Public Housing Expenditure and Rent Freezes

Around the world, the combined effects of landlordism and the structural changes resulting from the special COVID-19 period - which is still ongoing - have led to serious issues concerning interest rates, inflation, productivity, and rental prices. In Australia this has come to a particular debate with two somewhat progressive political parties - the governing Australian Labor Party and the minority Greens party - having very different views on solving the various issues relating to housing. The matter has particular interest for the Isocracy Network, as being the initiating body of the (now largely defunct) Labor-Green Alliance, and with several previous articles on housing and land related matters; including the concerns relating to negative gearing and capital gains, several articles on the benefits of land tax, and a Victorian Parliament submission on homelessness.

The two sides of the debate can be fairly summarised as follows: From the Labor Party, they wish to introduce a Housing Australia Future Fund. This involves making a capital investment of some $10 billion AUD and using the returns of some $500 million per annum to build social housing. For their part, the Greens have argued for $2bn of direct investment along with at least $1bn to for the States and Territories to institute a rent freeze for two years. The difference has come to a head with the Greens teaming up with the conservative coalition of the Liberal and National Parties to vote down the legislation and even potentially force a double-dissolution election. Labor's policy, for what it's worth, is supported by all the major housing advocacy groups in the country, including the Grattan Institute, Community Housing Industry Association, the Housing Industry Association, the Urban Development Institute, the Property Council, the CMFEU (construction), Industry Super Australia, and National Shelter, even if some have a preference that the HFFA should be even larger still.

Before reviewing the evidence of the two approaches - and, as always, the Isocracy Network must derive ideology from evidence, rather than the other way around - one must also consider how the housing issue arose, and address the question of public provision of housing in the first place. On the first matter, there is a general trend for rents to increase over time due to the effects of private land ownership, as has been recognised in theory and fact by economists for hundreds of years. Land is a fixed resource and location price depends on the productivity of the site; as land-rents appreciate from labour and capital, houses depreciate. This general trend has been accelerated by the effects of the 2019 pandemic, as workplace spaces were abandoned by many clerical and technical workers in favour of working-from-home, with a reduction in persons-per-household, which puts an upward pressure on rents. Finally, there was a dramatic fall in productivity in the period to its lowest level in 50 years, resulting in real inflation which has driven interest rates, placing financial stress on mortgage holders.

On the second matter, the benefits of affordable housing are well-recognised, especially for the poorest sectors of society. Finland, quite famously, has a policy of ending homeless by providing shelter on need. We all need food, clothing, education, housing, and health to live and participate as members of our communities. However, one also notes that the whilst the satisfaction of human needs are a basic and beneficial social right individuals do have diverse preferences; some people would prefer better housing, and to have less salubrious food or clothing, whilst others would prefer the reverse. Allowing people to select their own preferences produces more optimal levels of welfare. This is the basis of a welfare and microeconomic argument against the government providing any sort of subsidies in particular, but rather providing financial support such as a Universal Basic Income, in general. Whilst this may not be politically possible in the current environment, it is worth noting as a longer-term goal.

Given this, the first point of difference is between how social housing (that is, public and community housing) is to be funded. Whilst both Labor and the Greens have argued for some level of direct funding, the two parties differ in the sense of whether an investment fund should be used to redirect returns or whether direct funding should be used more generally. From the Greens' perspective, their housing spokesperson has described the HAFF as "gambling on the stock market", noting that schools or hospitals are not funded through investment returns (nor is defense, for that matter). That is certainly true, however, the productivity returns on public expenditures are greater than that from housing, which means that public expenditure on housing will result in increased real inflationary pressure and interest rate rises at exactly the wrong time for it. There is a role for direct public expenditure, but it is best limited to providing a more limited and requisite level where it acts as a type of infrastructure, with social housing expenditure topped up from investment returns.

The second point of difference refers to rent freezes in particular and rent controls in general. It must be stated from the outset that these most certainly provide temporary security of tenure and can be appropriate during crisis situations (e.g., wartime). However, the overwhelming international evidence of the past decades is that rent freezes and rent controls lead to worse outcomes for renters. The theory is not too hard. If you stop returns on investment, people will stop investing. This means a drop in housing supply (investors don't build) or a drop in quality (owners won't do maintenance) or an increase in black market rents (to the market equilibrium). Unsurprisingly, the evidence matches the theory. Ameeta Jain, Senior Lecturer in Finance, Deakin University, makes this point precisely. Another study from Diamond, McQuade, and Qian from rent controls in from 1980 to 2016 in San Francisco tracked every individual that lived there; there was a 15 percent reduction in the number of rental properties, and there was a 20 percent reduction in the mobility of residents. Indeed, there is a meta-analysis of 60 studies, with the rather blunt conclusion "economic research quite consistently and predominantly frowns on rent control". Here are the comments from Richard Holden, professor of economics at UNSW Business School and President of the Academy of the Social Sciences in Australia.

Rather than adopt rent controls - which the best evidence says will have very negative effects - we need to increase housing supply in Australia. The government’s Housing Future Fund is a step in the right direction, but a modest one. Zoning and construction regulations need to be reassessed, and land releases must be increased. That’s the way to fix our housing problems. Not reverting to failed policies of the past.

There are justified criticisms of the HAFF; as mentioned the Grattan Institute, the CMFEU (construction), Industry Super Australia, and independent Senator David Pocock have all argued that the HAFF should be much larger. The Greens did make the point that if the fund had been introduced a year prior it would have lost 1.2%; that criticism was certainly accepted by Labor who changed the disbursement to $500m as a minimum, rather than a maximum. Obviously, there are plenty of other ways of improving housing affordability and security in the country, such as those suggested by Associate Professor Dorina Pojani from the University of Queensland, or from an earlier review by the Grattan Institute.

In general, however, the key policies advocated by the Greens in blocking Labor's Housing Australia Future Fund fall short of the mark. Whilst they are popular (rent freezes have sixty percent support according to an Essential poll). Facts, however, are not a popularity contest. In the past, there has been good reason to support the Greens for many of their "principled, well-researched, yet unpopular" positions in the past, from asylum seekers to the AUKUS submarine deal. But this is unresearched popularism; they know quite well that many people in rent and mortgage distress will hear "rent freeze" and automatically assume it's a good thing, without knowing the implications. The Greens should know the implications and either they are promoting damaging policies out of ignorance or malice, and unfortunately, both are possible.