Reflecting on the New Scottish Rent Control Proposals
In September 2023, the Scottish Government launched a consultation engagement process concerned with the rented sector proposals within the imminent Housing Bill. The current proposals set out the intended plan for the much-vaunted effective national system of rent control, first mooted in the SNP-Green Party government agreement in 2021. This is the clearest indication yet put in the public domain about what the Government is proposing.
We should declare an interest. In the last two years, we have completed an international evidence review on rent control (Gibb et al., 2022), written a paper on international practice and policy design for the Scottish Government (Gibb and Marsh, 2022), led a report on rent control for the Holyrood Cross Party Group on housing (Gibb et al., 2022), and developed an academic paper from this work (Marsh et al., 2022).
The proposals should be viewed in the context of the 2017 private residential tenancy model and the local Rent Pressure Zone (RPZ) model designed to limit rent increases, introduced as part of the same 2016 legislation. Also important is the autumn 2022 announcement to freeze (and later cap) existing private rents across Scotland – a programme still in place. The proposals also need to be understood in relation to the current cost of living crisis and the affordability problems associated with the ongoing freeze of the local housing allowance.
Nonetheless, the national rent control proposal is a longstanding piece of unfinished business, actively in development since 2021. Rent control (without further specifics) has had considerable support in different political circles, tenant activists, student groups, and beyond. The challenge has always been to develop a credible policy that can both be acceptable to the market and its stakeholders and materially superior to the existing ineffectual local RPZ model.
The consultation document outlines the rent control proposals (paragraphs 7 to 23). The key features are:
- Local authorities are best placed to decide whether local circumstances imply that rent control should apply for the LA area as a whole or an area within the council borders. The Scottish Government proposes a mandatory requirement that ‘local authorities would be required to carry out an assessment of conditions in relation to rent in their area and make a recommendation about whether Scottish Ministers should impose rent controls.’ It would also be mandatory that rent conditions would be re-assessed on a regular basis. Scottish Ministers would be the final decision maker on the imposition of rent control, and the introduction of the rent control area (RCA) would be subject to Parliamentary approval.
- The core proposal is that where rent control applies there would a ‘restriction on the amount by which rents can be increased’ locally – the control mechanism used would be a ‘rent cap based on a fixed percentage or a formula by which the increase could be calculated’.
- Any new rent control area would be established for a fixed period of time with re-designation dependent on a further assessment showing a continued need for rent control.
- RCAs are based only on restricting rent increases during a tenancy, but the new proposals also include limiting rent increases for new tenancies where a new tenancy is created. In addition, rents could only be increased once a year for tenancies even where there is a new tenancy created (if the new tenancy is substantially the same as the previous one). This extension of the principle is an attempt to counter the widely observed phenomenon of much larger increases in rents when new tenancies are created.
- There may be circumstances where landlords can increase rents above the proposed cap where high quality properties to let have certain permanent improvements made. Also, for landlords who choose not to increase rents during a tenancy and only change rents at a new tenancy, the Government is considering how best to encourage within tenancy regular rent increases. The government is also considering how best to support tenants by ensuring landlords comply with the rent cap.
- The Scottish Government acknowledges that there will be some new tenancies where it is not easy to determine what the previous tenant’s rent was or other circumstances may apply, e.g. where there was no previous tenancy. The government proposed to exempt such ‘new to market’ properties and to allow a market-determined initial rent in such cases.
- Finally, the Scottish Government would wish to ‘retain a power to specify types of tenancy, types of property or other circumstances where the rent cap should be disapplied’. The consultation questionnaire suggests one of these might be Build to Rent investment properties.
This proposal is essentially a revamped and enhanced form of Rent Pressure Zone. While it is a policy that will operate nationally, it is not a policy that is likely to lead to a system of rent controls being applied nationally across the whole private rented sector. To be fair, many people in our discussions in the cross-party group made a case for this sort of proposal. At the same time, it is more comprehensive than the existing system – in addition to covering existing rents, it seeks to include new tenancy and initial rents. It is more sophisticated than the existing system, in that it seeks to take account of complications such as new to market properties.
Key details of the proposal are not yet finalised. That may be fair enough given the consultation engagement, but we would argue that this is also a recognition that several of the second order questions, like where exemptions sit for different renting models or property types, do not have straightforward answers.
The history of regulatory reform in the private rented sector often involves a lack of recognition of potential unintended or unevidenced consequences of certain changes, only for those consequences to emerge as serious problems thereafter. A contemporary example of this would be the declining acceptability of student HMOs in the Scottish PRS. So, it is good to see the proposal authors thinking hard about some of these concerns, such as how new tenancies may or may not be incorporated in the rent control area.
But have they addressed all outstanding issues? We do not think so. Here are some outstanding matters that strike us:
- The proposal does not set the level of the rent cap nor give a sense of a formula to be used. What does this silence mean? Without these details it is hard for market participants to begin to judge the impact of the proposals on the viability of business models.
- What level and extent of evidence of local circumstances will be expected for local authorities to undertake a local rent control assessment? What would be the template or criteria that would need to be assured to make a case to Ministers and to Parliament. What is the evidence threshold? Will it be a case of local authorities having to make an argument that their local circumstances are such as to justify the imposition of rent controls? Or is it a case of demonstrating that certain nationally specified thresholds have been reached or exceeded locally?
- How will the new proposals overcome the data problems that have afflicted RPZs? Again, the proposals are silent on this – and we cannot at this stage say with any confidence how these problems will be overcome. But without fixing the issue of data on rents and market behaviour (i.e. moving beyond the overwhelming reliance on new tenancy rents and adverts) the proposal will not work.
- Certainly, the original new Deal for Tenants consultation offered the hope of extending the landlord registration system to include individual rent data, but the Government later went cold on this idea. Yet, recent discussions suggest that the issue might be being re-examined. What is the current position? We know that ONS plans to develop its new rent index which weights new and existing rents in a single index – down to broad rental market areas. Either option could help address the data gap. But both options would take time to roll out. Making progress from a standing start will take years not months. And even with this progress, there would continue to be real concerns about the large size of Scottish BRMAs.
- There will need to be a transition from the current ‘temporary’ cap to the new national system. This will be a matter of judgement and awareness of market trends regarding rents. The end result is likely to be that in some areas current controls are disapplied and there is a return to market rents, whereas in other areas controls will become more comprehensive and, potentially, bind harder. This will need to be thought through and carefully implemented.
- In capacity terms, there will need to be extensive market analysis training for councils (presumably within housing strategy teams and or private sector teams) as well as clarity over compliance and enforcement.
The Scottish Government made a bold move in 2021 in signalling its intention to move to a national system of rent control. We are now beginning to see the shape of policy emerging from an extended period of policy deliberation. This gives sector stakeholders a clear indication of the future trajectory. But as we have indicated above, a range of critical outstanding issues remain. One thing that is clear from the research literature on rent control is that these matters of detail and mechanism design can fundamentally affect the ultimate impact of the policy not only on tenants and rental affordability but on the size and shape of the sector.
Date: November 1, 2023 4:39 pm
Categorised in: Governance