Rent Control – Myths vs Reality

Myth 1 – Rents are out of control

Rents are categorically not out of control. If we look at the Scottish Government’s own published figures on private rents for 2-bed properties (which are the most popular rental type) we see that rents have gone up by less than the rate of inflation during those 4 years in all but two broad rental market areas. The largest dedicated survey of private tenants ever undertaken in Scotland was completed by Lettingstats in December 2014. It found that only 14% of current PRS tenants had actually experienced a rent rise during their tenancy. The study also found that 90% of tenants in Scotland had never experienced a rent rise that they felt was unreasonable.

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increased rent chart

Myth 2 – Rents force people into poverty

According to the Scottish Household Condition Survey 2013, the income profile of private renters shows a very even distribution and is remarkably similar to the income profile of those who own their homes outright. The vast majority of people in the PRS are not in poverty.

Tenure Income SHCS 2013

Myth 3 – Rent controls make economic sense

Few economists conclude that rent controls make sense. In general, rent control is not popular with economists, with the mainstream consensus that rent controls have negative impacts on market efficiency, housing allocation, new supply, social justice and housing quality. Economists have also concluded that rent controls distort the market by front loading of rents (where landlords profit in early years to compensate for losses in later years); and by dis- incentivising investment in property. Rent controls have also been found to distort the market in areas bordering the controlled area forcing up rents and reducing economic mobility.

Myth 4 – Rent controls help stop homelessness

The recently published English Housing Survey tells us that increases in rent are the least likely reason private renting tenants gave for difficulties in paying rent on time. We have no reason to believe that this is not also the case in Scotland, especially since we also know that housing in Scotland is more affordable than elsewhere in the UK . It is pleasing to see that homelessness applications in Scotland have been declining over the last 10 years, while at the same time PRS households have been doubling in number which rather suggests that the PRS is part of solution rather than part of the problem.

English Housing Survey Tenancy EndedScotland Homelessness

 

 

 

Myth 5 – Landlords are raking it in

Landlord returns depend very much on when properties were purchased and with how much debt. With the recent announcement that the UK Government is restricting the tax relief landlords can claim on property finance costs to the basic rate of income tax, there are implications for the profitability of landlords. Average flat prices in Scotland have barely appreciated since 2007 (falling in real terms) and most landlords have achieved gross initial yields of less than 6%, which still does not take account of finance, refurbishment or management costs. This suggests that most private landlords in Scotland are achieving only relatively modest returns.

real flat prices

 

Chart produced by Lettingstats derived from Registers of Scotland data

Myth 6 – Rent controls will make buying a home more affordable

In real terms, average house prices in Scotland have been declining since 2007, it is however not clear how a potentially swift drop in the overall housing market is a desirable outcome for the wider Scottish economy, existing home owners or mortgage providers. By driving landlords and investors from the market, rent controls reduce the incentive to deliver housing and increase new supply – the main factors that impinge on affordability. Rent controls are also proven to lead to greater dilapidation reducing quality in the housing stock.

Myth 7 – Rent controls are popular

Of course they are – which is why so many politicians advocate them.  Although there is an intuitive appeal, where rent controls have been imposed in many places, they have not been popular. By reducing supply, they create a two-tier rental market that is not popular with tenants outside of the privilege controlled market. Sitting tenants are also dis-incentivised to move to more appropriate locations/property due to the difficulty of finding property with equal value. This leads to greater market inefficiency in allocation.

Myth 8 – Rent controls are tried and tested in other countries

Rent controls are used in other countries but often in cities where rents are rising exponentially (unlike in Scotland). There are few examples of rent controls working across countries. In the few examples provided, such as Germany, there are radically different economic incentives and a planning system that encourages strong supply against population. It is not possible just to cherry-pick an element of one country’s system and assume that it will work benignly in yours when you do not have the same market conditions or legislative framework.