Good intentions aren't enough

Australia's June quarter CPI data are due to be released today and will go some way to informing the RBA's next cash rate decision on 6 August. My view is that rates should be kept on hold no matter what the inflation figures show, but these days you never really know. The RBA has a deep credibility problem following its pandemic mistakes, so if it doesn't look like it's making progress, then Governor Bullock might be tempted into a hike if for no other reason than to avoid further scrutiny.

So, here's hoping for a quarterly rise under 1%!

But today I want to discuss policy. Specifically, the NSW government's decision to proceed with "no fault" evictions legislation:

"From next year, landlords will have to meet one of several 'commonsense and reasonable' thresholds for eviction, which include the sale of the property or if the tenant causes damage.

There will be an obligation on owners to provide evidence when issuing an eviction notice, with penalties for 'non-genuine' reasons.

The reform will apply to everyone who is covered by the Residential Tenancies Act."

To be clear, such legislation already exists in most other jurisdictions; as far as I'm aware, only WA doesn't have similar tenant protections in place.

But banning no-fault evictions is more of a feel-good policy than anything that will meaningfully affect the rental market. Being a tenant gets a little bit better, so demand for rentals will increase. But landlords will raise their risk premium because it's slightly more difficult to evict tenants, reducing the supply of rental properties over time. And as we all know, when demand goes up and supply goes down, equilibrium rents (prices) will increase.

In fact, a recent paper by Columbia's Boaz Abramson found exactly that effect:

"I find that stronger eviction protections exacerbate housing insecurity and lower welfare. The key driver of this result is the persistent nature of risk underlying rent delinquencies."

So, what does work? Abramson found that giving renters means-tested cash is quite effective at improving welfare in the short run, and that the gains of doing so are greater than the cost to taxpayers:

"Rental assistance, in contrast, reduces evictions and homelessness and improves welfare because it lowers the likelihood that renters default ex-ante."

The problem, of course, is that governments have to spend money to provide rental assistance, whereas the direct effect of banning no-fault evictions is virtually costless to the government (although it will eventually raise fiscal costs indirectly, e.g. due to higher homelessness).

The short run effects will be negligible, perhaps even positive, but the negative indirect effects will take a longer time to be felt. Banning "no-fault" evictions also sounds good to those who aren't familiar with economics, i.e. the vast majority of the population, including most politicians (even if they mean well), which is one why such policies are so popular.

But if the long-term goal is to make housing in Sydney more affordable, then good intentions aren't enough.

Beyond good intentions

I was hopeful for the Minns NSW government. Indeed, I've praised the government's approach to housing twice: first in February, then again in March. But as so often happens, interest groups get themselves organised and start throwing copious amounts of sand into the gears of would-be reformers. The reforms then get watered down, or scrapped entirely.

Take the state's Transport Oriented Development program. Announced in December 2023, the plan was to apply "accelerated rezoning" to a bunch of well-located suburbs within 1,200m of Metro and rail stations, followed by a "snap rezone" of dozens of suburbs within 400m of Metro or suburban rail stations. It also committed a bunch of cash for "community infrastructure" to help support the expected increase in density.

But only two months later, the a bipartisan group of politicians launched a Parliamentary inquiry into the development of the program. That inquiry won't even table a report until 27 September, but considerable local government opposition has already led the government to scale down its original plan:

"The state government will water down its key housing density policy with significant concessions to local councils that have alarmed housing advocates ahead of the release of a new five-year plan for Sydney and surrounds.

A 'policy refinement paper' seen by the Herald reveals several types of land will be excluded from the imminent low- and mid-rise housing reforms, which aim to increase the supply of duplexes, terraces and small apartment buildings within 800 metres of train stations and town centres.
...
It is not the government's first compromise on housing policy. As the Herald also revealed, it granted several councils more time – up to 15 months – to work on local housing plans rather than being captured by the TOD program, slated to apply in 37 suburbs with train stations."

I understand that "community consultation" is important, but all too often it's simply a way for home-owners, who lucked out by being born when well-located land was relatively plentiful and affordable, to pull the ladder up behind them.

Community consultation also suffers from what's known as survivorship bias. That is, the people most likely to participate such "consultation" processes are not representative of the community as a whole: