Tuesday, July 21, 2015

Caps, Controls and CPI

American TV provides insights into many of life's trickiest situations. Adolescence, relationships, crime, and poverty have all been reflected back at us and even changed by focus of the camera lens. Affordable housing sneaks in there from time to time too, and one phrase bubbles up particularly in New York. Friends, Seinfeld, Sex and the City have all grappled with the ups and downs of rent control. Housing affordability discussions and recent changes in Berlin and New York have brought discussions of how best to regulate rent up around the world.
What is the deal with rent control?
On the home front, the Greens Member for Newtown Jenny Leong has been quoted as calling for a "cap on rent" and even calling for rent control, however this may have been a slip of the tongue, and confused in the media by an association with the Berlin system. The NSW Greens platform calls for a stricter control on rent increases for existing tenants. That control is limited to tenants in existing tenancies, and doesn't appear to be intended to apply to the rent that is able to be set at the very beginning of a tenancy.
The Real Estate Institute naturally wasn't keen on the idea and President Malcolm Gunning said a couple of things that are worth digging into. First, that capping rent increases would actually hurt tenants in the long run. "What they're proposing in a few years' time will bite them in the arse," he said. "Rent control has never worked in the past; it won't work again."
But what exactly does Mr Gunning mean when he scolds supporters of rent control? Is anyone even suggesting rent control in NSW?
A rent cap or rent control in its classic meaning really applies to the property, rather than the tenancy agreement. In rent controlled properties, the rent is set at a specific amount and increased periodically by a legislative or administrative power outside of the landlord or the market.
New York has the most famous rent regulation system, where more than a million homes have rents heavily regulated, under two separate systems known as rent stabilisation and rent control. New York's system is tied to the tenant as well as the property however, limiting rent control only to sitting tenants or their successors.
In Berlin, the example pointed to in some of the media recently, existing tenants have had protection against rent increases based on for a considerable amount of time, but if that tenant left the landlord was able to increase the rent to whatever price they thought the market could handle. In response to reports of landlords evicting tenants in order to increase rents, and rapid gentrification of some areas of Berlin, the city has now introduced a requirement that the price cannot rise more than a certain amount between tenants as well. This is rent control beyond the New York system.
The Greens platform so far is calling for a rent increase system more similar to that which Berlin had before their recent change, rather than after. Landlords will still be able to set rents at market rates between tenants, but it introduces a check and balance on the amount a landlord can increase the rent during a tenancy. Jenny Leong's bill may move from that position, but for now we will deal with the platform as written.
This leads us to our next question: What would rents in Sydney look like if rent increases were tied to CPI?
Source: FACS Rent and Sales Report, ABS Consumer Price Index
Well, if you'd managed to hold on to a property from March 1990 to today, and the rent had increased in line with CPI every year since then, then the rent payable would be almost $150 per week less than the equivalent property under the market. The median house rents are measuring new rents each quarter- that is, where a tenant has just moved in.
We do consider it highly unlikely that a landlord who currently has no practical limit on their ability to increase the rent, but does not increase it every year, would begin to do so in response to a change in this ability. The landlords who already increase the rent yearly, or even more often, will naturally feel an effect, though that is rather the point.
However, we must note that this is comparison pits current market rents for newly leased premises with a measure assuming some form of CPI-restricted rents on the property for 25 years! Not impossible, but rather unlikely. Since no one is proposing rent control, the effect of the Greens proposal will lie somewhere between that extreme and the status quo. What we really need is a real world example of how this system might work, in the Australian context. If only there was somewhere close by testing this proposal out...
Canberra!
As it happens, we've got an example of something very close to the Greens suggestion inside, or at least encircled by our very own state. In Canberra, if the rent is to be increased more than 20% above the CPI increase for the period since the last rise, the onus falls on the landlord to show that that increase is not excessive. If a proposed increase falls below this mark, the onus is on the tenant. This measure, introduced in 1998, is very similar to the Greens' proposal.
So, what difference has this made to the rents in Canberra? It is hard to say for sure, as Canberra does have some peculiarities- very high student and public servant populations for a capital city, and a tight bind to the political cycle. However, what we can see is that for the most part Canberra rents have tracked very closely to Sydney's since the introduction of the scheme. Though it is hard to pinpoint the precise effect the policy has had, it is clear that landlords should not run in fear at the thought of this proposal being introduced in NSW.
Source: ABS Consumer Price Index
So then, what exactly is the point? Well, this form of rent increase does not, and nor is it intended to, deal with housing affordability at a broad level. All that is intended by this kind of proposal is that landlords who do wish to increase the rent above a certain level, take on the burden of demonstrating why it is justified in those circumstances.
Currently, tenants bear this burden in all cases, despite the landlord and their agent holding most of the information relevant to any decision to increase the rent. Shifting this responsibility in cases of large increases seems a reasonable thing to ask, and certainly not something to be nervous about.
To truly deal with housing affordability across our state, there are other, much more powerful levers available to government that they can and should use.
For more on the TU's policy platforms around rent increases and other housing affordability concerns, see our policy page.

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