This article has been republished from the June 2023 edition of Your Investment Property Magazine.

The plight of renters and aspiring tenants worsens by the day as the crisis continues to hound Australia’s rental markets. For Queensland, a possible solution is to limit the ability of landlords to increase rents.

Queensland Premier Annastacia Palaszczuk announced in late March that the state — following existing policies in other states — will be capping rental price increases from once every six months to once a year.

The new annual limit for rent increases will apply from 1 July 2023 for residential tenancies and rooming accommodation agreements.

Ms Palaszczuk said this move is a “wake-up call” for investors to do the right thing for tenants, who are already struggling with skyrocketing living costs.

“We must act and will act to deliver reforms that balance the rights and interests of Queenslanders who rent and property owners to sustain healthy rental supply,” she said.

The move was met with criticism from industry experts and property groups, with the Real Estate Institute of Queensland calling it a “blazing red flag” for property investors.

But what could the change really mean to the market?

Short-term relief, long-term woes

For many experts, the change is a short-term relief to tenants and could potentially cause more harm than good in the long run.

Festoon House managing director and Damien McEvoy co-owner Matt Little said rent limits do not provide a sustainable solution to ending the rental crisis.

“Limiting rent increases may result in the exit of landlords from the market, a decrease in the number of rental properties available, and an eventual rise in rental prices over the long term,” he told Your Investment Property Magazine.

Mr Little said it is crucial to strike a balance between protecting tenants from excessive rent increases and ensuring landlords are able to maintain and invest in their properties.

“A system in which landlords are only permitted to increase rent if they can demonstrate that they have made significant improvements to the property could be one potential solution — this system would link rent increases to the condition of the property,” he said.

PRD Real Estate chief economist Dr Diaswati Mardiasmo said while the move is, in a way, a very objective response, it does stop or limit one side of the investment financial equation, which is income.

“Investors impacted would be those who have been doing six month leases, which admittedly there was an increase of due to the tight rental market,” she told Your Investment Property Magazine.

Dr Mardiasmo said landlords continue to bear higher costs, including body corporate fees, mortgage repayments, council rates, utilities, and fees for insurance, maintenance, and property management.

“If we look at the equation between income and cost, we can already see it is quite imbalanced – hence the notion of negative gearing during tax time,” she said.

“With the income stream limited, this balance deepens, and investors may choose to exit the market as it is no longer financially viable — in the current rental market this does more damage than good.”

Speaking from the tenants’ perspective, Everybody’s Home spokesperson Maiy Azize said while limits to rental increases are good, the key is making sure rules are enforced.

“Without real, enforceable limits on rent increases, we will see more and more people from all walks of life plunged into housing stress and poverty,” Ms Azize told Your Investment Property Magazine.

“Landlords might say that rent limits are unfair, but the real victims are renters — they have been smashed by skyrocketing rents in Australia’s broken housing system for years without reprieve.”

“Investors can write off losses on tax or pass them on to tenants, but renters pay through the roof or find themselves with no home.”

Meanwhile, CEO Jarinda Wilson said imposing the rental caps is a positive move by Queensland to make a fairer system.

“Rental increases must be tempered by real market value, not on a self-perceived fluctuation to the marketplace by landlords and agents,” she told Your Investment Property Magazine.

Ms Wilson said agents and landlords who overprice their rental properties would ultimately realise that it is a false economy of scale.

“Raising your rent by 20% or $100 a week, but having it left vacant for a month quickly erodes any perceived or real profit when a 10% rise would have had the property occupied immediately,” she said.

“Sometimes, tenants pay over the marketplace value in their desperation to find a home — unable to sustain it, they soon fall behind. The agents and landlords cannot remove the tenants and they get stuck in a difficult cycle that they cannot extract themselves.”

Rental limits in other states

Rent limits are not something new — many states already have policies in place to limit either the frequency or amount of rent increases.

New South Wales, Victoria, South Australia, and Tasmania have existing rules in place limiting the frequency of increases to once a year.

There are also other policies imposing a specific limit on the percentage of rent increases. For instance, landlords in the ACT are not allowed to increase rents by more than 10 percentage points above the annual inflation rate. So at an inflation rate of 7%, ACT landlords can only increase rent in a single year by up to 17%.

Most states also have varying requirements for the length of notice a landlord must provide before implementing a rent increase. For example, Victoria requires 60 days' notice, while New South Wales and Queensland require at least 30 days' notice.

Dr Mardiasmo said the influx of interstate investors was one of the major reasons why the Queensland government decided to change the rules on rent increases.

“The rationale is having similar policies makes it easier for investors with multiple properties in different states — the benefits of standardisation so to speak,” she said.

“Overall, the recently imposed rental cap in Queensland might sound scary. In reality, however, the change is already almost business as usual.”

Will it ever be fair to introduce rent limits?

Still, Dr Mardiasmo said rental caps can have negative consequences especially when introduced in non-optimal economic conditions.

