The case for rent controls
The global consensus opposing rent controls is quite remarkable, and to explain it, Columbia University-based gentrification theorist Tom Slater uses the concept of agnotology – the study of the intentional production of ignorance. Agnotology questions why humans do not know, treating some kinds of ignorance as not just the absence of knowledge but an ideological objective – think of the debates last century on the hazards of smoking that relied on research funded by the tobacco industry, or the disinformation circulating around action on climate change.
Slater argues that the current economic orthodoxy on rent controls is generated by classical and neoliberal economists and think tanks. It is propagated, he says, by real estate lobbies, the development industry, conservative media and other institutions similarly riddled with vested interests and free-market ideologies that are fundamentally opposed to any form of state regulation – except when it’s in the market’s favour.
The particular ignorance around rent controls is enabled by postwar experiences in Europe and North America in the 1920s and ’40s, when rents were frozen below market rates to prevent profiteering in times of housing shortage and high need. Now known as first-generation rent controls, some of these were fixed at wartime levels for decades, leading to dilapidation when maintenance costs exceeded rental income. Few proponents of the orthodoxy discuss the existence of poorly maintained housing before these controls came into effect or after they were lifted, allowing instead the century-old worst-case scenario of rent control to become the defining and inevitable outcome of any serious regulation of private property rights.
The second mainstay of the case against rent controls is that they reduce housing supply. While property industry and real estate lobbyists always warn of dire consequences – developers will stop building new housing, small investors will sell up and get out of the property rental sector – there is no robust evidence to support such claims. The orthodoxy is premised on out-of-date information and supposition.
Rent controls globally have moved on: they are in their second and third generations, sometimes enacted as rent stabilisations, sometimes applying to starting rents at the beginning of a lease, sometimes to increases within the lease. They are often linked to consumer price index. They limit the amount and frequency of increases, and enact tenant protections ranging from durations of leases and grounds for eviction, to maintenance, conversions and other landlord–tenant relations.
Rent regulations of various sorts are widely applied around the world. Second and/or third generation rent controls exist in Canada, in the United States – notably New York, New Jersey, California and Washington, DC – and in many European countries. A comprehensive comparison of rent regulations in the 21st century by Finnish scholars Hanna Kettunen and Hannu Ruonavaara details their use in Austria, Belgium, Croatia, Cyprus, Denmark, France, Germany, Ireland, Luxembourg, the Netherlands, Norway, Poland, Scotland, Spain, Sweden and Switzerland.
Nevertheless, the current debate on rent controls in Australia, such as it is, is stuck in the tired old narrative of the beneficiaries of property price increases. The centrist Grattan Institute is the latest to join in, with its director of economic policy, Brendan Coates, and senior associate in economic policy, Joey Moloney, asserting in The Sydney Morning Herald that rent caps will “blunt the incentive to build more housing, leaving us with fewer, poorer-quality dwellings”. They cite a paper on San Francisco that does not discuss new housing builds, only existing rental units, and with a qualified analysis.
A similar case was made by Kos Samaras in these pages last month, with reference to two international examples. The first is the regularly rolled-out New York City experience, where poor property maintenance allegedly shows that the battle on behalf of tenants is being lost. In fact, the New York State’s Housing Stability and Tenant Protection Act of 2019 expands protections for renters and sharply limits the opportunity for regulated rent increases. Research from the NYU Furman Center found sale prices dropped following the changes but housing complaints and violations remained steady. Even in the land of the free, the battle is not at all lost.
Second, to support the notion that investors will offload property en masse – therefore somehow reducing housing supply – the introduction of rent controls in Paris in 2015 is said to have reduced rental stock so much the French government was forced to repeal the law. This too is misleading. The repeal in 2017 was not because of reductions in rental stock, but because of a jurisdictional issue over their application to the city only. A subsequent national decree in 2018, the Elan law, enabled rent controls across the whole of France and granted cities the right to set their own caps on how much landlords can charge. The head of Paris’s housing authority, Ian Brossat, told Le Parisien newspaper that in fact “rent control was very effective in the capital when it was implemented between 2015 and 2017, before it was overturned by an administrative court”. Use of the Elan law has since expanded across France, and rent controls now apply in 24 cities.
It’s as if those in the echo chamber of this neoliberal orthodoxy have become so complacent that they see no need to accurately back up their arguments. The federal Labor government has not surprisingly fallen wholly in line, with the minister for housing, Julie Collins, confidently repeating that the experts agree rent control “doesn’t work”. She is mistaken.
Let’s turn to some of the orthodoxy’s projected long-term consequences of rent regulation. If lower rents did mean some investors were inclined to stop maintaining their properties, accompanying tenant protections mandating certain standards, such as those that apply in most European countries, would oblige them to either take less profit or sell. As the vast majority of investors in Australian capital cities have seen their property prices double over the past decade, they do have a bit of wriggle room.
If properties were offloaded at a dramatically faster rate, their prices would drop. These properties don’t disappear. They might be bought by households leaving, or not yet in, the rental sector, which means one less household occupying or seeking a rental property. The price drop might be sufficient for those who have been just missing out on a purchase. Or the offloaded properties will be bought by other investors and put back on the rental market. A common tenant protection in Germany and the Scandinavian countries prevents vacant possession prior to sale. If applied here, tenants would be unaffected by the change of ownership. If prices came down enough, they might even translate to a rent reduction from the new owner.
The prediction that rent controls will reduce new housing builds has a simple classical economic logic to it, but establishing a causal relationship in the face of inflation, rising construction and energy costs and interest rates is not at all straightforward. In addition, those countries that most liberally apply rent controls also have state and other large institutional players involved in construction. These are usually state housing agencies and pension funds – the former with a commitment to building social housing, the latter interested in secure, low-risk returns over decades – that counteract the ebbs and flows of the private construction sector.
Australian superannuation funds are already entering this field, with Australian Super recently extending its partnership with Assemble Futures to finance build-to-rent-to-own units that provide an affordable route into home ownership. With gentle prodding from the Commonwealth government, more of the trillions of dollars in workers’ contributions could be invested in long-term low-yield projects that bring social benefits well beyond secure retirement incomes.
Australia used to have government land development agencies that moderated the market by delivering affordable land and housing sites at scale. Nicole Gurran at the University of Sydney has recently argued their restoration would go a long way to guaranteeing ongoing countercyclical construction. Evidence of the efficiency and equity benefits of direct government involvement in housing provision is extensive in the many countries that continue on this path, despite the sustained pressure from the free-market ideologues.
Let’s be clear: the prevailing orthodoxy is premised on maintaining and elevating profits for the already privileged, regardless of the consequent exclusion of poorer households. As its central purpose is to encourage private sector speculation as a means of accumulating wealth, it is structurally incapable of conceiving solutions to the growing inequities in market economies. The accompanying tax incentives that enable the treatment of housing as a commodity are of course part of the problem.
Rather than relying on the wilfully narrow understandings of the current consensus on rent controls and private sector solutions to the housing crisis, Australian governments would do well to look at the international evidence of the successes of greater regulation. Rent controls are one lever. When combined with strong tenant protections and state and non-profit housing construction, they work. The changes required may take a generation to fully take effect, but if Australian governments don’t grasp the nettle, the crisis in housing affordability will persist. It is time to face up to this deliberate production of ignorance and to call it for what it really is.
This article was first published in the print edition of The Saturday Paper on September 9, 2023 as "The case for rent controls".
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