Rent Controls in Scotland: Balancing Affordability and Housing Supply

In September 2024, Scottish First Minister John Swinney announced the government’s commitment to rent controls as part of the Housing (Scotland) Bill. This initiative forms part of a broader Programme for Government, which aims to address housing affordability while driving sustainable economic growth. However, the proposal to introduce rent controls has sparked a heated debate. While the government aims to protect tenants, housing industry experts have voiced concerns about the potential negative impact on housing supply and the private rented sector (PRS).

This case study examines the effects of rent control policies on Scotland's housing market, the balance between economic growth and housing policy, and the potential long-term consequences of the proposed Housing (Scotland) Bill.

Scotland has faced a growing housing crisis in recent years, with rapidly increasing rents, particularly in urban areas such as Edinburgh and Glasgow. These market pressures have been exacerbated by inflation, a limited supply of rental properties, and stagnant wage growth. In response, the Scottish Government has proposed granting local authorities the power to cap rent increases as part of the Housing (Scotland) Bill.

Key government objectives include:

• Stabilising rents and providing tenants with greater financial security
• Encouraging investment in the private rented sector
• Balancing affordable housing development with sustainability and economic growth

Challenges Identified by Propertymark and Other Stakeholders

Industry experts, including Propertymark, have raised significant concerns about the potential consequences of rent controls. Their key arguments include:

1. Reduced Housing Supply:
   • Rent controls may disincentivise landlords from remaining in the private rented sector. As landlords face restrictions on rental income, many may choose to sell their properties, reducing the supply of rental homes in the market.
   • A smaller rental market could lead to increased competition among tenants, pushing rents higher in properties not subject to controls.
2. Impact on Future Investment:
   • Developers and investors may perceive rent controls as an added regulatory burden, reducing the attractiveness of investing in Scotland’s housing market. This could result in fewer new housing developments, particularly in the private sector, exacerbating housing shortages.
   • Scotland’s reliance on private investment to meet housing demand, particularly in urban areas, would likely suffer if developers retreat due to financial concerns.
3. Rising Rents and Market Instability:
   • Research conducted in 2023 indicated that the anticipation of rent controls had already driven rent increases, with the average rent for a two-bedroom property surging by over 14%. Landlords are raising rents pre-emptively to cover future costs, undermining the policy’s goal of rent stability.

Government Commitments to Affordable Housing

Despite concerns over rent controls, the Scottish Government has outlined significant investments to alleviate the housing crisis:

• £600 million for affordable housing
• £40 million for repurposing vacant properties, including reforms to compulsory purchase rules
• 2,800 mid-market rent homes funded by £100 million

These measures aim to increase housing availability and provide more affordable options for residents who do not qualify for social housing but struggle to afford private rents.

The Economic Vision: A Balancing Act

The Scottish Government’s broader Programme for Government seeks to foster economic growth, housing development, and sustainability. However, the introduction of rent controls may create tension between these objectives. While housing affordability is a key priority, the risk of shrinking private investment and reduced housing supply could slow down the government’s ambitious plans for economic growth.

Key conflicts identified include:

• Housing Supply vs. Affordability: Rent controls could drive landlords out of the market, reducing housing availability. As supply decreases, competition for rental properties may intensify, driving rents higher rather than lower.
• Investment vs. Regulation: Private investors may avoid the Scottish housing market due to increased regulation, reducing the capital needed to build new homes. This could lead to a stagnation in new housing developments and the potential failure to meet housing targets.

International examples of rent controls, such as in New York and Berlin, provide cautionary tales. In Berlin, rent controls led to a significant reduction in the availability of rental properties and encouraged landlords to withdraw homes from the market. Many properties were left vacant, and new developments slowed, which resulted in higher rents for available homes and reduced housing quality.

Similar trends may emerge in Scotland, as landlords react to restrictive legislation by reducing their portfolios or choosing not to invest in property maintenance. Tenants may be forced into more competitive housing markets, and rent caps could lead to unintended increases in rental prices for non-controlled properties.

Conclusion: Navigating the Road Ahead

The Scottish Government’s introduction of rent controls reflects a desire to protect tenants, but the potential risks to housing supply and market stability are significant. Policymakers face the challenge of balancing tenant protections with the need to maintain a healthy, functioning housing market. The risk of reduced investment in the PRS, alongside shrinking housing availability, could ultimately exacerbate the housing crisis the government is seeking to solve.

For rent control measures to be successful, they must be carefully designed and complemented by policies that encourage new housing developments, both in the private and affordable housing sectors. The Scottish Government’s investment in affordable housing is a positive step, but without careful management of the PRS, the benefits could be overshadowed by unintended consequences. In striking the right balance, Scotland can move towards a more sustainable housing future that addresses both tenant security and housing market stability.

Key Takeaways

• Rent controls are intended to stabilise rents, but they may reduce housing supply and investment.
• Property sector experts warn that rent controls could lead to unintended increases in rents and market instability.
• Government investments in affordable housing are essential but must be accompanied by policies that maintain private investment in housing.
• International examples of rent controls, such as Berlin, suggest caution, as similar measures have led to reduced housing availability and increased rents.

Written By.

Harsh Mayavanshi
Business Development
Email: harsh@peaksons.co.uk
Peaksons Properties Limited
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