The Cost of Living (Tenant Protection) (Scotland) Act 2022: report to the Scottish Parliament - 1 June to 30 September 2023

4. Updated Economic Context

4.1 The Statement of Reasons which accompanied the proposal for a second extension of the Cost of Living (Tenant Protection) Act, published on 1 June 2023, provided an updated economic context and Business and Regulatory Impact Assessment.^[7] This section summarises data which has been released subsequent to that Statement of Reasons. Overall, while some of the data suggests that the economic situation might be beginning to stabilise, there has as yet been no significant improvement following a sustained period of deterioration in household finances.

4.2 The latest Understanding Scotland: Economy report carried out in August 2023^[8] found that around six in ten (58%) Scots surveyed believe that their own personal financial situation has worsened in the last 12 months, only slightly down from 63% in February 2023 and 60% in May 2023.

4.3 According to recent YouGov polling for the Scottish Government, in August 2023^[9] private renting households continued to report higher levels of concern about paying mortgage/rent^[10] than households in all tenures: the proportions were 27% for private renters and 12% for all tenures.

4.4 In addition, in August 2023 private renters remained more likely than households generally to say that they were struggling at least a little^[11] to pay for household bills, including energy bills, rent and mortgage payments (65% of private renters compared to 50% of all tenures – these proportions have remained relatively steady since November 2022^[12]), and that they were managing less well financially^[13] (35% of private renters compared to 22% for all tenures). In August 2023, a majority of private renters (57%) reported that their mental health had been impacted negatively^[14] by the cost of living, broadly similar to the figure of 63% recorded in March 2023.

4.5 A major challenge faced by households is the degree to which energy costs have risen, pushing more households into fuel poverty. Tables 1 and 3 show the change in the fuel poverty and extreme fuel poverty rates respectively, while Tables 2 and 4 show the change in the total number of households in fuel and extreme fuel poverty respectively between October 2022-March 2023 and October-December 2023.^[15]

4.6 These tables show that the fuel poverty rate is expected to fall slightly to 33% in October-December 2023 when the Ofgem Energy Price Cap falls to £1,923. This will result in a decrease of around 20,000 fuel poor households compared to July-September 2023, bringing the total number of households in fuel poverty in Scotland to 830,000, of which 530,000 (21%) will be in extreme fuel poverty. This is a decrease of around 50,000 households in extreme fuel poverty compared to July-September 2023.

4.7 While all tenure types will see a decrease in both fuel and extreme fuel poverty, the rates remain uneven between tenures. In October-December 2023 we estimate that 46% of households in the private rented sector and 52% of households in the social rented sector will be in fuel poverty. These represent very slight decreases of one percentage point from estimates for October 2022-March 2023 for both tenures. However, for October-December 2023 we estimate that 23% of owner occupied households will be in fuel poverty, meaning that the overall trend of social and private renters having higher rates of fuel poverty remains. This shows that there has been little change in the pressures faced by households in all tenures since October 2022.

4.8 As a result, fuel poverty rates remain significantly higher than before the cost of living crisis. In 2019 the national fuel poverty rate was 24.6%, around 9 percentage points lower than the estimated October-December 2023 rate. Similarly, in 2019 the fuel poverty rate for social rented properties was 37%, around 15 percentage points lower than October-December 2023, while the fuel poverty rate for households in the private rented sector was 36%, around 10 percentage points lower than October-December 2023. By comparison the fuel poverty rate for owner occupiers in 2019 was 17%, around 6 percentage points lower than October-December 2023.

* Note differences may not sum due to rounding

* [low] indicates a value of less than 1%

* Note differences may not sum due to rounding

* Note differences may not sum due to rounding

* Note differences may not sum due to rounding

4.9 The tables above on fuel poverty assume different mitigation packages to reflect the change in mitigations announced by the UK Government and Scottish Government. These are outlined in Table 5.

4.10 Annual Consumer Price Index (CPI) inflation, which reached a peak of 11.1% in October 2022 (its highest rate since 1981), has subsequently moderated, falling to 6.7% in August 2023, its lowest level since February 2022. One of the key reasons for this is that previous very large increases in energy prices are now in the baseline: as a result, annual inflation for the category "electricity, gas and other fuels", which reached 89.7% in October 2022, has fallen significantly to stand at 5.3% in August 2023. The most recent Bank of England forecasts (published on 3 August 2023) projects that CPI inflation will continue to fall, reaching around 5% in Q4 2023, 4% in Q1 2024 and then 3% in Q2 2024, although this remains above the 2% inflation target.^[16] Furthermore, even if the inflation rate (the change in prices) moderates, the level of prices, in particular energy prices, will be significantly higher than prior to the cost of living crisis. For example, in August 2023 the CPI subindex for the category "electricity, gas and other fuels" was 56% above its level in March 2022. Office for National Statistics provisional estimates for inflation rates for different income groups show that annual CPI inflation was higher for low-income households (8.4% in June 2023, the latest available figure for this breakdown), than for high-income households (7.7%) and all households (7.9%).^[17]

4.11 For the 3-month period May-July 2023, annual growth in employees' median seasonally adjusted regular^[18] pay in Great Britain was 7.8%, the highest figure since comparable records began in 2001.^[19] However, this was approximately in line with annual CPI inflation over this three-month period, meaning that regular real pay was unchanged over the year. Furthermore, this follows a period of consistent falls in regular real pay, with the last annual increase recorded in August-October 2021. As a result, regular real pay in May-July 2023 was 3.3% below its level in August-October 2021. Based on data from HMRC PAYE records, the annual growth rate in median (seasonally adjusted) nominal pay in Scotland was 8.1% in the period June-August 2023. In real terms (adjusting using CPI), pay rose by an annual 0.9%, although again the recent stabilisation in real pay follows a period of significant decline which began in early 2022; relative to the period December 2021- February 2022, real pay in June-August 2023 was 3.4% lower.

