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As Shakespeare once wrote, ‘not all that glitters is gold’. Whilst legislative text is perhaps the furthest you can stray from Shakespearean prose, the Scottish Government would do well to take heed of such wisdom. The governments’ Cost of Living (Tenant Protection) (Scotland) Act 2022, which introduced a range of measures to regulate rent increases and expand tenant rights, may have glistened in the headlines, but it is far from sound policy. Beneath the surface, the introduction of rent controls has taken what shine was left from the Scottish rental market, at the expense of both landlords and tenants alike.
How Are Rent Controls in Scotland Legislated?
Given Royal Assent on the 27th of October 2022, the Cost of Living (Tenant Protection)(Scotland) Act 2022 – we will call it the Cost of Living Act for short – introduced a range of measures to regulate rent increases and expand tenants’ rights across Scotland. The legislation capped rent increases during tenancies at a maximum of 3% per year, increased minimum notice periods, watered down eviction rights, introduced new tenant repair rights and changed repossession grounds. Such changes have come during a time of surging mortgage rates, spiralling costs and ever-increasing regulatory burdens for landlords.
Why Rent Controls Don’t Work
The problem is that rent controls are not a new phenomenon devised in secret by an innovative branch of the Scottish Government. Similar policies have been tried and tested across the globe, from Berlin to San Francisco. In nearly every case rent controls have failed to mitigate rent increases, created split housing markets and reduced investment, ultimately hurting the very renters they are designed to protect. In fact, price controls are one of the few areas where there is an economic consensus. Unfortunately, they just do not work in the long run.
By introducing restrictions on rent increases, the Scottish Government have opted to implement a policy which grabs vote winning headlines but fails to address the driving problems behind spiralling rents. Whilst it will offer a small relief for tenants in the short term, the eventual repercussions on the housing market will be far more costly. Ireland’s decision to introduce rent pressure zones (RPZs) in 2016 resulted in significant “rent rigidities” and an inefficient two-tier system that deters effective property maintenance and has driven smaller landlords from the market. Germany announced rent controls in 2016 –catchily termed Mietendeckel. Similar to Ireland they created a segmented housing market and reduced the supply of rental properties available for tenants. The policy drove up prices and encouraged the creation of a grey rental market, prompting The Economist to label the controls a ‘failure’. Most evidence tends to point towards the same thing, that rent controls tend not work and are best avoided.
How Are Rent Controls Impacting the PRS in Scotland?
Recent data collated by the trade organisation Propertymark indicates Scotland is beginning to witness a similar pattern of events to Dublin and Berlin. Their survey of all the letting agencies in Scotland demonstrates that there have been three main impacts following the introduction of the Cost of Living legislation. Firstly, landlords are opting to increase rents between tenancies. As landlords are unable to increase rents by more than 3% per year when their properties are tenanted, many are choosing to aggressively increase rents between tenancies to make up for this. Secondly, rent caps have come at a time when the financial burden and costs for landlords are increasing, placing many under acute financial pressure. Finally, investment in the private rental sector has stalled, with landlords questioning whether it is worth continuing to rent their properties out.
Rents are Rising More Aggressively
The primary aim of capping rent increases at 3% per annum is to protect tenants. However, this only works in the short term. Every letting agent surveyed by Propertymark highlighted that landlords are now opting to increase rents more aggressively between tenancies. If this pattern continues, it will manufacture a situation of the haves and have-nots in the rental market. Those tenants fortunate enough to be able to reside in their properties for a prolonged time will benefit from below market rates, further discouraging them from moving or even purchasing their own home. Whilst new tenants or those needing to move will need to stump up an ever-greater amount to rent the few remaining properties available to rent.
More Landlords are Exiting the Sector
Not only will rents be driven up by between-tenancy hikes. But an overwhelming number of landlords are considering exiting the market altogether. Propertymark found that every agent surveyed highlighted an increasing number of landlords that considering leaving the private rental sector. In fact, many landlords have served their tenants with a notice that they intend to sell, driving them out of the very homes that the Scottish Government hoped to help them afford. This has dire repercussions for the long-term health of the Scottish housing market. Without a bustling private rental sector, tenants will be forced to compete for an ever-dwindling supply of lettable homes, or turn to black market options with unregistered landlords. Others will be forced into costly home purchases at a time when mortgage rates are skyrocketing. None of which ultimately benefits tenants.
Landlords are also Suffering from the Cost of Living Crisis
Landlords themselves are experiencing significant cost pressures. The price of the average inventory check has increased by 84% since 2019, whilst required compliance checks such as EICR’s and Gas Safety Certificates are both up 25% in the same period. Even the Scottish Government themselves have increased landlord registration fees in line with inflation, with landlords facing increases in excess of 9%. Combined with mortgages rates spiralling beyond 6%, for many landlords it is simply becoming financially untenable to let properties at their current prices. It is a question of increasing rents, selling properties or becoming bankrupt. Moreover, when financial pressures are so tight, it will force some landlords to cut costs such a maintenance and repairs just to survive. A decision which could have significant impacts on the most vulnerable of tenants.
Tenants deserve good quality, secure and affordable housing. They deserve to be able to sleep well in their beds, knowing that they can afford their rent and without fear that their property will be sold by landlords forced cover their losses. They deserve better that posturing policy designed to woo headlines rather than solve the root problems. Years of hostile regulation, failed building targets and restrictive planning legislation have forced thousands of landlords out of the market and driven up home prices and rents alike. As a result, many households are trapped in a position where they are unable to afford to buy their own home and the choice of rental properties is limited by a chronic lack of supply. Until the Scottish government can come to grips with this, renters will continue to be consigned to ill-thought-out policies that are detrimental to everyone involved.
References
Barker, G. (2019, December 2). Labour’s Housing Policy: The Impact Of Their Rent Cap Promise. Retrieved from Forbes.com: https://www.forbes.com/sites/garybarker/2019/12/02/labours-housing-policy-the-impact-of-their-rent-cap-promise/?sh=4106afbe38ac
Kluth, A. (2021, March 2). Berlin’s Rent Controls Are Proving to Be a Disaster. Retrieved from Bloomberg.com: https://www.bloomberg.com/opinion/articles/2021-03-02/berlin-s-rent-controls-are-proving-to-be-the-disaster-we-feared?leadSource=uverify%20wall
McArdle, M. (2019, June 14). The one issue every economist can agree is bad: Rent control. Retrieved from Washington Post: https://www.washingtonpost.com/opinions/2019/06/15/comeback-rent-control-just-time-make-housing-shortages-worse/#comments-wrapper
Propertymark. (2023, July). Scottish Parliament’s Local Government, Housing and Planning Committee Views sought on the Cost of Living (Tenant Protection) (Scotland) Act 2022 (Amendment of Expiry Date) (No. 2) Regulations 2023 Response from Propertymark. Retrieved from www.propertymark.co.uk: https://www.propertymark.co.uk/static/e33c1448-87f0-489a-a12efec034f579a2/Cost-of-Living-Act-2022-Amendments-Propertymark-response.pdf
The Economist. (2021, March 9). After a year, Berlin’s experiment with rent control is a failure. Retrieved from www.economist.com: https://www.economist.com/europe/2021/03/09/after-a-year-berlins-experiment-with-rent-control-is-a-failure
The Irish Times. (2022, May 18). Report claims rent controls have backfired and worsened crisis. Retrieved from www.irishtimes.com: https://www.irishtimes.com/business/economy/report-claims-rent-controls-have-backfired-and-worsened-crisis-1.4881856
