A rental cap would only worsen the rental crisis

The rental crisis in Australia has been an ongoing issue for some time now, with tenants struggling to find affordable and suitable accommodation.

As a result, there have been calls to cap rental increases as a solution to this problem and while this concept has been praised by some economists, I believe this show no understanding of how our housing markets operate.

Now I'm not downplaying the terrible rental crisis Australia is experiencing nor the financial hardship many tenants are experiencing with rents skyrocketing around Australia.

But industry insiders know that capping rental increases will only worsen the rental crisis in Australia.

Recently Ms Palaszczuk commented on a new report which showed the extent of the crisis showed the extent of the housing crisis.

According to the report, median rents rose 80% in the central Queensland city of Gladstone, 51% in Noosa and 33% on the Gold Coast over the past five years.

During that time, the proportion of private rentals considered affordable for low-income households halved from 26% to 13%.

"I understand that this is a big issue for families, they are constantly being faced with huge increases in rent," says Palaszczuk.

She further said:

"We're looking very seriously at how a rental cap can be put in place."

One of the main arguments in favour of capping rental increases is that it will provide tenants with greater stability and protection against rapidly increasing rents.

While this may be a short-term fix it will only worsen the situation in the long term.

Here’s why…

1. Fewer Investors

Capping rental increases will discourage property investors from entering the rental market.

Property investors rely on rental income to generate a return on their investment.

By capping rental increases, the potential return on investment is reduced, which makes investing in rental properties less attractive.

This, in turn, will result in fewer rental properties being available in the market, exacerbating the already existing rental crisis.

2. Decreased property maintenance and upgrades.

Moreover, capping rental increases can discourage property investors from investing in property maintenance and upgrades.

Property investors need to make a return on their investment to justify the costs of maintaining and upgrading their properties.

If rental increases are capped, the potential return on investment is reduced, which may discourage property investors from investing in property maintenance and upgrades.

This can lead to a decline in the quality of rental properties, making it even harder for tenants to find suitable accommodation.

3. Market distortions

Capping rental increases can create market distortions.

Rental markets are subject to supply and demand, and capping rental increases can disrupt this delicate balance.

It can create an artificial shortage of rental properties, which can lead to higher demand for existing properties and ultimately higher rents.

This is because property investors will try to maximise their rental income by setting rents at the highest level possible.

4. Unintended consequences

Finally, capping rental increases can lead to unintended consequences.

Capping rental increases may lead to a reduction in the number of properties available for rent.

If landlords are unable to increase rents in line with market conditions, they may choose to sell their properties or use them for other purposes.

This would lead to a decrease in the overall supply of rental properties, further exacerbating the rental crisis.

Targeting “Greedy Property  Investors” is fuelling the rental crisis

Around one-third of dwellings in Australia are rental accommodations, and the vast majority of these are provided by mum and dad investors who only own one or two properties.

On the one hand, these investors are trying to secure their financial future and on the other, they're providing a service for people who choose not to buy a home or who cannot currently afford to buy a home.

Remember not all tenants a poor or are unable to buy a home-  many are tenants because of the stage of their life they are in.

For example, they've had a relationship separation, they are building a new home, they looking for a lifestyle change, they've had a job promotion or transfer or they are new migrants.

Governments see property investors as an ATM – a cheap way to raise more taxes and over the last decade governments and regulators have hammered property investors.

For example:

• There have been a raft of market controls and interventions in favour of tenants
• Investors are forced to pay higher interest rates than home buyers
• Land tax increases have been punishing investors with a quasi “wealth tax.”
• A 3% serviceability buffer is currently making it harder for investors to swap lenders

The answer

While capping rental increases may seem like a solution to the rental crisis, it is not a viable one.

Capping rental increases is not the solution to the rental crisis in Australia.

Instead, we need to address the root causes of the crisis by increasing the supply of rental properties, streamlining planning and development processes, and encouraging investment in the rental market.

Making it easier for property investors to invest in and maintain their properties will create a more sustainable rental market that benefits both tenants and property investors.

About Leanne Jopson Leanne is National Director of Property Management at Metropole and a Property Professional in every sense of the word. With 20 years' experience in real estate, Leanne brings a wealth of knowledge and experience to maximise returns and minimise stress for their clients.