Don’t believe the hype: Rent controls are a bad idea

Rental affordability is a major Australian issue. Rental prices are up by 50% nationally since 2017 (Figure 1). This has coincided with a rise in renter households, up to 32% (2021) from 29% (2006). These households are typically younger cohorts priced out of homeownership, or ‘generation rent’. Affordable rental availability is at record lows¹.

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Figure 1. Median Dwelling Asking Rents, Australia (2005-2024)

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Direct government intervention is being touted as a solution. Some are advocating for rent freezes to tackle ‘property moguls’². This is a mistake. The rationale that rent controls aid tenants is misguided as international experience shows. They are more likely to worsen the crisis. Here we look at what could be imposed and how they have worked elsewhere. As well as look at the consequent policy implications.

Restricted Rents: Two different approaches

ent controls come in two forms. The first one is rent freezes. Rent freezes prevent landlords from raising rents on existing and any new tenancies. They artificially cap them. The second are rent limits and allow for price increases. But curtail their frequency and amount usually to a fixed percentage above inflation. For example, in 2019 the ACT limited rent increases to 110% of inflation each year.

In jurisdictions that have adopted rent controls, these are often accompanied by rules that weaken the ability of landlords to terminate leases or they compel longer rental terms. The rationale of rent control is that landlords hold all the power and take advantage of high moving costs to exploit tenants.

Thus, rent controls ensure that tenants who need protection aren’t exploited. In reality, rent controls discourage landlords from investing in existing and new properties. It also deters tenants from moving even when their circumstances change. Politically, they are hard to unwind once implemented, even if they are failing.

Stockholm Syndrome: A case in point

‍Stockholm, Sweden provides a cautionary tale. It has serious housing challenges with 810,000 people on waiting lists for affordable rentals. The average wait time is 9 to 11 years. But this wait-time doubles for the more desirable neighbourhoods³. High costs and low affordable housing availability are cited by 20% of businesses as an impediment to hiring workers⁴. This is a major concern in a city with such acute labour needs as Stockholm. This situation exacerbated by the strictest hyper-regulating or rental control system, globally.

Rent controls have existed since World War II. Approximately 40% of Stockholm’s rental stock is rent controlled. With rental prices held as much as 50% below the market level⁵. High demand for these cheap rentals coupled with low supply means private rents are even higher than they would otherwise be. Disadvantaging lower income households the most. It also prevents landlords from making long-term returns. Deterring them from investing in existing and/or new properties.

Those households lucky enough to get a rent-controlled apartment tend to stay. Or find inventive ways to keep it in the family. There is an active sublet black market which circumnavigates regulations and supports bribery. The system gives preference to Swedes already living in the city and tend to be more affluent. Leaving those priced-out tenants or expats on waiting lists or missing out altogether.

Despite the problem rent controls create, reform is hard. Swedish parliamentary debates on reform have come to nothing. In 2021, the ruling coalition collapsed due to pressure from the Tenants Association. They had submitted a moderate proposal to introduce market rents for new property developments. So, with current rent controls firmly in place, the future for young renters looks bleak.

Unwanted outcomes: Rent controls result in perverse outcomes

Well intentioned rent controls have unintended consequences. Often acting in direct contradiction to their intended goal. While Stockholm is an extreme case there are many other examples. From Germany to France, the USA to Scotland, we can see the same outcomes occurring. Rent controls limit household mobility, aid wealthy households, and hinder lower income earners. They inhibit new supply and lead to lower quality stock starved of investment. Better solutions are available.

Rental affordability is a fraught policy area with not a singular solution. A lack of investment in subsidised rental housing over many decades has forced otherwise eligible households into the private rental market. Many of these households could not afford market rents even before the current housing crisis. Investment in subsidised rental housing (social and affordable housing) is needed alongside facilitation of market rental housing. Which will take many decades to reverse.

This piece has focused on private rental housing which also needs a multi-faceted response. Our series on the Australian Housing affordability crisis highlights various solutions. These range from professionalising the rental sector, ‘Generation Rent‘, urban densification, ‘Auckland’s lessons for Sydney‘ through to better utilisation of existing housing stock explored in ‘Influencing behaviour: Tax changes are divisive but necessary’

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1. The Guardian. (8 March 2024). “Number of affordable rentals in Australia at its lowest since records began”. Available from: Number of affordable rentals in Australia at its lowest since records began | Australia news | The Guardian

2. The Greens. (30 November 2023). “Labor’s new ‘hard to get’ housing policy tinkers at the edges while housing crisis gets worse”. Available from: Labor’s new ‘Hard to Get’ housing policy tinkers at the edges while housing crisis gets worse | Australian Greens

3. The Nordic Times. (18 September 2023). “Housing crisis worsens in Stockholm – over 800,000 in housing queue”. Accessible from: Housing crisis worsens in Stockholm – over 800,000 in housing queue – The Nordic Times; Bostads Formedlingen. (2024). “The Stockholm Housing Agency – how it works”. Available from: The Stockholm Housing Agency – How it Works – Bostadsförmedlingen i Stockholm AB

4. The Economist. (29 May 2024). “Is your rent ever going to fall?”. Available from: https://www.economist.com/international/2024/05/29/is-your-rent-ever-going-to-fall

5. Bloomberg. (3 September 2022). “Stockholm’s ‘Housing for All’ Is Now Just for the Few”. Available from: Stockholm’s Rent-Controlled Housing Guarantee Has a Catch – Bloomberg

6. Source: CoreLogic Monthly Indices. Available from: https://www.corelogic.com.au/our-data/corelogic-indices