4.12 While the decision by the UK government to uprate reserved disability and low-income benefits by 10.1% (the inflation rate in September 2022) in 2023-24 will compensate benefit clients for the exceptionally high rate of inflation in 2022-23, they again face elevated inflation in 2023-24. Furthermore, the UK Government has frozen Local Housing Allowance (LHA) rates, which apply in the private rented sector, at 2020 levels for the third year running.

4.13 Since the publication of the Statement of Reasons for the second extension at the beginning of June 2023, the Bank of England's Monetary Policy Committee increased Bank Rate by 50 basis points at its June meeting and by 25 basis points at its August meeting, taking Bank Rate to 5.25%. However, at its September meeting, the Committee decided to leave Bank Rate unchanged, ending a sequence of 14 consecutive increases in Bank Rate which began in December 2021 when Bank Rate was 0.1%.

4.14 The increases in Bank Rate in June and August have been reflected in mortgage rates, with Bank of England data showing that the average quoted two-year fixed rate, 75% loan to value (LTV) Buy-to-Let (BTL) mortgage rate increased from 4.78% in May 2023 to 6.23% in July, before falling to 6.10% in August (the latest available figure for this dataset; this dataset therefore does not yet reflect any impact from the decision to hold Bank Rate steady in September).^[20] However, this is similar to the level of mortgage rates experienced towards the end of 2022, following the UK Government's mini-budget in September 2022.^[21]

4.15 Increases in mortgage rates are likely to have contributed to the increase in BTL mortgages in arrears: UK Finance data show that the share of all outstanding BTL mortgages in the UK with arrears of more than 1.5% of the outstanding balance has risen from 0.37% in Q2 2022 to 0.68% in Q2 2023, the highest level since 2013.^[22] Landlords in Scotland who have experienced an increase in mortgage rates who have an existing tenant are able to apply for a rent increase on the alternative ground of prescribed property costs, which has a higher cap of 6%; if their tenant has moved, they are able to set the rent for a new tenant to the market level. It is also worth noting that the absence of restrictions on rent increases would not protect those landlords who are particularly exposed to interest-rate risk – such landlords still need to compete with other landlords who are not subject to the same financing costs,^[23] and the impact of the cost of living crisis on tenant finances restricts the ability of landlords to pass on financing costs. This is illustrated by the fact that the increase in arrears is a UK-wide phenomenon.^[24] As yet, there has been no significant increase in repossessions: according to UK Finance data, the share of BTL properties taken into possession as a share of all BTL mortgages in the UK has been around 0.02% over the period from Q3 2022 to Q2 2023, about half the level (0.04%) recorded in Q3 2019 prior to the pandemic.

4.16 In terms of available data on other costs faced by landlords, the CPI category relating to regular maintenance and repair of a dwelling shows that annual inflation for this category has moderated from 7.5% in September 2022 to 2.7% in August 2023.

4.17 Latest data from letting agents^[25] shows continuing high growth in new let rental prices in Scotland, although similarly high rental inflation is evident in other parts of the UK where rent restrictions do not apply. Citylets data^[26] shows an increase of 11.4% in Scotland in Q2 2023; Rightmove data^[27] for the same quarter shows an annual increase of 13.7% in Scotland, with London showing the same growth rate while the national average excluding Greater London shows a 9.3% increase; Zoopla^[28] reported an increase of 12.7% in Scotland in July 2023, as compared with 12.4% in London and 10.5% in the UK as a whole; and HomeLet^[29] reported a 14.4% increase in Scotland in August 2023, as compared to 13.0% in Greater London and 10.3% for the UK as whole. In the rest of the UK, therefore, new tenants are also exposed to approximately double-digit rent increases while existing tenants are not protected as in Scotland.

4.18 As has been set out in previous reporting, official statistics on the size of the private rented sector based on the annual Scottish Household Survey estimates have been affected by the impact of the Covid pandemic on the operation of the survey. Therefore, the most comprehensive up-to-date measure of the overall stock of privately rented properties is the number of properties registered on the Scottish Landlord Register. There are some limitations of this data source, such as the fact that registrations last for a period of three years and there could be a time lag in landlords de-registering properties which are no longer available for rent. Also in the case of any landlords looking to leave the sector or reduce their portfolio, it should also be recognised that the process could take several months from freeing up properties to completing sales. Nevertheless, subject to these limitations, Table 6 shows that the number of registered properties has been steady across the period January 2022 to September 2023, with the number of properties registered in September 2023 (343,635) being 1.2% higher than in August 2022 (339,632).

Source: Scottish Landlord Registration System monthly monitoring figures. Note that May-23 figures were based on a snapshot taken on 6 June 2023