Residential rent caps are one of those policies that sound sensible in theory when rents are rising significantly but often make the underlying problem worse.
When vacancy rates are low and rents are increasing, it is understandable that governments feel pressure to act. For tenants facing rental stress, a cap on rent increases appears to offer immediate relief. The political appeal is obvious.
The fundamental problem in Australia’s housing market is that there are not enough homes. Western Australia, like much of the country, has experienced strong population growth while housing construction has struggled to keep pace. We’ve seen that for a number of years and it feels like there is no end in sight to the problem.
A rent cap does not create a single additional dwelling. Instead, it changes the economics for those providing rental housing.
The vast majority of rental housing in Australia is supplied by private investors. These investors are not charities. They allocate capital based on risk and return. When governments limit returns through rent caps, some investors simply choose to invest elsewhere. Others sell their properties. Fewer new investors enter the market. Over time, the rental pool shrinks.
The result is that today’s solution becomes tomorrow’s problem. Existing tenants within the system may benefit temporarily, but prospective tenants face fewer available properties and even greater competition. The shortage worsens.
This concern is particularly relevant today. Changes to negative gearing and capital gains tax arrangements are reducing the attractiveness of residential property investment. We are already seeing more investors exit the market and fewer coming in. Stock for rent is already decreasing. Adding rent caps on top of that would further discourage investment in rental housing.
There is also a fairness issue that deserves consideration. Who exactly should receive the benefit of a rent cap?
Some tenants are undoubtedly struggling and deserve assistance. Others are high income professionals living in premium locations. A blanket rent cap provides the same subsidy to both groups, regardless of need. It is an expensive way to address housing affordability.
Another challenge is that rent caps become increasingly difficult to remove. Once rents have been artificially suppressed for years, governments face political resistance when trying to return to market settings. Landlords seek to catch up lost ground, tenants oppose adjustment, and governments become trapped. The longer the policy remains in place, the greater the distortion.
If governments want lower rents, the solution is more supply to meet demand, though, as we have experienced, this is not easy when our population is growing rapidly. If our population continues to grow, we must focus our migration program on those who have the skills to build more homes. Every additional dwelling reduces pressure on the market.
The reality is clear. Unless housing is provided by an entity unconcerned with economic returns, such as government funded social housing, then the market will respond to economic incentives and barriers.
Reduce returns and less capital will flow into rental housing.
Rent caps may provide short term political relief. But by discouraging investment and reducing supply, they risk creating exactly what renters fear most: even higher rents and even fewer rental homes in the years ahead.
This Thought Leadership was published in The West Australian 2 September 2026.
