Source: Alex Motoc from Unsplash.
  • 2021 study on rent control in Berlin showed unintended consequences
  • Solving rising rental prices comes to to increasing supply
  • Arguably the debate should be about the red tape surrounding the housing and rental market

A new study on rent controls implemented in Berlin found that the policy has produced the unintended consequences economists have warned about for years – reduced supply of rental accommodation and rising rental prices.

The study was conducted by economists at Munich’s Ifo Institute. The report’s abstract reads: “The decline in the number of rental advertisements in the regulated segment is a first clear indication that the rent cap has reduced the supply of available rental apartments in Berlin. The decline in real estate price growth documents the losses for apartment owners caused by the rent cap.”

Unintended consequences

The rent controls have essentially split Berlin’s rental market into two: the regulated market consisting of all apartments built before 2014, and the smaller regulated one of relatively new buildings.

Unsurprisingly, in the regulated market, the supply of apartments basically froze. This was due to landlords tending to sell their rent-controlled unit rather than re-let to a new tenant.

After all, what incentive do landlords have to keep their rent-controlled units on the market if they can no longer receive a positive return under this new regime?

Furthermore, when supply freezes while demand increases, this creates long waiting lists. The result is that rent control is superficially great for the minority who were lucky enough to already occupy units, but this comes at the expense of new rental seekers, who must now compete for the limited remaining stock.

Rent control is likely to only worsen the situation of the housing market the longer it remains in place. As empirically shown in the study, landlords and developers were discouraged from building more low-rent housing, making the shortage of rental apartments more severe. This further damages housing affordability, hurting those people which the policy originally intended to help.

To economists, these detrimental results were not surprising at all.

In 2012, a survey of leading economists on the effectiveness of rent controls implemented in San Francisco and New York City found that only 2 per cent agreed the policy had a positive impact on the quantity and quality of affordable housing.

Calls for rent control

But despite its documented failure in countless studies since the 1940s, rent control seems to be all the rage among some political factions around the world these days.

New Zealand’s Finance Minister, Grant Robertson has said rent control would not be ruled out, despite the opposition arguing rent caps have never worked effectively.

London Mayor, Sadiq Khan published a City Hall report in 2019 which set out the new powers he needed to introduce rent control.

Everybody’s Home, a national campaign group to end homelessness has called for tighter regulations on rent increases.

And the most recent example of this closer to home at the legislative level was the Tasmanian Greens party attempt to push tighter rent controls as an amendment to the Residential Tenancies Act 1997.

President of the Real Estate Institute of Australia, Adrian Kelly, who lives in Tasmania followed this case very closely. He reaffirmed the unintended consequences of rent control when speaking with The Property Tribune recently.

“The thing about rent control is that it distorts the market. In Tasmania and other regional parts of Australia, the problem is supply. And tinkering with policies like rent control won’t solve the overall problem. In many ways, it just makes the situation worse because the more tinkering you do, the fewer investors there are in the market.”

Now, the various campaign, political, and lobbying groups advocating for rent control –  their intentions are well placed. In a nation where rental prices are heating up and rental stress rears its head as a more prevalent issue, it’s understandable to want to immediately and reflexively do something about it.

But, as the saying goes: good intentions do not necessarily translate to good outcomes.

The issue of supply

Now, that’s not to say that there isn’t a problem with the affordability in Australia’s rental market. There are issues that absolutely need to be addressed.

The weighted, median rent per week in Tasmania has increased from $266 to $357 – a 34% increase over 4 years according to the Tenants’ Union of Tasmania.

Domain’s latest rent report figures for the March quarter found unit median rents increased $15 a week during the first quarter of 2021 to $365. Furthermore, Perth rents have now risen three consecutive quarters making the rate of annual hikes the fastest since 2013.

But looking objectively at the data, countless studies, and expert opinions of prominent economists, rent control is simply not the answer to combat rising rental prices.

Arguably, a conversation to fix this issue cannot occur without first considering the red tape surrounding the housing and rental market, such as onerous land approvals and zoning laws (see this article).

A 2018 Reserve Bank of Australia study found that zoning laws have contributed to the rise in apartment prices across the nation, particularly in Sydney. These effects have been exacerbated over the years due to the existing restrictions binding more tightly as demand continues to increase.

The public policy think tank, the Grattan Institute in their latest Housing Affordability Report found that “over much of the last two decades, constraints have limited new supply that would normally respond to higher demand. Planning rules that restrict the construction of more homes in inner and middle-ring suburbs have dragged on development. Not enough medium-density housing, such as mid-rise and low-rise apartments, townhouses, and terraces, has been built in the established suburbs of our major cities closest to most new jobs and existing infrastructure. Although there have been more high-rise apartments, overall dwelling supply has not matched population growth, resulting in higher prices.”

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