Can rent caps work in NSW?

New vacancy rate reports in Australia’s capital cities show signs that the rental crisis in the country could be easing, with Sydney leading with an increase of 0.28 percentage points.  

Vacancy rates remain well below pre-COVID levels, while tenant advocates call for changes to protect renters from financial stress during a crisis that saw the median rent in Sydney go up by more than 30 per cent since January 2022. 

Community Legal Centres across NSW have experienced a substantial increase in tenancy advice requests in the past year, from helping negotiate rent rises to guidance in unfair evictions. 

To tackle the crisis, the State Government has advocated for a series of reforms to help tenants, including ending ‘no-grounds’ evictions, implementing a portable bond scheme, and creating a Rental Commission as a voice for renters in the state. 

For many advocates, it is not enough. Jenny Leong, State Member for Newtown and housing spokesperson for The Greens, welcomed the State Government’s recently announced rental reform consultation, and is calling for a temporary freeze of all rents, followed by a cap on future rent increases. 

“Dealing with rent increases isn’t a data or information sharing exercise – renters know when their rent increase is excessive, but they need clear limits on what a rent increase can be,” said Leong.  

“The Greens want to make unlimited rent increases illegal, establish rent caps, and put hard limits on the amount and frequency of rent increases.” 

 Do rent freezes and rent caps work? 

The State Government’s position is that freezes and caps can cause more harm than good and pour “gasoline into the fire of a complex housing crisis issue”. 

“I’m ruling [ACT-style rent caps] out,” Premier Chris Minns said.  

“We believe that would have an impact on supply, and we need to get supply going. The vast majority of the rental market and new supply in the NSW marketplace has got to be provided by the private sector.” 

That is also the opinion of Ameeta Jain, Senior lecturer at the Faculty of Business and Law at Deakin University Business School. 

“So what happens with rent freezes and also caps? It takes away incentives from landlords to keep providing properties.” Jain said to the LSJ. 

“In the case of Australia, where we have primarily mum and dad investors, unless there is a certain return on investment, they’ll be reluctant to supply more housing.” 

That is the main argument against rent freezes. Without the incentive of profit margins, private investors will not build new properties that can be rented or sold to first-home buyers. 

Jain offers the example of San Francisco, where rent control laws have been operating since 1979. She points to a recent study that concluded, “While rent control [in San Francisco] prevents displacement of incumbent renters in the short run, the lost rental housing supply likely drove up market rents in the long run, ultimately undermining the goals of the law.” 

This 2017 study from economists Rebecca Diamond and Tim McQuade looks specifically at the effects of a policy change made in 1994 to the original law. It is a comprehensive look at the consequences of these measures in the long run.  

Critics of the Diamond-McQuade study say the paper ignored the impact of the loopholes in the law and criticised the methodology which they deemed flawed and incomplete.  

Another study from the University of California Berkeley, showed the impact of displacement due to evictions and priced-out tenants.  

“Displacement was a significant disruption and trauma for respondents and their children. Two out of three children in displaced households had to change schools.” 

“Protecting existing tenants from rent increases, in line with a new tenancy market, is entirely consistent with looking for a market supply response to the new tenancy rate increases.” Dr Chris Martin, Senior Research Fellow at the University of New South Wales, said.  

In Martin’s opinion, while the economists’ perspective says significant rent increases signal a demand for more supply, protecting existing tenants from pricing them out is “not the sort of supply response we need, or that’s helpful”.  

The idea is that high new tenancy rents should signal a demand for supply outside of the existing market.  

“It’s a harmful waste of that price signal if it’s going into increasing rents for existing tenants because that’s not the supply response we want. It doesn’t enter supply; to the extent it does, it’s by making people homeless.” Martin said. 

Are there any examples of capping rents? 

Both camps in NSW have cited the San Francisco example several times during the recent debate. But rent control in San Francisco only applies to dwellings built before 1979 with some exceptions (single-family homes and business units are not covered by rent control). For now, little over 60 per cent of all dwellings available in San Francisco are rent-controlled. 

Minns referenced Berlin as an example of rent freeze policies that failed. In 2019, the German city unanimously voted for a stricter cap and partial freeze for the upcoming five years, but the decision was overturned in 2021.  

Minns noted this was because the measure had been “catastrophic”. Still, it came down to a legal technicality where the Federal Constitutional Court declared the law unconstitutional since the Federal Government already had a law regulating rents, so state governments could not impose their regulations. 

Some European countries, including France, Germany, and Ireland, apply rent caps depending on circumstances. Others, like Spain, Italy, Portugal, the Netherlands and Belgium, have rent moderation measures.  

In Belgium, rent rises are indexed to the Health Index, calculated each month by the Government (for example, in the past year, rents in applicable dwellings could not exceed 4.1 per cent). 

“[Australia] is very different from Europe or San Francisco,” says Jain. “There’s a lot of institutional investment into the rental market. Germany is one of the countries with the lowest home ownership in the world because leases are so long.”  

Australia, continues Jain, relying on “mum and dad” investors to provide private dwellings for rent.  

In tandem, there is the fact that Australia’s population grew considerably post-COVID, with the return of international students, expatriates, and other new immigrants. At the same time, “none of the governments in the past ten years focused on increasing the housing supply”. 

Then there is Canberra. 

In the ACT, rent increases are limited to 110 per cent of inflation, as measured by the Consumer Price Index (CPI). A generous measure, says Jain, that could work at a limited time in some local regions in NSW.  

“In local government areas that record higher rent increases above a certain threshold,” continues Jain, “can look at [short-term] rent caps to the likes of Canberra”. 

Jain warns the ACT measures only passed in 2019, and it is still too early to see if it worked. The last SQM Research report revealed the vacancy rate in June was 2.1 per cent, above Sydney’s 1.7 per cent. As of June 2023, Canberra recorded a 1.9 decrease in the annual median rent. 

Can rent regulations work in Australia? 

Red tape is an obstacle to fixing the housing crisis, Jain concludes. “If we can remove the red tape so there’s a more direct link between state and local governments,” Jain says, “I don’t think it would take so long to increase the housing supply.” 

Jain also calls for tax credits for developers to provide more affordable housing, including a system similar to other European countries where a certain percentage of new blocks of units – 20 to 25 per cent – must be reserved for social or affordable housing. 

“Landlords face rent freezes all the time when they increase their rents,” Martin says concerning the Residential Tenancy Act NSW, which states that rents cannot increase more than once every 12 months.  

“[Rent freezes] sound dramatic, but it isn’t completely outlandish or alien to our current laws or rental systems”. 

“If the proposal is capping rent increases for existing tenancies. I don’t think that has a big supply effect. Certainly not the supply effect opponents of rent regulation claim.” he continues.  

“They would say any sort of rent regulation discourages the supply of rental housing to the market, pushing the market prices of rental housing up. I don’t agree with that. If you’re regulating the increases in existing tenancy rents, that’s perfectly consistent with the market for new tenancies. Sending a price signal to bring on more supply. So provided you’re not also trying to regulate the amount or level of rent for new tenancies commencing, I don’t think that supply argument stands right now.”  

The State Government hasn’t changed its position. Instead, Premier Minns and Anoulack Chanthivong, Minister for Building, announced Trina Jones as the first NSW Rental Commissioner. The Government hopes this appointment can give a voice to tenants in the state and rebalance the rental market amid a crisis. 

One of Jones’ roles is to examine rental affordability and supply and encourage longer-term rental agreements. 

The question of stronger state rent regulations will surely arise again.