This is going to fundamentally alter the market balance there and could have a devastating impact on the already dwindling supply of properties available to tenants.
Earlier this month, the Scottish Government announced it would be introducing an immediate rent freeze for all private and social tenants which will last until at least the end of March next year.
The implications for Scottish landlords, and indeed their tenants over the longer term, are going to be huge. Landlord Associations have already, I’m told, been inundated with communications from their members who no doubt want clarification on this, but who are also suggesting their ability to continue functioning within the sector is now over.
Early days for legislation
The detail around this policy remains to be seen, and I will be intrigued to see how the Scottish Government polices this, but any thought of issuing an immediate rise in rents to cover increased landlord costs over this initial seven-month period looks futile. The policy will backdate this measure to the 6 September even though the emergency legislation required to enact the policy has yet to be brought forward.
So, how to view this? Firstly, I understand that the cost of living crisis is a huge issue for everyone, including tenants. Rents have risen but is the Scottish Government really understanding here, why this is the case?
What this measure effectively does is tell the owner of an asset – the property – how much they should be able to charge in rent, and that they are not allowed to move this rent upwards, regardless of any increase in costs they might have to stomach over the next seven months.
Rent rise ban
So, if a landlord’s mortgage payments rise during that time, rents can’t be raised to cover it. I’m sure we’re all acutely aware of how many landlord borrowers will have products maturing over the next six or so months – the likelihood is that they will be paying higher rates, meaning higher payments.
Even with wider intervention to freeze energy bills, these will also be rising. HMO landlords in Scotland, for example, who include bills within the monthly rent will not be able to raise rents to cover those increases.
So, what this policy does is effectively try to solve the problem, not the symptom. The market determines rents – why have rents risen recently? It’s because we have less supply of rental properties and a considerable amount of demand. Why do we not have enough supply within the PRS? Well, Governments have enacted policies which were fully designed to move properties out of the PRS into owner-occupation.
They have made it harder to be a landlord by increasing their tax burden and this rent freeze looks suspiciously like another nail in the coffin, which will see leave many landlords wondering what their next step is. If your costs outweigh what you can recoup in rent, why continue to be active in the PRS?
Bob Young’s infinite wisdom
A wise man – former chief executive of this parish, Bob Young – once told me that any kind of rental freeze or cap would be an utter disaster for the PRS, and the UK had its very own historical precedent to draw upon to see this in full effect.
Admittedly, the 1974 Rent Act went rather further than a freeze, putting in place a ‘fair rent’ not just a cap, but this was – like the Scottish Government’s decision here – effectively enacting an artificially-set rent which had a pretty devastating impact on the number of homes available to rent through the PRS. The number fell through the floor.
In effect, the Scottish Government is setting up tenants for more problems down the road. Further supply will be drawn out of the market over this period, with the likelihood that when the rent freeze ends, not only will rents be up because of falling supply, but they will also be raised by those landlords who have stayed the course but need to recoup the extra costs they have endured over that period.
To be ‘successful’, this is a rent freeze that will have to remain in perpetuity. The irony being that the longer it is in place, the more damage it will cause to a PRS which, lest we forget, provides homes for 38 per cent of all households north of the border. This is a policy which is likely to be hugely damaging to both landlords and tenants. I hope I am wrong, but fear I’m not.
