If ever there was a case of classic textbook economics, it’s that high residential rents are caused by demand exceeding supply. It follows that the only sustainable way of reducing rents in a growing population is to increase supply.
That this reality is being debated in federal parliament tells us about the state of political discourse, as an alliance of the Coalition, One Nation and the Greens blocks a modest proposal to increase the supply of public housing.
The Greens seem to believe soaring rents are the result of rapacious landlords.
And because landlords are despicable people, the solution to the rental crisis is to cap rents.
If that’s truly the case, then the solution to rising grocery prices is for the government to cap the prices of oranges, lemons and breakfast cereal.
Flood insurance is getting expensive these days, so why not cap the price of insurance?
By this reasoning, if Australia wants a rapid switch from petrol to electric vehicles, we need only cap the price of EVs.
Most first-year university economics textbooks contain a case study of the consequences of capping rents.
When I studied microeconomics two eons ago, the case was Mumbai, where a state government capped rents to gain the votes of numerous tenants. It was a very popular move – until the entire residential neighbourhood was transformed into a slum as landlords refused to fund the maintenance of their properties.
The Greens argue this is pure fantasy, that the textbook authors are baby-boomer, neo-liberals who are siding with the landlords.
Earlier this month we gathered at Sydney University to commemorate Adam Smith’s 300th birthday. Smith observed that people received their daily meals not from the benevolence of butchers and bakers but from their self-interest.
Smith’s famous statement emanated from his observation of human behaviour, not from his desire of their behaviour, adding later in The Wealth of Nations: “… all for ourselves, and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind.”
If Smith were asked about the behaviour of self-interested landlords if rent controls were put in place, he would certainly have predicted they would reduce the supply of rental accommodation and refuse to maintain their rental properties.
Yet this basic observation of self-interested human behaviour seems to have escaped the Greens.
There are two ways of reducing property rents: reduce demand or increase supply.
The Albanese government has reopened Australia to migrants – permanent and temporary – following the end of the Covid-related border closures.
Temporary migrants include university students, an important source of national income and eventually of skills if they choose to remain in Australia.
Some rorts have been exposed and need to be dealt with, but in general are the Greens opposed to bringing in overseas students for a university education and quite probably becoming permanent residents?
The permanent migration intake is heavily skewed towards skilled migration, complemented with a humanitarian component. It is necessarily large, to fill the void created by border closures and was announced at the Jobs and Skills Summit at the urging of the Business Council of Australia.
If the Greens are opposed to either the skilled migration or the humanitarian program, they should say so. They would have allies in One Nation and the Coalition, which is again campaigning against “A Big Australia”, just as it did in the early days of the Rudd government.
The only feasible way of putting downward pressure on residential rents is to increase supply.
This will take time, and a change of attitude, particularly in Sydney and Brisbane. The Andrews government has been ensuring medium-density apartment building proceeds in a ring just outside the city centre. Of course, more apartments are needed but the debate about the need for higher-density apartments in proximity to the city centre has essentially been won.
Not so in Sydney and Brisbane.
Local councils in the wealthier parts of Sydney in reasonable proximity to the city centre have successfully fended off proposals for medium-density apartment building.
Local residents living in free-standing houses don’t much like apartments being built nearby, out of concern that this could affect their property values. They express their dissatisfaction at council elections, electing candidates who pledge to oppose apartment building.
Based on Adam Smith’s observation about self-interest, this is understandable. A local councillor who acquiesced to the building of an apartment complex risks incurring the wrath of voters at the ballot box.
The NSW government has indicated it will step in to override local councils where necessary and facilitate apartment building in locations around metros and other transport hubs. This has been affirmed by premier Chris Minns, planning minister Paul Scully and housing minister Rose Jackson.
A similar approach could be adopted in Brisbane. Owners of renovated Queenslander houses on stilts understandably want to keep their suburbs free of apartments. In their endeavours they have staunch allies – none more so than local Greens, including the national parliamentary Greens housing spokesperson.
Yes, the strongest opponents of increased housing supply – the only effective solution to the national rental crisis – are the Greens.
Craig Emerson is CEO of Emerson Economics. He is director of the APEC Study Centre at RMIT University, visiting fellow at the ANU and adjunct professor at Victoria University’s College of Business.