Has the attempt to regulate private residential letting worsened the problems it sought to solve? Peter Smith, partner at UK law firm Shepherd and Wedderburn, shares his thoughts.
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You don’t have to look too hard for examples of countries where systems of rent controls have been tried and found wanting.
It’s been just over a month since the Scottish Parliament approved legislation to extend the Cost of Living (Tenant Protection) (Scotland) Act 2022 from 30 September 2023 to 31 March 2024.
On the same day the extension took effect, private residential letting agents were drawing breath as Q3 2023 closed to mark yet another quarter of double-digit rent increases in a busy year for the Scottish private residential letting market.
The latest extension to what the sector has dubbed the “emergency legislation” is the last permitted by the current Act.
Introduced to protect residential tenants during the cost-of-living crisis, the legislation-imposed restrictions on evictions from residential tenancies on certain grounds and limited in-tenancy rent increases to 3%, or in some cases 6%. Between tenancies, landlords are free to increase rents to align with the market and lease to the next tenant at the higher market rate.
Above inflation rent increases
The law of unintended consequences says that actions often have unexpected effects – although for many the outcomes of the legislation were predictable.
The combination of a substantial part of the private residential housing stock becoming subject to rent controls and underlying supply constraints sent rents for available residential stock in the Scottish market soaring.
According to the most recent Citylets Report, annual rents increased 13.7% nationally in the year to Q3 2023 – well above the inflation rate experienced in the rest of the economy.
Locally, rents for one, two and three-bed properties in Aberdeen have increased by over 10% in the last 12 months.
As well as feeling the positive effects brought about by legislation, the private residential letting sector has benefited from the recent uptick in activity and confidence in the oil and gas industry, with the Q3 results being boosted particularly by letting activity during that quarter as the student population returns to the city.
Looking to the future
So, will this bubble burst?
Well, it would be reasonable to assume that once the eviction moratorium and rent controls end on 31 March 2024 that the capped rents will increase to align with the level of rents in the open market – particularly since supply constraints are likely to continue for some time due to high interest rates on buy-to-let mortgages.
However, Patrick Harvie, minister for tenant’s rights, has indicated that some form of rent control will remain in force after 31 March 2024.
While the Scottish Government have said that in the coming months there will be further announcements about the shape these controls may take, it is likely that it will introduce some measures towards implementing a national system of rent controls in Scotland by 2025.
Reflecting on this most recent – albeit (apparently) well-intentioned – attempt to regulate private residential letting which arguably worsened the problems it sought to solve, the sector will be holding its breath waiting for the next round of legislative reforms to be announced and the “unintended consequences” that might follow.
