Affordable rental policies and unintended consequences

Welcome to Finance and Fury.

Today’s episode is going to be going through some economic theory on some recent promises from politicians on housing policy – the focus on most of these has been on rental markets – for affordable rent – there’s lots of coverage on affordability from purchasing a property – but its only in the past few years politicians are looking at the rental market

1. So I want to look at these policies, if they are going to help or hurt both those seeking to rent and the investors who own the properties –

After recent election – The Greens and Labor were the clear winners of the election –

1. There is no way to really tell the reason why every individual votes – but what was speculated was that a significant number of people voting for Labor and particularly the Greens were renters due to their policy promises for this voter demographic
   1. This speculation comes from a YouGov poll that found young renters were more likely to vote for Labor and the Greens over the Coalition
   2. Albanese government has promised to build 30,000 social and affordable homes over five years – Greens promised far more – so we will look at these policies further – around government housing policies and if they have the capacity to do more harm than good

Going back a few months now to look at the election results – One of the big surprises of the election, particularly in QLD was that some of the most wealthy electorates went Green –

1. As I said – there is no way to say the broad reason on why people vote the way they do – but many people are single issue voters – i.e. they vote around the issue that is closest to their hearts – be it climate change, equality, or housing policies –
   1. This is where I saw an ABC article that was focusing on housing policies where they interviewed a number of voters who voted for the greens – and the focus was on renters –
   2. From YouGov – “Voters who don’t own their own homes are almost half as likely to vote for the Coalition than voters who do own their own homes”
      1. This is particularly the case with younger voters aged 18 to 34 – and the problem for the Liberals is that the share of these young voters is going up every election
   3. According to figures from the just released 2021 Census, there are 2.8 million rental households, accounting for more than 30 per cent of the population
      1. The issue for many renters over the past 12 months – just like people building or purchasing their first property – is that they are coming under increasing financial pressure in terms of increasing rents – due to market dynamics of low vacancy rates and higher demand –
   4. So now there are calls to regulate the rental market – Labor already plan to establish a council to try to increase supply and affordability – but the greens want to introduce rent control

Before we get into that – Is rental affordability really an issue over the long term?

1. Looking at the data – from SQM research –
   1. For homes – the average weekly rent is $666 – up from around $570 over the past 12 months – this is a large increase – almost $100 per week, or $5,200 p.a.
      2. However – the average rent was $460 at the earliest data in 2009 – so over the past 13 years – there has been an increase of only 2.5% p.a. when annualised even after the most recent bump in the past 12 months by around 14.8% – where rents only increase $100 per week over a 12-year timeframe – this works out to be around 1.9% – almost in line with inflation and lower than wage growth
   2. For apartments – the average weekly rent is $483 – up from around $422 over the past 12 months – this is also large increase – just over $60 per week, or $3,120 p.a.
      1. However – the average rent was $360 at the earliest data in 2009 – so over the past 13 years – there has been an increase of only 1.8% p.a. when annualised even after the most recent bump in the past 12 months by around 14.5% – where rents only increase $82 per week over a 12-year timeframe – this works out to be around 1.4% – well below inflation and average wage growth
   3. If rent were to increase by 14% p.a. there may be a real problem for renters – but be a great opportunity for investors – however – the market would soon normalise – however in response we see a political response to enter the market

What are the political solutions – Stephen Bates is one of three new Greens MPs to win seats off the major parties in Brisbane – And he credits this win to campaigning on rental affordability

1. He states that “more than 50% of the electorate of Brisbane rents, so it’s important to have that representation reflected in Parliament, so me being a renter and my entire immediate circle of friends are renters,”
2. This is where the Greens took an ambitious housing policy to the election – to build one million affordable homes over 20 years – Of these, seven hundred and fifty thousand homes would be for public and community housing, and 125,000 would be rental properties, costing almost $23 billion over a decade – its impossible to do a full breakdown on this due to the sparse information available about the policy proposals
3. But I do have question on this costing – as the maths may not line up – $23bn over 20 years to build 1m properties – this would be an average cost of $23k per dwelling – especially with inflationary pressures over the next two decades – unless they are going to put this housing in the middle of nowhere with people living in the equivalent of tents – alternatively they may be looking at pod living – like in LA or Japan – where you cram 10 people into the space of a 1 bedroom apartment – and equate the living capacity to homes – where you could build 100,000 dwellings of this sort

2. Regardless – let’s say the maths plays out – in comparison – the average build that private developers and construction firms complete for dwelling is 52k per quarter in Australia – so over 5 years 1m would naturally be built – over 20 years just over 4m would be built
   1. Comparing the numbers – Labor wants to build an additional 30k – or an increase of just under 3% – but Greens plan is an increase of 24% in total properties built –
3. Questions come into this – who is going to build these properties – and at what cost to you and I? And is it even going to work?
   1. The building industry is already under pressure – to take away the demand from builders in the market would simply push prices up further for those wishing to privately build – or for developers – as a bump in building demand by 24% will may not be replaced by an increase in the number of builders by the same margin
   2. The true costs for this will not be $23bn – more likely at least $230bn if not $460bn by the time they are done – this may be assuming that building costs don’t increase
4. Beyond this – he states: “What that would do is cap rents at 25 per cent of your income or the market average — sort of whichever was lower, basically — so that you can put that floor in the market and give people access to housing,”
   1. I think he means ceiling in the market – not floor – as a price ceiling, i.e. a price cap, is the highest point at which goods and services can be sold – a price floor would put a minimum on what rent could be charged at – not a maximum being the either the average market rent or 25% of someone’s income
   2. This introduces two immense complexities –
      1. What income are they assessing against – if it is your individual income or an average? If so, the rent could vary significantly – due to individuals earning different levels of incomes
      2. What average rent are they looking at? The averages we have looked at encompasses higher end rentals at a few thousand per week, to one-bedroom apartments in outer suburbs at $250 per week.
   3. These clarifying points aside – rent control have come from the good intentions of activists and policymakers but do not necessarily translate to good outcomes – often it is unfortunately the opposite – where history has shown these types of policies causing far more harm than good
5. The reason for this is due to artificial changes the property market – interfering into supply and demand always has unintended consequences –
   1. As with almost every good or service – the price of rent is a function of supply and demand – high demand with lower supply equals higher rental prices –
   2. What rent control does is install a price ceiling – which caps rents artificially and often to a point below the free market – distorting incentives of individuals that make up markets
      1. You can set out with the best of intentions – only to make things worse – and often have the exact opposite effect on what you are trying to achieve
      2. Forms of rent controls are nothing new – the US has tried to do this in major cities like Manhattan since 1917 – every time failing to meet their agenda and instead having the unintended consequences of property quality declining the eventually rents increasing
   3. Anything economic has to do with incentives – people act based around incentives – investors invest to make money – and do so in an easy way
   4. Renters rent somewhere they want to live – that is their incentive – and there are different price points in every market based around their incentive to minimise what they spend on rent to minimise their costs – I could rent a mansion close to the inner city – that might cost me $3,000 per week – or I could rent an apartment in a similar location for $500 a week – however money is a limitation – economically I couldn’t justify renting for $3k p.w. – so I would rent for $500 per week instead – this is me meeting the market on where I want to live – if I couldn’t afford this, I would look at a housemate or moving slightly outside of the city – it might not be what I want, but its what is realistic
6. When governments enter the equation and start to introduce price controlled scenarios which are unrealistic
   1. Through price controlling – this creates a rise rentals demanded while discouraging the quantity of rentals supplied – how? It increases competition – an artificial competition which you cannot compete with – as you are competing against a government which is using other peoples money to fund the project
      1. The result is that for those few who can benefit from this strategy in the short term – i.e. the renters – things are good – but longer term, what is created is a shortage of rental accommodation – as this style of policy comes at the expense of everybody else on the outside, who must now compete for the limited remaining stock at a higher price due the limited supply
      2. This is all due to a mis-match between tenants and rental units on the private and government side of the equation
   2. Rent control not only creates a shortage of housing, but can overtime reduce the quality of rent-controlled units
      1. When rent control are introduced on existing property owners – the desire to hold a property is reduced – potentially leading to a shortage in apartments
         1. Developers are discouraged from building as investor demand drops – making the shortage of rental apartments more severe – further damaging housing affordability for those not renting off the government – potentially hurting those people which the policy originally intended to help
      2. However – if the apartments/accommodation is owned by the government which seems to be the proposal here – good luck to you – have you ever delt with Centrelink? Now imagine that they are your landlords – if you need anything fixed prepare to wait 2 years – this is where the free market provides an instant incentive to keep tenants happy by keeping a property liveable

What makes this worse is the greens plans for renters in the form of legislation on existing investment property owners –

1. Boost and guaranteeing funding for tenants’ advocacy services by $30 million per year to improve access to independent information, advice and advocacy. 
2. Establish a National Standard of Renters’ Rights which will:
   1. Limit the amount and frequency of rent rises in private rental
   2. Enforce disability access, energy efficiency and environmental sustainability standards for rental homes
   3. There are many others – but in the interest of time – again, these all are measures to disincentives investors in property
3. All this does is destroy incentives for investors to build the stock that is build for people to rent from –
   1. As we have seen from the rental data – affordability hasn’t been much of an issue until the last 12 months – seeing a major spike – but long term the costs even with the recent bump have been below that of inflation –
   2. Less incentive for people buying investment properties – if you have to put ramps everywhere, increase the cost of the property by putting solar panels on this and buying new appliances, the incentive to own an investment property declines
4. You might think that this is good for those looking to buy, as prices decline long term if they are less people looking to buy investment properties –
   1. However two things can occur – less building occurs – as no incentive for developers to build at lower prices – leading to lower supply – meaning prices won’t decline by the same margin – all else being equal
   2. In addition – there is less supply of rentals due to this – outside of the pod living that is likely under government owned housing – meaning that there are higher rental prices for everyone else

Summary –

This form of legislation is unlikely to pass in full in the short term – but give it 10 years and this form of thinking may become normalised –

1. But the is large body of evidence on rent control and it is very clear on the result – despite providing short-term relief to those able to secure a rent-controlled apartment, in the long-term, it disincentivises residential construction, decreases affordability, fuels housing deterioration, and creates a misallocation between tenants and rental units
   1. Whilst it may be implemented with the best of intentions – it misallocates resources and makes affordability worse
2. Long term solution – in a free market would be wait and see – if rental incomes continue to rise by 14% p.a. then all of a sudden everyone is going to be jumping on purchasing an investment property – this pushes up the supply and with more competition beyond demand – rental prices decline – this has been the natural state of the market over the past decade or more – whilst property prices have been rising – there has been competition amongst rental properties – up until the past 12 months – but it takes time for markets to respond – and often quicker than government policies

https://sqmresearch.com.au/weekly-rents.php?t=1&avg=1