Chris Dougray: Rent controls - solution or setback?
Chris Dougray, executive director at CBRE Scotland, provides his take on whether rent controls are a good or bad thing for the housing market.
Over the last four decades, the number of homes in Scotland has increased by 34% to 2.65m (in 2020). Within the Scottish housing market, 15% of households are in the Private Rented Sector (PRS) against 58% of households owning the property they live in and 23% renting from a council or housing association. Across the UK, PRS counts for 20% of stock - this is an increase of 14% over the past year to more than 78,000 units in the UK with almost 164,000 in the pipeline, according to the British Property Federation. PRS varies throughout Scotland with it ranging from 5% in Falkirk to 24% in the City of Edinburgh. Larger local authority areas tend to have higher rates of households in the PRS compared smaller local authorities.
But, despite this growth, the demand for PRS still outweighs the supply of rental homes and rents are rising. Add to the private Buy to Let landlords exiting the market, the cost-of-living crisis, EPC requirements and recent regulation changes in Scotland, and we have a perfect storm of conditions that has sparked debate around the pros and cons of UK-wide rent controls and whether they have a role to play in resetting the balance.
We’ve been here before; imposing rent controls on a market with a severe lack of supply only exacerbated the problem of the shrinking rental sector after WWI, deterring private landlords and forcing the Government to prolong rent controls for over 70 years. It would be naïve to ignore the lessons of the past and we must not underestimate the risk we currently face due to the lack of supply in the PRS.
Rent controls would also likely steer institutional investors away from the Build-To-Rent (BTR) sector to other markets, due to concerns that rigid rent regulation does not adapt or align to unexpected economic changes, such as high inflation, thus impacting the return on investment. Again, we should look to lessons that others have learnt here. Results from a 2019 US survey found that 34% of multifamily market participants in cities and states with rent control (or considering rent control) had already cut back on investment or development, and a further 49% were considering doing so. The maturity of the US multifamily market suggests a similar, if not bigger, impact on UK BTR investor sentiment.
Poorer living conditions are also a valid concern. Landlords are already facing rising costs to maintain their properties as inflation increases and, given the majority of the PRS is owned by private buy-to-let landlords in the UK, introducing rent controls is likely to worsen this problem, in addition to meeting likely new minimum EPC requirements; landlords will deploy less capital to their assets, leaving tenants with fewer options and poor-quality homes. Additional rent controls that narrow yields further will only discourage both private and institutional investors, especially at a time when interest rates are rising.
Although there are some short-term benefits of rent controls, it’s clear that they would not outweigh the long-term cost of supply shortages and the risk of poorly maintained stock. Implementing rent controls would risk reversing the growth of the PRS over recent years, and halt development of the emerging BTR sector, which with increased build costs is already struggling with viability.
Ultimately if the BTR sector is going to continue to grow it needs to continue to attract institutional investment and investors need predictability, and even the anticipation of future rent controls will deter investment. Once rent controls are embedded into legislation, it is very difficult to remove them, and even if they are removed, it’s likely to cause surges in rental prices as landlords reset the rent back to market levels.
The primary focus must be on fixing the chronic supply shortages, incentivising BTR investment, and reducing the barriers that exist within the planning framework. Improvement of supply is barely evident in Scotland even though there was a 9% (1,806 homes) increase in all sector houses being built between June 2021-2022; this is only 1% (220 homes) above the 21,605 homes completed in the pre-pandemic year to end June 2019. The lack of supply is only set to worsen given the budget for affordable housing in Scotland is being cut by nearly 25% in a year, dropping from £744m in 2022/23 to £567m in the next financial year. Therefore, to ensure housing security for the long term there needs to be a focus on supply, not imposing rent controls.