July 8, 2022
In the current economic climate, it’s probably not unreasonable for a tenant who is renting their home in the private market to think that Government controls on how much rent they should pay is a good thing: capped rents equal improved affordability.
But it’s a more complex issue than that.
Rents have been rising over the past 18 months and, now in the grip of a cost-of-living crisis, politicians are rightly focussed on what they can do to ease those financial pressures.
While intervening in rents has been ruled out in England, Scotland and the other UK devolved governments are still pursuing them. The Scottish Government is intending to publish more details of what form they will take later this year.
Rent controls do not address the root issue which is that demand for private rented property is currently outstripping supply.
To understand the potential implications for tenants, letting agents and their landlords, and the wider housing market, it’s important to understand what rent controls might look like.
There are three common forms: a cap on annual rental increases; a restriction on rent increases during a tenancy; a rent ceiling specifying the maximum amount a certain property can be let for.
The case against controls is strong
In the immediate term, rents could increase as landlords seek to initiate tenancies at a higher rate to compensate for a lack of future increases.
In the short- to medium-term, they would keep rents depressed, benefitting ongoing tenants.
However, in the medium- to long-term, the potential reduction in available properties that could be brought about by the departure of landlords from the market due to lower returns, would constrain supply and push up market rents even further as more tenants compete for fewer properties.
In short, future renters will almost certainly be financially worse off.
The unintended consequences
Those benefitting from capped rents would have less incentive to move and would likely stay in a property that may not be appropriate for them to the detriment of others who may have greater need for it.
Rent controls could also change landlord behaviour, making them more selective about potential tenants, or reduce spending on remediation and improvements, affecting housing quality.
There is nowhere in the world where rent controls have proven to have worked.
n Scotland, councils can already apply to the Government to designate a rent pressure zone (RPZ) if they can prove rents in their area are rising so much they are causing problems for tenants, or if they are coming under pressure to provide housing or subsidise the cost of housing as a result. That cap has been set at consumer price index (CPI) plus 1%.
If you compare average market rents for a two-bedroom property in Edinburgh at the start of 2021 and what they would be if a rent pressure zone had been in place since the beginning of 2018, when local authorities gained the powers to implement them, the data suggests RPZ rents could have risen by £400 more than market rents over the four-year period.
Rents are rising because there is a lack of homes across all tenures… what the Scottish Government appear to be blatantly ignoring is rents, like house prices, can decrease as well.
In a free market, where rents are not capped but allowed to flex in line with demand, investment in the private rented sector is incentivised. This provides a far more effective solution to the issue of affordability and encourages the long-term supply of good quality housing.