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Rent Controls - the lessons the industry should learn

The Scottish Government has launched a consultation on migrating away from the emergency rent controls introduced in September 2022 and extended until the end of March this year. 

If there’s one benefit that emerges from the Scotland experiment, it’s that any talk of introducing similar rent caps in other parts of the country should be quashed. A rod has been created for Scotland’s own back, unfortunately to the detriment of those it was ultimately designed to protect. 

For new tenancies, Scottish rental inflation is higher than in any other part of the country. Zoopla’s Q4 Rental Report showed Scottish rents grew by 12.9% last year, compared to 9.7% more broadly. Additionally, Edinburgh and Glasgow were the UK cities with the highest rental inflation at 15.2% and 13.2% respectively.

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Scotland is now trying to avoid a wave of rent increases across existing tenancies in a market that has been placed into an artificial bubble.  

The problems experienced in Scotland should come as no surprise. If you purposefully add dysfunction into an open market, you can’t be shocked when it acts dysfunctionally. Imposing rent caps simply exacerbated a chronic supply-demand imbalance in the Scottish rental market. 

Tenants protected by the rent cap simply stayed put, reducing the churn of property for new tenancies and driving up rents for the smaller pool of homes that did become available to rent. Scottish media widely reported a shortage of rental homes last year and prospective tenants jostling for the few homes available on the market.

The emergency legislation also unsettled landlords and prevented them from operating their businesses on normal commercial terms. Landlords are SMEs and they require a stable business environment in which to operate. Adding uncertainty means that they may look elsewhere to invest their capital. 

Data from estate agency Hamptons shows the proportion of Scottish investors buying properties in other parts of Britain more than doubled between 2019 and 2023, from 2.5% to 5.3%. Scottish landlord purchases in England and Wales are now at their highest level since records began in 2009.

Rent controls are essentially flawed and are usually deployed for political posturing rather than to deliver any true benefit to tenants. Even when genuinely well-intentioned, they end up causing damage to a functioning market. 

The argument presented by proponents of rent caps is generally reductive, made black and white. Landlords are typically painted as exploitative, and tenants as victims. The reality is always far more nuanced.  

Landlords are contending with the inflationary environment we have all endured in the past 12 months. Two-thirds of those who intend to increase rents in the next six months are doing so because of their non-mortgage costs increasing. Only an estimated four in 10 rental homes are mortgaged, but those who have come to the end of the fixed-rate mortgage in the past 15 months have faced an increase in mortgage payments.  

Instead of addressing the underlying reasons why rents are increasing, the argument is boiled down to an ‘us against them’ scenario. 

Sadiq Kahn has been one of the loudest voices calling for a rent cap in the capital, yet he doesn’t reflect on the causes of London’s rental problem, which is a significant slowdown of fresh stock coming onto the market following the introduction of the 3% Stamp Duty surcharge in 2016, coupled with the highest proportion of landlords seeking to sell in any part of the country. 

Add in landlords switching to short-term lets and it’s clear London’s issue is, again, a supply-demand imbalance rather than exploitation by landlords. 

Fundamentally, there is no sound economic argument for rent controls. Over the long term, rents in the UK have tracked wages. Of course, we are talking averages and we will always see extremes, but rents in normal market conditions typically remain affordable because they lag wage increases. 

ONS figures show that rents on the stock of rental property (as opposed to new tenancies) have been increasing, but at a level below wage inflation and, until very recently, the Consumer Price Index. The latest ONS figures show annual UK rental inflation at 6.2% in the year to the end of November 23. Annual growth in regular earnings (excluding bonuses), meanwhile, was 7.3% in August to October 2023. 

Of course, there are extremes and more direct, targeted support is required to help those on low incomes. I was glad to see the Chancellor sensibly unfreeze Local Housing Allowance in the 2023 Autumn Statement and I would hope to see more support developed for those whose needs are better met by the social housing sector than the private rented sector. 

But to simply inhibit a market by imposing mandatory rent caps ultimately damages that market for the majority. Lessons need to be learned from the Scotland experience. 

