Scottish First Minister Nicola Sturgeon has announced a rent freeze, designed to help tenants stay on top of their finances, amid spiralling energy bills and rising prices.
The SNP, part of a coalition government, has tabled emergency legislation, effective from September 6, which stops public and private landlords raising rents until at least March 2023. It also bans evictions during this period.
This move has caused consternation among many in the mortgage industry. Although most are not anticipating similar legislative action, in England at least, there are concerns this could further undermine confidence among landlords, after a period that has seen them hit with higher taxes and increased regulation, denting profit margins in the buy-to-let sector.
Some brokers pointed out that this measure will help cash-strapped tenants. L&C Mortgages director David Hollingworth says: “A rent freeze will clearly bring significant peace of mind to tenants, reassuring them that one of their biggest, if not the biggest, outgoing will not be rising when other bills have been escalating at pace.”
He says out that provided this is a short-term move, the impact on landlords profit margins may be relatively short-lived, given most will be on fixed-rate mortgage deals.
But others say there could be longer term implications. Peak Money managing director Rhys Schofield says rent controls do not address the root cause of rising rents: the shortage of rental properties, caused by a lack of housing supply. In fact he says it might worsen this situation. “Whilst it might be a short-term vote winner to be seen as tough on landlords in the midst of a upwards surge in property prices, how does driving landlords from the industry actually help in the long term?”
Former Rics residential chairman, and a north London estate agent Jeremy Leaf says a rent freeze is a “blunt tool” that could damage the industry, unless it is a very short-term measure. It will do nothing to encourage greater supply of rental properties he says, and may result in some leaving the sector.
“Landlords have investment choices too. Contrary to popular belief, the overwhelming majority of landlords only own a few properties. In my experience, many seem to rely on rent from buy-to-lets to meet their own financial and maintenance obligations as well as to supplement pensions.”
Most brokers don’t expect a UK-wide rent freeze but there are concerns that this could lead to demand for similar action elsewhere, particularly in areas with high rental prices, such as the capital.
Private Finance technical director Chris Sykes says: “I have already heard from many landlords that they are contemplating withdrawing from the market and definitely not actively purchasing in the market especially in low-yield areas like London. “If rent controls were put in place I feel it could be the final nail in the coffin for landlords — given higher acquisition costs, higher interest rates, higher tax on rental income and no longer being able to offset interest costs.”
Other brokers agree this could lead to a stampede of landlords exiting the market. Rowley Turton director Scott Gallacher says: “Landlords are likely to exit the market rather than accept frozen rents during a period of high inflation and rising mortgage costs. This exit may be forced on some landlords if the rent no longer covers their mortgage payments as interest rates increase.”
Brokers say that this could contribute to a dip in house prices, which on the face of it might allow some renters to get a foot on the housing market. But they point out that not all renters will be in a position to buy and those with no option but to rent could find their situation more difficult with fewer choices.. Any fall in house prices might also lead to banks tightening lending criteria for FTBs and removing higher equity deals (to avoid negative equity) creating different problems for would-be purchasers.
Other brokers pointed out that a rate freeze may not only lead to reduced supply but could affect the quality of properties in the rental sector.
Permanent Wealth Partners co-founder Adam Walkom says: “Does nobody in government bother to look at history anymore? Look at New York in the 1980s and 1990s where rent controls were in place. Capping rent disincentivises landlords from investing in the upkeep of these properties. Why put more money into a property when you cannot make any more income?
“This led to a fall in the quality of properties and followed with the increased crime rates from the ‘broken window’ theory that shows a poor social environment leads to increased crime and deprivation.”
Blue Fish Mortgage Solutions owner Ross McMillan describes this emergency legislation as “ill-thought out soundbite policy”. He says legislators would be better off waiting for the details and impact of the energy price freeze.
He adds: “There can be few other professional businesses where the supplier rather than customer is legislated against in a way that sees them expected to absorb all of the cost and risks and yet – with this rent freeze – have no means to potentially pass on at least a proportion of this on to the customer, if they chose to do so.”
AndCyborg Finance chief technology officer Adam Hokser says: “The state interfering with free market price has negative consequences other than the attractive headline of keeping rents low. In the longer term, it disincentivises investment as margins dwindle, lowering the supply and making it harder to obtain a rental home. If maintained, it will make Scotland a hard place to move into and encourage the youth to move out to places with homes for them
“As Swedish professor of economics Assar Lindbeck famously said ;short of bombing, I know of no way to destroy a city that was more effective than rent control’.”