In his regular Mortgage Solutions column, Paragon's Managing Director for Mortgages, Richard Rowntree, explains how rent controls announced by Scottish First Minister, Nicola Sturgeon, could exacerbate the shortage of rental properties in Scotland. Read the article here.

When a good or service becomes scarce and its demand in the ascendency, simple supply and demand means the price will go up. Is the solution to that problem to further restrict supply? Most sensible economists will tell you no.

Well, that is exactly what Nicola Sturgeon’s rent controls will do to Scotland’s private rented sector (PRS) where some landlords have already said that placing a ceiling on rents will simply force them to sell up, buy elsewhere or switch into the more lucrative short-term holiday lets market.

This is set to exacerbate an already under strain rental market with students one example of how a further limit of supply ultimately effects renters. Since the emergency legislation was announced by the SNP, it has been reported that universities have advised students to withdraw or suspend their studies in the face of what Glasgow University labelled ‘accommodation challenges’ as a result of a ‘contraction in the rental market’.

If we look south of the border, we see examples of a counter-productive rise in average rents as a result of Government intervention aimed at curbing the PRS.

London, where rent controls have been proposed by Mayor Sadiq Khan, has seen a decline in the number of new properties coming into the rental market since 2016, when the Government implemented a 3% Stamp Duty surcharge.

The number of new buy-to-let homes purchased in London was 58% lower in 2019 than in 2015, the final year before the surcharge was introduced.

And what about existing landlords? Well, the evidence suggests that many have sold up in London or have transitioned across to Airbnb.

Data recently released by Hamptons highlights how so far this year one in six home sales were rental properties, rising to one in five in the capital.

Further research suggests that rental properties are not being purchased by other landlords and retained within the PRS. Figures from Zoopla show that the average lettings inventory of London lettings agents has more than halved since 2016. Propertymark agents’ data showed the availability of rental stock in London has fallen by 71% in 12 months, with an average of just four rental properties available per agent.

As a result, rents are rising – Hometrack’s latest rental market report revealed the capital’s staggering year on year increase of almost 18%.

With housing costs representing most people’s largest monthly outgoing, the need to limit any increase is clear but we should also remember that landlords are subject to the same price hikes for food, fuel and energy as the rest of us.

On top of this, labour and materials shortages now mean it is more costly to maintain properties, something that landlords not only have reduced means to do but also less incentive if rent isn’t able to reflect an improvement in quality – again, at the detriment of renters.

And, while it is true that rising interest rates won’t impact those landlords who have fixed rate mortgages, increases to the cost of funding mean that these are nowhere near as cheap as they would have been for those lucky enough to lock in one of the historically low rates seen during the height on the pandemic.

In addition, we know that incidences of ‘payment shock’ have increased this year after changes in Government policy in 2017 (see a pattern emerging here?!) encouraged a shift in popularity from fixing over two years to doing so over five years, with those five-year mortgages now having matured.

This highlights how if we are to solve the UK’s housing shortages, Governments must look beyond the next election and consider the long-term and broader implications of policies.

Richard Rowntree
Managing Director for Mortgages