The Cost of Living (Tenant Protection) (Scotland) Act 2022: report -1 October to 31 December 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,^[6] and there was a further update on the economic context in the report to Parliament covering the period from 1 June 2023 to 30 September 2023.^[7] This section summarises data which has been released subsequent to those two publications. Overall, while the data provides evidence of some improvement in the economic situation, this follows a sustained period of deterioration in household finances, and economic and financial conditions remaining challenging for households in the private rented sector.

4.2 Households in the rented sector entered the cost of living crisis in a more vulnerable position than owner occupiers – across the period 2018-2020, 63% of social rented households and 40% of private rented households in Scotland were estimated to be financially vulnerable, with savings which would cover less than one month of income at the poverty line, compared to 24% of households buying with a mortgage and 9% of households owning outright.^[8]

4.3 According to recent YouGov polling for the Scottish Government, in November 2023^[9] private renting households continued to be more likely to report concern about paying mortgage/rent^[10] than households in all tenures. The proportions were 15% for private renters and 9% for all tenures, although these levels had reduced from 27% for private renters and 12% for all tenures in August 2023.

4.4 In addition, the same polling shows that private renters remain more likely than households generally to say that they are struggling at least a little^[11] to pay for household bills, including energy bills, rent and mortgage payments (65% of private renters compared to 47% of all tenures – these proportions have remained relatively steady since November 2022^[12]), and that they are managing less well financially^[13] (28% of private renters compared to 19% for all tenures). A majority of private renters (56%) report that their mental health had been impacted negatively^[14] by the cost of living.

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 number of households in fuel poverty and the fuel poverty rate respectively, while Tables 5 and 7 show the total number of households in extreme fuel poverty and extreme fuel poverty rate respectively from the October 2022‑March 2023 Ofgem price cap period to the January‑March 2024 price cap period.^[15] Similarly, Tables 2 and 4 show the change in the number of households in fuel poverty and the change in fuel poverty rate, while Tables 6 and 8 show the change in the number of households in extreme fuel poverty and the change in the extreme fuel poverty rate.

4.6 These tables show that the fuel poverty rate is expected to rise slightly to 34% in January-March 2024 when the Ofgem Energy Price Cap for the typical dual fuel household paying by direct debit rises by 5.1% to £1,928, which equates to an increase of around 20,000 households in fuel poverty relative to estimates for October-December 2023. This brings the total number of fuel poor households in Scotland to 840,000, of which 570,000 (23%) will be in extreme fuel poverty, which is an increase of around 40,000 households from October-December 2023.

4.7 While all tenure types will see an increase in both fuel poverty and extreme fuel poverty, the rates remain uneven between tenures. In January-March 2024 we estimate that 47% of households in the private rented sector and 53% of households in the social rented sector will be in fuel poverty. This represents a very slight increase of one percentage point from estimates for October-December 2023 for social rented households and an increase of less than one percentage point for PRS properties. In contrast, for January-March 2024 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. Overall, the picture shows that there has been little change in the energy cost pressures faced by privately renting households, as well as by households in other tenures, since October 2022.

4.8 Furthermore, 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 January-March 2024 rate. Similarly, in 2019 the fuel poverty rate for social rented properties was 37%, around 16 percentage points lower than what is estimated for January-March 2024, while the fuel poverty rate for households in the private rented sector was 36%, around 11 percentage points lower than what is estimated for January-March 2024. By comparison the fuel poverty rate for owner occupiers in 2019 was 17%, around 6 percentage points lower than January-March 2024.

* [low] indicates a value of less than 10,000

* Note differences may not sum due to rounding

* [low] indicates a value of less than 1 percentage point

* Note differences may not sum due to rounding

* [low] indicates a value of less than 10,000

* Note differences may not sum due to rounding

* [low] indicates a value of less than 1 percentage point

* 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 9 on the following page.

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 3.9% in November 2023, its lowest level since September 2021. The most recent Bank of England forecasts (published on 2 November 2023, prior to the most recent CPI publication) project that CPI inflation will continue to fall, reaching around 3.6% 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, and energy prices in particular, will be significantly higher than prior to the cost of living crisis. Looking over a two-year period, i.e. comparing November 2023 to November 2021, the overall CPI is 15% higher, while the CPI subindex for the category “electricity, gas and other fuels” is 48% higher. Office for National Statistics provisional estimates for inflation rates for different income groups show that, while the gap has narrowed, low-income households continue to experience higher inflation than high-income households: in September 2023 (the latest available figure for this breakdown), annual CPI inflation was 7.0% for low-income households, compared to 6.5% for high-income households, and 6.7% for all households.^[17]

4.11 For the 3-month period August-October 2023, annual growth in employees’ (seasonally adjusted) median regular^[18] pay in Great Britain was 7.3%, which, although down from the series peak of 7.9% recorded in June-August 2023, remains amongst the highest nominal growth rates since comparable records began in 2001.^[19] The growth in pay was also above CPI inflation over this three-month period, meaning that in real terms, regular pay rose by an annual 1.2%. However, increases in real regular pay in recent months follow a period of consistent falls, with real pay in August-October 2023 3.8% below the series peak recorded in March-May 2021.