“A rental cap has more of the desired impact when the economic conditions allow for it, which is an economic condition that is relatively static. Right now, our economic conditions are anything but static,” she said.

“Mortgage repayments, infrastructure costs, council rates, body corporate costs, and other fees are not static — they are not stopping. And all of these costs fall on the landlord, which is passed through to renters.”

Dr Mardiasmo said for a rental cap to be viable, there is also a need to cap the costs borne by landlords.

“The issue that landlords have is balancing income and costs, to ensure that their investment is financially viable; thus, any assistance or policies that create a lower cost environment will, technically, also translate to lower rent,” she said.

For rent limits to favour both landlords and tenants, there are some perspectives to consider. Linking rent limits to inflation is one, as it will help ensure that rent increases remain in line with the overall cost of living.

This approach can protect tenants from excessive rent hikes while allowing landlords to adjust rents according to economic conditions.

A regular review and adjustment of rent limits based on current market conditions can also help guarantee their relevance and effectiveness.

Lastly, Dr Mardiasmo said rent control policies must strike a balance between protecting tenants from excessive rent increases and safeguarding landlords' rights to a fair return on investment.

How deep in the rental crisis is Australia?

Census records show that a third of Australian households depend on rental accommodation.

Roughly 96% of the total rental pool of 3.3 million properties is funded by everyday Australian investors and the rest are government funded.

Propertyology head of research Simon Pressley said the intensity of the crisis means that only around 32,000 properties were advertised for rent across the country as of the end of February 2023.

“Looking back 13 years earlier, when 4.5 million fewer people lived in this country, there were 43,559 properties advertised for rent,” he told Your Investment Property Magazine.

This is not to say, however, that population growth is the problem, Mr Pressley said.

For him, the series of regulatory restrictions on investors that started in 2015 triggered the series of events that ultimately led to a sharp and consistent reduction in rental supply.

“While population growth was not the cause of the dire shortage of rental supply, the fact that there is such a shortage means that a perfect storm is now ready to erupt, with the biggest population boom in our nation’s history unfolding over the next couple of years highly probable,” he said.

Mr Pressley said it would be hypocritical to punish the supplier of rental accommodation.

“Capping the price to rent and restricting fundamental controls of asset ownership discourages people to fork out their hard-earned money, diminishes one’s preparedness to accept financial risks, and creates a level of rage which is now nearing boiling point,” he said.

“Australia needs a lot more investors, not less — until that happens, tenants will have no choice other than to compete hard for the limited rental supply offered by the shrinking number of landlords.”

Coming up with a fair solution to the rental crisis

For Mr Little, there needs to be a combination of short-term and long-term policies to solve the rental crisis.

Government subsidies for affordable housing, incentives for property developers to build more affordable rental properties, and the introduction of rental assistance programs for low-income earners are some of the potential solutions.

“We additionally need to address the basic monetary and social factors that add to the rental emergency, like pay disparity and the absence of reasonable lodging choices for low-pay workers,” Mr Little said.

Dr Mardiasmo also shared possible short-term solutions to the rental crisis, including temporary rental assistance and strengthening tenant protection.

“Governments can provide short-term rental assistance or subsidies to those in need, helping to bridge the affordability gap for low-income households and preventing homelessness,” she said.

“Implementing policies that protect tenants from eviction without just cause and providing resources to tenants for legal assistance and mediation, can help ensure stability in the rental market.”

Another idea is to allow longer stay in temporary accommodation such as caravan parks, with the number of charges paid taken into account as the ability to pay, which Dr Mardiasmo said, is almost like a rental referral or rental balance sheet.

“More often than not these stays are limited to a certain period of time, which creates uncertainty for the tenant and also hinders them from having an address for rental applications,” she said.

The concept of house-sharing can also help, especially for those tenants who don’t have stable finances. For instance, households can rent out their spare room to students or young professionals.

Long-term solutions to the rental crisis

PRD Real Estate chief economist Dr Diaswati Mardiasmo said solving the rental crisis involves policies in five main areas:

  1. Affordable Housing Stock – Public-private partnerships, social housing projects, and incentives for developers can expand the construction of affordable housing units.

  2. Land use and zoning – Reviewing and reforming land use and zoning regulations can encourage higher-density development and the construction of diverse housing types, making more efficient use of urban land and increasing the availability of affordable housing options.

  3. Tax Policies – Implementing changes to tax policies that encourage the development and maintenance of affordable housing, discourage property speculation, and promote equitable distribution of housing resources can contribute to long-term housing affordability.

  4. Diversifying Housing Stock – Policies reducing red tape and encouraging innovative measures such as Build-to-Rent and Asset Repurposing can introduce new types of housing supply.

  5. Incentivising Landlords - Offering tax incentives, grants, or subsidies to landlords who can provide affordable housing or who maintain rents at a reasonable level can encourage the availability of affordable rental properties.