance of rent-controlled housing deteriorates.
“Rental rates rise due to restricted supply, while landlords with sitting tenants suffer. Eventually, a black market evolves with ‘protected’ tenants unable to move and with the rampant use of sizeable ‘key money’ paid by prospective new tenants.
“The latest version of the Residential Tenancies Act 1997 in the ACT reveals that pre-existing rent control in Canberra has doubled in its severity in 2019. It now limits rent increases to no more than 10 per cent above the increase in the rent component of the ACT Consumer Price Index (CPI). It was previously 20 per cent.
“As a result, it has left some landlords no option but to sell their properties, leaving evicted tenants back on a tighter rental market."
According to a 2018 analysis by the National Bureau of Economic Research (NBER) on San Francisco legislation, rent control resulted in a 15 per cent reduction in rental supply as landlords converted their properties to exempt building types, subsequently causing a 5.1 per cent rise in rents in San Francisco.
“The repercussions of these circumstances result in a significant portion of tenants being at risk of eviction and will face the challenge of re-entering an increasingly competitive rental market, where they may be required to pay, effectively, a substantial increase in rent in the form of a bribe, ‘key-money’, to secure a new place.
“Interest rates will persistently climb until we align with the rates of countries like the US, UK, and others. As a result, these escalations will lead to even higher rental prices and if restrictions were imposed on these unavoidable increases, the current inventory of rental housing will diminish even more,” said Professor Swan.
A possible solution: adopting other rental practices
The rent freeze policy has both positive and negative implications, prompting the need to examine the delicate balance between the needs of renters and the challenges faced by landlords.
“The solution to the crisis lies in boosting the housing supply. However, governments and councils commonly exhibit significant reluctance when it comes to permitting new developments or streamlining bureaucratic processes plagued by excessive regulations and prolonged delays,” explained Professor Swan.
Because governments and councils often hesitate to approve new developments or streamline bureaucratic processes, which can create housing supply bottlenecks, this begs the question: should we turn to international renting practices to consider alternative methods?
“All these variations on rent regulations should be on the table. Scotland implemented a rent freeze in September 2022, and in April 2023 moved to a rent cap of 3 per cent (in most cases). For years, most Canadian provinces have had rent caps (called ‘guidelines’ there) that limit rent increases to a certain percentage rate set by the government,” explained Dr Martin.
“Ireland has a system of ‘rent pressure zones’: if a local government area records increases in median rents above a certain threshold for successive quarters, a cap kicks in, currently 2 per cent, and not more than once in 12 months.”