Richard Rowntree is Paragon Bank’s Managing Director of Mortgages 

Want to comment on this story? If so...if any post is considered to victimise, harass, degrade or intimidate an individual or group of individuals on any basis, then the post may be deleted and the individual immediately banned from posting in future.

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    • A JR
    • 20 January 2024 10:51 AM

    Good article well argued.
    As Richard outlines the problem is too many politicians are naively hooked into the us vs them, victim exploiter narrative.
    We are witnessing a wide spread ‘selective deafness’ to the value of all objective reasoning.

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    Sure we have rent Controls the Authorities have taking billions out of the Private Rented Sector’s Rents already what would you call that, it’s not in our pockets.

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    I find that if Sad IQ Khan is for it, I am going to be against it. Worked so far.

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    A good, well reasoned article using statistics from recognised sources. Any sensible landlord will already know this so perhaps we should be sending this article on to all MPs, prospective MPs and media outlets so they realise what they are arguing for and the potential consequences.
    Unlikely to change anything as it does not feed into the established narrative sadly.

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    What would be really interesting would be if someone could quantify the almost certainly negative effects on the rental market availability and prices as a result of the section 24 punishment tax for those arrogant and exploitative individuals that dare to rent out property under their own name rather than as a "proper" business, I.e. a company; and the effect of SDLT surcharge on both.

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    "Two-thirds of those who intend to increase rents in the next six months are doing so because of their non-mortgage costs increasing. Only an estimated four in 10 rental homes are mortgaged, but those who have come to the end of the fixed-rate mortgage in the past 15 months have faced an increase in mortgage payments. "

    Not sure this is totally accurate.
    A lot of rent increases will be for LHA tenants. Some have had no or minimal increases for 4 years. The rent they are currently paying is often £400 or £500 a month below market rent.
    Some of us have some mortgaged properties and some unencumbered. I certainly treat my portfolio as one entity with various properties subsidizing other properties.
    Just because I don't have a mortgage on certain properties doesn't mean rent won't go up. Just because a mortgage payment has more than doubled it doesn't mean the tenants in that house will have a big enough increase to cover the whole extra payment plus the extra Section 24 tax. I'll spread it around. For the last 3 years student rents have risen hugely, mainly to subsidize the LHA tenants. This year the rises for students and fully self funding tenants will be far more modest as the LHA is going up between 10% and 18%. Still way below market rent but sufficient for the non LHA tenants to have below inflation rent increases. Ultimately I want to be at a price point that retains good tenants and minimises voids.

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    I have always said that high rents are not an unqualified bonus for landlords.. The tenants need to be able to afford the rent. We don't want arrears and evictions.. There should be more Social Housing with very few in the private sector. What I want is a growing economy that is raising wages..

     
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    My good tenants don't normally get rent increases, tenants that P me off do, like the woman who held back 200 pounds in December because she was short of money for Christmass, and the guy who has been fly tipping rubbish in his front garden for me to clear up

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    In my experience good landlords are reluctant to put up rents by very much until the tenants leave. Most put rents up by general inflation than by rental inflation. The last year or so has made it hard for landlords who ignore rental inflation as general inflation has been too high.

     
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    A welcomed article. It makes valid points 👍🏻 But nothing will change, certainly under Labour 🆘🆘

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    Bristol PRS Strategy Team - are you reading this?

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    Rent controls are the inevitable consequence of abolishing fixed term tenancies.. Many tenants think below inflation increases are unacceptable but the LL can refuse to renew the tenancy.. With the new "for life" tenancy of Mr Grove tenants will have nothing to lose by appealing to the rent accessmemt office that the rent increase is unreasonable "eviction by stealth"... The rent office will be overwhelmed as it was by the failure to build enough social housing meaning that housing benefit claimants have become increasingly private sector tenants.. This led to HB being paid on size of property rather than quality /market price (as it previously was)... Such a change has encouraged slum landlordd as decent landlords who rent to benefit claimants make less profit than slum landlords who neglect their properties.

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