4.12 Data from an alternative source (HMRC PAYE records) shows that the annual growth rate in (seasonally adjusted) median nominal pay in Scotland was 6.7% in the period September-November 2023. In real terms (adjusting using CPI), pay rose by an annual 1.6%, although again the recent improvement in real pay follows a period of significant decline; relative to the series peak in March-May 2021, real pay in September-November 2023 was 2.6% lower.

4.13 The long-lasting impact of the cost of living crisis on household living standards is also highlighted by the latest Scottish Fiscal Commission (SFC) Economic and Fiscal Forecasts released alongside the Scottish Government’s 2024-25 Budget in December 2023. The SFC note that while declining inflation combined with strong nominal earnings growth has returned real earnings to growth during 2023-24 (as illustrated above), they still expect living standards (as measured by real disposable income per person)^[20] to fall slightly (by 0.2%) in 2023-24.^[21] Taken together with the fall of 2.5% in 2022-23, the cumulative fall over the two-year period from 2021-22 to 2023-24 is 2.7%, which is the largest reduction since Scottish records began in 1998. The SFC expect that living standards will take until 2026-27 to return to their 2021-22 level.

4.14 In its recent Autumn Statement,^[22] the UK Government confirmed that it will, as per usual practice, increase working-age benefits in line with September CPI inflation, which was 6.7%. The UK government also announced that the National Living Wage will increase by 9.8% to £11.44 with the age threshold lowered from 23 to 21 years old. Local Housing Allowance rates, which have been frozen since 2020, will be restored to the 30^th percentile. Meanwhile, the Scottish Government announced in the 2024-25 Budget that all Scottish benefits will also be uprated by 6.7% in line with September 2023 CPI inflation.^[23] It should be noted that these measures will not come into effect until 1 April 2024, after the period for which the emergency measures apply.

4.15 Since the previous report to Parliament covering the period July to September 2023, there has been only one meeting of the Bank of England’s Monetary Policy Committee. At this meeting in November, the committee maintained the Bank Rate at 5.25% for the second consecutive time.

4.16 The stabilisation in Bank Rate has 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 has moderated from 6.22% at the end of July 2023 to 5.38% at the end of December 2023, which is also below its 2022 peak of 6.00% reached at the end of November 2022.^[24] However, interest rates remain much higher than their levels in the years prior to the cost of living crisis, when the two-year fixed rate, 75% LTV BTL rate averaged around 2%.

4.17 UK Finance data show that the number of buy-to-let mortgages in arrears of 2.5% or more of the outstanding balance in the UK stood at 11,540 at the end of Q3 2023, a 29% increase from the previous quarter and twice the level a year ago. UK Finance estimates that this is equivalent to 0.57% of all outstanding buy-to-let mortgages across the UK. Meanwhile, there were 450 buy-to-let possessions during Q3 2023, the same level as the previous quarter, and 13% higher than a year ago. However, across the first 3 quarters of 2023, buy-to-let mortgages taken into possession as a share of all buy-to-let mortgages (0.02%) was below the level across 2019 (0.03%), prior to the covid pandemic. This data is only available at the UK level, and given the Scottish private rented sector is estimated to constitute only around 7% of the UK private rented sector, these trends will reflect wider UK and not just Scottish trends.

4.18 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 0.8% in November 2023.

4.19 The Scottish Government published its annual private rent statistics publication in November 2023. A breakdown of rent growth by bedroom size is set out below.

4.20 Average 2-bedroom rents (the most common size) increased in all 18 Broad Rental Market Areas of Scotland compared with the previous year. Increases in 11 of these areas were above the average 12 month UK CPI inflation rate for the corresponding period of 9.0%. The increases ranged from 1.5% in Dumfries and Galloway up to 22.3% in Greater Glasgow.

4.21 Note that these statistics are based predominantly on advertised rents, and so reflect rents that landlords are charging when their properties become available for rent at the point of tenant turnover or when properties are new to the rental market. The statistics present a similar picture to letting agent rental reports, which are published more frequently and thus have been included in previous reporting to Parliament (letting agent data similarly shows trends in new lets). Given the rate of growth in new let rents, it is therefore likely that it in the absence of a rent cap some existing tenants would also be experiencing large increases in rents, although this would depend on the rent setting approach of individual landlords.

4.22 The Scottish Landlord Register provides a measure of the overall stock of privately rented properties. 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 11 shows that the overall number of registered properties across Scotland has been steady across the period January 2022 to November 2023, with the number of properties registered in September 2023 (344,590) being 1.5% higher than in August 2022 (339,632). There are however differences at the local authority level, with more rural local authorities showing a decline in private rented sector properties, whilst others are showing an increase.^[25]

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