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.
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
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