Rent Adjudication (Temporary Modifications) (Scotland) Regulations 2024 – Business and Regulatory Impact Assessment

Rationale

The 2022 Act was introduced in response to extreme pressure on household incomes, with the Scottish Fiscal Commission (SFC) reporting a 2.5% fall in living standards in Scotland in 2022-23.^[3] There has been some improvement in various economic indicators in recent months, in particular, increases in earnings and falls in inflation.^[4] However, while the SFC expects that nominal average earnings growth in Scotland will rise by 6.6% in 2023-24 (compared to 4.5% in 2022-23), once other determinants of household income (such as taxes and transfer payments) and inflation are taken into account, they expect a further, albeit limited, fall in living standards of 0.2%. This would take the cumulative fall in living standards since 2021-22 to 2.7%, the largest reduction since Scottish records began in 1988.

The SFC expects that nominal average earnings growth in 2024-25 will slow to 3.6%, with nominal disposable household income per capita growing by a similar amount (3.5%). After taking inflation into account, this would leave living standards broadly flat (up only 0.1%) in 2024-25. Living standards are only expected to return to their 2021-22 level in 2026-27.

The position of lower-income households may be even more challenging. The Resolution Foundation expects that across the UK as a whole, after-housing-cost real incomes for poorer households will likely fall in 2024-25, in part because the impact of the uprating of benefits will be offset by the ending of targeted cost of living payments for pensioners and families on means-tested or disability benefits.^[5]

Households in the rented sectors entered the cost of living crisis in a more vulnerable position than owner occupiers.^[6] Across 2017 to 2020, the rented sectors had a higher proportion of people who were in relative poverty^[7] as well as children in relative poverty.^[8] Across 2018-2020, households in the rented sectors were also more likely to be financially vulnerable.^[9]

According to recent YouGov polling for the Scottish Government,^[10]in December 2023 private renting households continue to be more likely to report concern about paying mortgage/rent than households in all tenures,^[11] more likely than households generally to say that they are struggling at least a little to pay for household bills, including energy bills, rent and mortgage payments,^[12]and that they are managing less well financially.^[13]A majority of private renters (66%) report that their mental health had been impacted negatively by the cost of living.^[14]

A major challenge faced by households is the degree to which energy costs have risen, pushing more households into fuel poverty. Table 1 shows that the fuel poverty rate in the private rented sector is estimated to have risen by nearly 11 percentage points since 2019, prior to the cost of living crisis. Nearly half of privately renting households are estimated to be in fuel poverty, a level more than double that of owner occupiers.

As set out in Table 2, Scottish Government private rent statistics show high growth in rents across different bedroom sizes in the year to end September 2023. 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.

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.

Market expectations are that rental growth will slow over the course of 2024. For example, Zoopla expect UK rental growth on new lets at a UK level to slow from 9.7% in October 2023 (based on Zoopla data) to 5% by December 2024.^[17] Similarly, both Knight Frank^[18] and JLL^[19] expect UK rental growth of 5% in 2024. Meanwhile, the CBRE expects the annual growth on new let rents in 2024 to be 5.7% in the UK and 7.4% in Scotland.^[20]

However, even if new let rental inflation moderates from recent levels, continued growth in market rents in 2024-25 needs to be considered in the context of the period over which rents for sitting tenants have been capped. Table 6, Table 7 and Table 8^[21] below show the potential gap between the existing rent for tenants and the market rent, under different rental growth scenarios. These estimates illustrate that if market rent were the only rent adjudication criterion, some existing tenants, especially those who have been in their current tenancy throughout the period of the rent caps (which will have been in place for almost 19 months when they expire on 31 March 2024), could face excessively large increases in rents due to the rate of growth in open market rents, which could be extremely difficult for them to absorb given the ongoing pressure on household budgets.