Housing crisis demands forward-thinking solutions, not rent caps: REIV

Quentin Kilian, the chief executive of the Real Estate Institute of Victoria, had some firm words for governments considering caps in an opinion piece released this week.

Mr Kilian opined that residential rental providers have been “threatened” in recent times with rent freezes or “capping”, a method of regulating the price of rental properties.

Talks of rent freeze to address the nationwide housing problem bubbled to the surface most recently in August 2022, when Greens MP Max Chandler-Mather called for private rents to be frozen for 24 months in response to the nationwide housing crisis.

For context, the proposal to halt residential rents springboards off of a government decision to do so for businesses for eight months during the height of the pandemic.

Describing the measure as “necessary”, Mr Chandler-Mather explained that the nationwide rent freeze would be coordinated by the national cabinet, with “each state and territory to implement it via their respective rental tenancy acts.”

Ahead of the elections in March, the party renewed their push for the controversial policy that was notably slammed as “far-fetched and unrealistic” by the Real Estate Institute of Australia (REIA).

Recently, the national institute has called for a decisive end to the prolonged speculation surrounding rent freezes, criticising the Green’s persistent push as a maneuver to create “some short-term relief for political gain,” adding it will only “transfer future rent burdens to Australians seeking to enter the rental market later on.”

Since then, talks about the controversial reforms have not died down, with the Victorian government reportedly considering rent caps in a bid to gain support from the Greens for tax reforms included in the state’s upcoming budget.

In his op-ed piece, Mr Kilian argued that regulating the price of any service or product without careful long-term planning, “continues to be the wrong move” for any market, and simply worsens the problem, rather than resolves it.

“The aim of this policy, albeit misguided, is to make rental accommodation more affordable by limiting the amount rental providers can charge renters,” he acknowledged.

But the real estate leader then queried how far the policy might go:

“Can politicians successfully do that to milk, eggs, bread, fuel – just to name a few everyday essentials?” he asked.

While he contended there may be good intentions with this policy, he asserted that the implementation of rent capping has “never yielded the desired results.”

“The two major issues are reduced supply, as rental property is no longer an attractive investment option, and the deterioration in the quality of remaining rental stock,” Mr Kilian added.

To bolster his argument, he invoked the current state of Victoria’s rental market, where almost 90 per cent of tenants are renting from private rental providers.

“While it’s essential to ensure that tenants are not unfairly burdened with rising rental costs, it’s equally important to provide a fair return on investment for the owners who play a critical role in providing much-needed long-term rental properties,” he stated.

Mr Kilian said “forcing the hand” of rental providers and telling them how to manage their properties flies in the face of what attracts people to the market in the first place.

The executive’s warning comes as the state was also labelled as the “worst” state or territory across the country for renters by Property Investment Professionals of Australia (PIPA) and the Property Investors Council of Australia (PICA).

Additionally, the REIV executive took aim at an often-held notion that a significant portion of Victorian property investors are wealthy individuals with multiple rental properties.

“Despite popular opinion, 70 per cent of Victorian property investors only own one rental property, with 43 per cent of that group earning under $100,000 p.a. according to the ATO, so these investment properties represent the future financial planning of everyday Victorian families,” he stated.

Mr Kilian further cautioned that if rent is capped and cannot move with the market, investors are unable to respond to cost movements such as increasing interest rates, maintenance etc.

“They are very likely to take their hard-earned savings elsewhere, which is what we are already seeing as a response to the increases in land tax,” he said.

A recent study from the REIV supported these claims, revealing that agents have been flooded with calls from landlords considering selling since Victoria’s state budget imposed new and increased land tax on investment properties.

And the state body representative also argued that imposing restrictions on investors’ bottom lines hurts tenants in other ways, such as by reducing the quality of stock on the rental market.

“Rental providers who cannot charge the true cost of maintenance become unwilling to invest in maintenance, upgrades or renovations, leading to deterioration of the quality of the rental properties. This ultimately impacts on the renters,” he stated.

In the case of rent freezes, which freeze rental prices at their current levels, a new publication from LJ Hooker critiqued that they typically apply to existing lease agreements, leaving tenants without contracts on monthly agreements unaffected, limiting the benefits to a “significant portion of renters.”

It further argued rent freezes may discourage landlords from investing in property maintenance and improvements, potentially leading to declining rental property quality over time.

Rolling out the much-debated scheme may also disincentivise landlords from offering long-term leases or renewing existing ones, reducing the security of tenure that many tenants seek.

Meanwhile, rent caps – which limit the maximum allowable rental increases with the aim to control rental price growth – can discourage landlords from entering the rental market or investing in new properties, potentially reducing the housing supply.

As with rent freezes, the report warned rent caps may also result in landlords neglecting property maintenance and availability of rental housing, particularly in high-demand areas with limited supply.

“Short-term actions like rental freezes, which are not solutions, do little other than drive headlines for policy leaders and peddle inaccurate forecasting.

“Victoria’s rental crisis requires structural reform, not nonsensical ‘quick fix’ responses. It’s time the state government comes out and says, absolutely no, to rental caps, freezes and other market interventions,” he stated.

Notably, LJ Hooker’s report also called on the adoption of a “comprehensive approach” that tackles the underlying factors contributing to rental market challenges and ultimately ensures a “sustainable and equitable” rental sector.

“To address rental market challenges, solutions should focus on increasing the housing supply. This involves maximising the utilisation of existing homes and constructing new ones that are of high quality, suitable in size, and located in the right areas,” the report noted.