The South Australian parliament recently voted against a Greens’ proposal to cap rent price increases to CPI. There were a few cold-war rhetorical flourishes about free market capitalism and an argument that governments should not dictate to landlords what they can and can’t do with their property, but the main reason the other parties opposed the proposal was a concern it would drive landlords from the market and reduce the availability of rental properties (see Hansard, from page 2571). Similar arguments are often also raised in relation to increasing renters’ tenancy rights because it might spook landlords into selling up and leaving the market. These are really statements of the great landlord myth: that landlords contribute to housing supply.

Given the parliament’s attachment and propagation of this landlord myth, I am forced to argue (yet again, and not originally) that most landlords do not create housing or add to housing supply. By definition, landlords are rent-seekers, in both the colloquial and economic meaning of the term “rent” (the later referring to unequal returns based on market positioning rather than productive value added).

Housing Supply

A house is a house, and (as long as it is occupied) it provides shelter and a home for one household, whether it is owner-occupied or rented out. When a landlord sells their house, it is either bought by another landlord (probably using the extra market power provided by negative gearing) or by a new home buyer (or another home owner, whose existing home will be sold eventually leading to a new home buyer). No new housing has been created by the ownership or the ownership change. There is still only one home for one household. In the later case, there will be one less rental property in the market, but also one less renter demanding a house.

Of course, when a landlord fixes up a derelict house and rents it out, or builds new rental housing, they are adding to the stock of housing. But most landlords simply buy an existing house. There remain the same X houses for Y households.

But while the government has bought into the landlord myth, it is still right that there is a problem of lack of rental supply. Rental vacancy rates in South Australia, that is, the number of rental properties being advertised as a proportion of all rental stock, is at historic low levels. In March this year, the vacancy rate in Adelaide was 0.5%, down from 2.1% in December 2016. The government rental bond data shows what this means in practice. In the last quarter of 2016 there were 15,630 bonds lodged for new rentals across the state, but in December last year the number was down to 12,725. This represents a significant decline in availability. In this context it is no surprise that rent prices are increasing well above the general inflation rate.

Housing Supply and Renters’ Rights

The problem with the government’s argument is not the analysis that lack of rental supply is driving a crisis in rental affordability, it is just that the problem is not related to rental rights. A key report from AHURI, one of Australia leading housing research bodies, shows a lack of an empirical link between renters’ rights and landlords entering or leaving the market. Other factors were the big drivers of landlord behaviour.

Of course this research referred largely to renters’ rights within the tenancy contract, and arguably a rent price cap (e.g. limiting rent increases to the general inflation rate), may be different because it is a direct impact on a landlord’s revenue stream. But is the result really different? If a rent cap means that a landlord decides their return on investment is insufficient, they can sell their house – with the zero net impact on housing supply noted above. The only short-term impact on rental supply would be if a landlord decided that the rent-increase cap meant the property was not worth renting out and they leave it empty. But it is a strange maths that leaves a landlord better off receiving no income from an empty house, rather than “settling for” $20 or $40 a week below what they wanted.

And in the long run? Yes, a capped revenue stream may discourage landlords buying houses to rent out – but that is only a problem if we believe in the landlord myth.

As the AHURI report concludes, when renters already have very limited rights:

“Where landlords or their representatives say it is too difficult and they will disinvest from existing private rental system dwellings, this should not be taken as a threat, but as a good thing: that is, the incapable and the unwilling exiting the sector, and thereby opening up prospects instead for new owner-occupiers or for differently oriented landlords—especially non-profit rental housing providers.”

Community advocacy organisation, Better Renting, put it a bit more bluntly:

“landlords who sell because they don’t want to comply with the law are probably pretty shit landlords to be honest, and we’re better off without them.”

Building New Housing

So the bottom line is that, if it is not renters rights driving a rental supply and affordability crisis, then rather than depriving renters of rights or leaving them exposed to market prices which are unaffordable and lead to stress, sickness and/or homelessness, we just need to build more houses.

This creates a further problem in that developers will use this market shortage to demand government support and handouts, or to change zoning restrictions or avoid environmental protections. This too is pot of profiteering from people’s need for shelter, but at least developers are building houses (although not always of a type or to standards we may want)!

I say this as I sit just a short walk from hectares of waterfront land “sold” to a developer for $2 so they could bulldoze heritage buildings and build a housing estate. Development. It is the sort of deal governments do when they are desperate for someone to build new housing. They will roll over and do almost anything, anything that is except actually build the necessary new housing themselves!

A saner alternative, one which was at the heart of South Australian development in a previous era but conveniently forgotten with the onset of neoliberalism, is to build public housing. Building public housing not only increases housing supply overall (and the community’s wealth) – it is a build-to-rent scheme which adds directly to rental supply putting downward pressure on rents across the market. As I noted in a previous post, public housing is also particularly important because it provides housing to those on very low incomes and most marginalised in the housing market.

The Scale of Building Required

In February this year, the state government announced new housing initiatives (mischievously titled A Better Housing Future – the previous’ government’s plan was Our Housing Future). A centre-piece of this was the promise to stop the sell-off of public housing and investment in building more public housing. This was a welcome turn-around, but calculations I did elsewhere showed that the promised 564 new public houses over four years would not be enough to keep pace with projected population growth. That is, even with the promised new housing, the proportion of South Australians in public housing would still decline.

To maintain the current market share of public housing and keep pace with population growth, South Australia would need to build 1,421 new public houses by 2025-26 – more than double the government’s plan. Even more challenging, to begin to rebuild public housing assets at the rate they declined in the preceding 4 years we would need to build around 3,600 new public houses – more than six times the current investment.

Conclusion

Unfortunately building public housing – or any housing – takes time, which means that the current rental affordability crisis is not going to go away quickly. However, that does not mean that in the interim we need to continue to punish renters or make them bear the costs of a market that does not work. Yet it looks like that will continue to happen as governments and much media commentary accept and propagate the landlord myth, a myth that enables landlords to leverage support for their interests without actually contributing to the housing supply needed to end the rental affordability crisis.