The solution to Australia’s rental crisis is more regulation and fewer landlords

December 6, 2022

Two story contemporary house

Victoria has seen rents increase by 20% on average this year, but in some cases by up to 150%. These slightly terrifying statistics were revealed at a recent conference on the state of Australia’s rental market.

Such rental increases should concern policymakers even more than the recent rapid increase in house prices, since they disproportionately impact lower income households who are more vulnerable to housing stress.

While we have seen a new wave of residential tenancy regulation across the states, it is debatable whether our rental policies are up to the job of protecting renters from such price increases. Indeed, the updated Victorian Residential Tenancies Act covered such basics as a working toilet and rooms being free from mould. The fact that we are legislating such basic conditions in the 2020s rather than the 1920s indicates how far behind many of our rental regulations are.

However, whenever improvements to the rights of the three million renter households are broached, there are howls of outrage from property investors.

When the Victorian tenancy law changes came into effect last year, Gil King, chief executive of the Real Estate Institute of Victoria said, “I’m not sure how some [landlords] are going to be able to afford this … landlords who don’t have real estate agents [may be] blissfully ignorant about these changes.”

Blissful ignorance indeed.

There is no other industry where an investor can expect 8% annual asset growth, a 13% yield, receive a 50% discount on capital gains upon sale, while writing off any losses against taxes through negative gearing – and not even have to keep up to date on the regulations of their business. And all of this special treatment goes to landlords who aren’t required to undertake registration or demonstrate any skill in providing what is an essential service to one-third of Australians.

It is fascinating that we treat the rental market in this way. We would never dream of regulating something like childcare as though the needs of business owners were of equal importance to the safety of our children. But when it comes to regulating the homes of millions of children, landlords’ wishes trump safety and security concerns.

Perhaps we offer this special treatment because, as investors often argue, there would not be a rental market if governments regulate landlords out of existence. This claim was recently put to the test by a team led by Dr Chris Martin at UNSW. Their research tracked individual properties and mapped their entries to, and exits from, the rental market over periods when new rental legislation was introduced.

They found that, despite 44% of landlords reporting that regulation was very important for their investment decisions, introducing rental protections had no negative effects on the number of properties entering or exiting the market.

As well as putting that particular myth to bed, the research also highlighted another key problem with the current rental market: a huge turnover rate of properties.

In Sydney and Melbourne most rental properties leave the market within five years; sold on to owner-occupiers or occupied by the landlord themselves. This massive churn helps explain why average tenancy lengths are so low, and why tenants are so desperate to buy a home – if you can not be sure how long you’ll be able stay in a property, you can not treat it as a home.

Currently about 50% of tenancy contracts are between 6 and 12 months, and the proportion of people who prefer renting to any other tenure type fell to about 10% of people in 2022, according to new research by Prof Emma Baker of the University of Adelaide.

In 2017, an ANU survey found that the most common reason for wanting to buy a house was “emotional security, stability, belonging” (68%), and the third most important reason was “control, nobody can kick you out, you can bang nails in the wall” (41%).

Quite simply, we have created a housing market too expensive for many to buy, and a rental market too poorly regulated to give people a home.

But there is some cause for hope.

The build-to-rent sector is growing rapidly, with the Industry Superannuation Property Trust, ANZ, HESTA, Australian Super and other investors seeking to invest in this roughly $10bn sector. If regulated well, pension funds could help to improve the rental sector by building long-term rental properties, focusing on slow recouping of investment costs through rental yields rather than capital gains, and developing mixed tenancy buildings of market rate, social and affordable housing.

While large-scale landlords come with their own set of issues, at least their objectives of long-term rental yields coincide with the desire of many renters: to know they can stay put for much longer periods, and have rental increases laid out in black and white in a contract.

It will be very interesting to see how well the Albanese government can steer this institutional appetite for rental property investment through the housing accord.

Time will tell, but perhaps the answer to the rental crisis will be fewer rather than more landlords.

Matt Lloyd-Cape

The Guardian 6/12/22