Unpacking Rent Pressure Zones

by Ken Gibb

Scotland recently broke ranks with the rest of the UK over private renting by introducing a new standard tenancy which will mandate the grounds by which a landlord can end a tenancy; otherwise they are open-ended and average tenancy lengths are expected to lengthen.  While some see this as a revolution in the rental market; others are more sceptical. It certainly has been the case in recent years that average length of tenancies had been growing under the old rules, as well as evidence that  more families are letting in the market. At the same time, others remain to be convinced by the new legislation. The new law is less than 6 months old and credible evaluation will take some time to surface and perhaps resolve these disagreements.

Alongside the tenancy reforms sit a new form of second degree rent controls in the shape of rent increase limitations in what are called local rent pressure zones, designated and applied for by local authorities. These are approved by the Scottish Government on the basis that the councils in question provide credible evidence that there is a clear case for such limitation to stop excessive rent increases. It is worth noting two or three things: the proposed limitations do not interfere with the initial rent setting that takes place at the beginning of a tenancy (they are not controlled) and any subsequent limitations will be capped but above the rate of inflation (a minimum of CPI & 1% for up to five years). These new proposals are, all in all, relatively modest.

For me, the most important issue is what the Scottish Government requires in terms of  credible and legitimate evidence from the council in question? Helpfully, the Scottish Government published a document which sets this out and I have just got round to reading it.

The first thing one is struck by in the guidance is that the evidence demands on a council are substantial. The early perception that many councils would be seeking such RPZs is clearly a misjudgement.  Paragraph 7 of the document says: Evidence of rent rises alone will not be sufficient to prove that they are rising by too much. Authorities also need to prove that rent rises in the proposed RPZ are causing undue hardship to tenants; and the rises are having a detrimental effect on the local authority’s broader housing system.

The cap only applies to tenants operating under the new tenancy in the designated geography of the RPZ. The guidance says that such a zone may be at different geographies such as a street, post code sector or data zone (but not necessarily a broad rental market area, as one might have intuitively expected). The guidance argues (para 18) that the provisions are intended to be used by a local authority to deal with excessively rapidly rising rents and where the Scottish Government consider that rents are rising too much, they are causing undue hardship to tenants, and, the council is coming under increasing pressure to provide housing  or subsidise the cost of housing as a consequence of rising rents (the Scottish Government expects the council to have plans to increasing housing supply and to link these to their RPZ application).

This is expected to be a transparent process where councils must publish their case and their evidence for RPZ designation. The guidance says (para 23): ‘the evidence will be a mixture of quantitative analysis e.g. statistics which demonstrate rent increases and qualitative analysis e.g. consultation with tenants. Councils will have to gather specific/ new evidence themselves where they do not hold this information already or where national data collections do not provide the level of detail required for an application. As such, councils might consider contracting with a third party with statistical and research expertise’.

Annex 1 of the guidance (criterion 3-5) sets out what is expected: a profile of the stock, time series evidence of rent increases, sample information and clarity over analytical methods, data from existing tenants, evidence that they are experiencing hardship, evidence that this rent pressure has increased pressure to expand supply and deliver more subsidy.

It would seem likely that the extent of evidence required will deter councils from making multiple applications and so the geographies may be comparatively wide. Second, it will take time for the new tenancies to generate the evidence required so do not expect RPZ applications immediately.

So, is this a modest proposal that sends a signal that may give tenants some comfort (and indeed landlords since they would have certainty about greater than CPI rent increases and can still set market rents initially); or might it be the thin end of the wedge that opens the door to greater levels of intervention?  I think it will be some time before we can assess the impact of RPZs.  Moreover, I think we need to place these reforms in a wider context of policy change for the private rented sector which go in different directions. These would include the adverse tax changes on landlords via LBTT, capital gains taxation and the tax relief available on borrowing, as well as the ongoing welfare impacts of the LHA cap and the treatment of younger single people (i.e. the single room rate). There is also the rental income guarantee pilot to encourage build to rent in Scotland.

And of course, the rental market is actually a series of more or less separate market segments on both sides of the market. We need to think through how these policy changes affect the different segments and the sector as a whole. Returning to the overall assessment of these interventions – rigorous analysis will have to both disaggregate the combined effects of these policies over time and ascertain their impacts across the multiple segments of the modern private rented sector –prs 1). All in all, we should be cautious about early evaluations telling us conclusively that the new system works or does not work later this year or even next.