There are ways that New Zealand’s rental market could be improved for tenants, but rent price controls are unlikely to be one of them, economists say.
The Green Party revealed a range of election policies at the weekend.
Among them was a cap on annual rent increases. The party proposed that property investors only be allowed to increase rents by a maximum 3% per year.
In years when inflation or wage growth was less than 3%, the maximum increase allowed would be the lower of the rate of inflation or the rate of growth in hourly wages, minus one percentage point.
Stats NZ data shows rents rose 3.8% in the year to May.
Property investors were unimpressed by the proposal and economists said their concerns were valid.
Infometrics chief executive Brad Olsen said he had never met an economist who thought rent controls were a good idea.
“Like any price control… no one looks back at Muldoon and goes ‘that was a fun time, wasn’t it, when we froze prices and wages?’”
He said the reason rents grew was usually due to supply and demand.
“What it often highlights is that demand has been able to increase at a greater rate than supply has been able to respond.”
But he said controls on rents would disincentivise people from providing the right type of rental housing.
“Rent controls have been seen over time not to produce the right sort of outcome in the market. They’re good if you’re in a rent-controlled dwelling but not if you’re not.”
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Limits on rents are probably not the solution to New Zealand’s housing problems, economists say.
James Graham, an economics lecturer at the University of Sydney, earlier said that studies suggested rent controls seemed to lower the cost of rentals initially but over time, the response of landlords undermined the goals of the policies.
One analysis of San Francisco found an expansion of rent control in 1994 led to a 25% decline in available rental units among the newly rent-controlled apartments.
A survey by the NZ Association of Economists last year found that 80% of economists on an expert panel said rent controls had not improved the amount and quality of affordable rental housing in places with rent control. Less than 6% believed rent controls had a positive impact.
NZ Initiative chief economist Eric Crampton said New Zealand already had a rental shortage and price controls would make it worse.
“If you let prices do their work, some people will rent out spare bedrooms, granny flats, whatever they’ve got that might be suitable. Higher rents will entice some people to put to market properties they otherwise wouldn’t have.
“You also see an increase in intensity of property usage. If in a tight market, prices can rise, one of the ways that clears is people grouping together to rent houses or apartments. It’s certainly not ideal but it’s a function of the housing shortage, not prices.
“Prices make sure every space is used as best it can. If you set a price cap saying rents cannot rise to the market clearing price, some people who could be landlords have less incentive to put a property on the market … people who might otherwise be pooling together to share a property, if they manage to luck out and get a price that’s price-controlled they don’t have that added incentive to take in another tenant.”
He said people who would benefit from investment properties being sold were probably not those who were most vulnerable in the rental market.
People who were marginal tenants would find it harder to find somewhere to rent, he said.
“The best protection for tenants we can possibly have is a very thick market of rental properties so it’s easy for people to put up more housing for rent, so all existing landlords face competition.
“Look at Wellington, how would half those places ever be able to find a tenant if it was easy to build new townhouse of decent spec and rent them out?”
