Rented sector reform: Housing (Scotland) Bill: business and regulatory impact assessment

Potential cumulative impacts of rented sector reforms

The above sections looked at the potential impact of each measure considered on its own. A further question relates to the cumulative impact of the various measures.

Within the social rented sector the proposed measures are already followed as best practice by social landlords; thus, the impact of individual measures as well as the cumulative impact of all measures on social landlords is not expected to be significant.

With respect to the PRS, there is evidence from recent research and engagement that some landlords may be considering partially or completely divesting from the sector in response to proposed regulatory changes. For example, in a qualitative study with landlords and letting agents in Scotland as part of the RentBetter project,^[129] where interviews were carried out between September 2021 and February 2022, 15 out of the 37 landlords interviewed felt that the ‘balance had tipped’ for them and they would be leaving the sector, typically over the next 2-5 years. In subsequent CaCHE research on private landlord behaviour,^[130] where the online survey was undertaken in August 2022, of the landlords from Scotland who answered the open question “What impact, if any, will the current proposals for legislative and regulatory change have on how you manage your properties?”, 75 answered with some variation of an intention to reduce their portfolio or leave the sector, although this was a minority of the 294 Scottish landlords who responded to the survey.^[131] In the BRIA engagement with business on the proposals in the Housing Bill, undertaken in November and December 2023, 26 of the 35 respondents to a question about whether they were planning to leave the PRS indicated that they intended to divest partially or fully from the sector.^[132]

There are, however, some important caveats which apply to such data. First, as is typically the case with qualitative studies, although the research design tries to reach a range of landlords, the results are not designed to be statistically representative of the PRS as a whole. In particular, those who are motivated to engage with such research may be disproportionately likely to be concerned about the proposals. Furthermore, landlord concerns may also reflect factors beyond the specific proposals from the Scottish Government. For example, landlords in the RentBetter study cited changes in financial risk associated with renting, which included regulatory-related costs, but also changes to the tax regime such as the restriction of tax relief on mortgage costs to the basic rate of tax, which is a UK Government rather than Scottish Government policy.

Finally, and most importantly, caution should be exercised when assessing whether stated intentions in surveys will translate into action. Respondents can be using their responses to signal their dissatisfaction with the proposed measures to policymakers, and they might not follow through (either completely or partially) when measures are enacted, perhaps because the changes do not have as negative an impact on them as they feared. Even if some landlords do partially or fully exit the sector, the impact on the overall size of the sector will depend on the size of this disinvestment – there is always a degree of churn, with new entrants replacing those who leave.

It is therefore instructive to look at previous periods of increased regulation. As shown in Figure 1 and discussed in the text immediately above Figure 1, there has been considerable growth in the PRS in Scotland during the last two decades, a period which has seen significant regulatory intervention (although most of this regulation has not been price related). While the SHS and SLR data show the size of the sector is somewhat below its peak, it remains significantly larger than it was in the early 2000s. There are a number of factors other than regulation which affect the size of the PRS (for example, market conditions which affect access to home ownership such as the level of house prices, mortgage interest rates and loan to value ratios, will in turn affect demand for private lets), but the data does suggest that a greater degree of regulation is compatible with a sizeable PRS.

A 2023 CaCHE literature review of the impact of regulatory reform^[133] did not identify any robust direct evidence that non-price regulation of the PRS has caused aggregate disinvestment. While the review found only one piece of research (for the Australian Housing and Urban Research Institute (AHURI))^[134] that made the direct contrary claim, i.e. that regulatory change does not cause disinvestment in the PRS, it did uncover a range of evidence regarding non-price regulatory reforms that have not been associated with aggregate disinvestment in the PRS or with other negative market outcomes; this indirectly supports the claim of the AHURI research.

As per the trends in Scotland discussed above, the CaCHE research similarly noted that the UK PRS has grown significantly in the past two decades, from 2 million households in 2000 to 4.7 million households in 2017-18, despite the introduction of a range of additional regulatory requirements. Furthermore, research into landlord behaviour and investment motivations finds that where landlords have decided disinvest from the PRS, this has been driven by personal circumstantial factors such as realising capital gains or attaining retirement age. Where policy and regulatory changes feature in landlord decision making, post-2015 tax changes are typically cited by landlords as a more prominent concern than other regulatory changes. A further CaCHE study looking at PRS landlord behaviours^[135] asked participants about the proposed regulatory changes in Scotland and the rest of the UK, as well as their intentions for the future. Those landlords planning to exit the market reported being influenced by a range of factors beyond just the proposed regulations, including their relationships with tenants, financial factors, and personal reasons.

Price regulation was introduced in Scotland in the form of a rent freeze as part of the 2022 Act. According to SLR data (noting the limitations of the data set out in footnote 6), there has in fact been a small increase (2.1%), in the number of properties on the register from 339,632 in August 2022, immediately prior to the legislation, to 346,767 in April 2024.

International evidence summarised in the section on Rent Control (and in more detail in Annex B) also shows that an appropriately designed rent control system is compatible with a sizeable PRS.

Turning to the specific concerns about the cumulative impacts of rent control and other rented sector reform measures which have been raised by current landlords and potential investors during the Scottish Government’s engagement with business, these include:

• the potential for private landlords to leave the housing market, reducing available properties for rent;
• the potential withdrawal or reduction in investment in new properties for rent;
• whether there will be sufficient capacity and resource in Rent Service Scotland and the SCTS to support new or amended requirements;
• potential cumulative costs to landlords in complying with rented sector reforms alongside other legislative changes such as moves to net zero standards; and
• concerns about the additional pressures caused to other housing and homelessness services.

In order to respond to such concerns, the approach taken in developing the various provisions in the Bill has been to build in a significant degree of flexibility and a number of safeguards to mitigate any unintended consequences. For example, with respect to evictions, there is a requirement on the Tribunal and Courts to consider all the circumstances of a case, including the detrimental effect of a delay to the enforcement of an eviction on private landlords in relation to financial hardship, health or disability. In relation to keeping pets and personalising the property, these protections include the ability for landlords to refuse a request where it is reasonable to do so, or to set reasonable conditions for approval. And in terms of concerns around resourcing, this will continue to be monitored ensuring early intervention where necessary.

There are also protections in the Bill in relation to rent control which safeguard the interests of landlords where appropriate; for example, Scottish Ministers will have the power to provide in secondary legislation for categories of property (by reference to matters including the circumstances of the landlord, the tenant or the description of the property) where a rent increase above the rent cap could be allowed or where the restrictions on rent increases would not apply

The details of any safeguards would be set out in secondary legislation to ensure that delivery and implementation of the measures is sufficiently flexible to take account of emerging issues, current market conditions and pressures. Scottish Ministers would be required to consult on proposals for safeguards to ensure transparency and allow those affected to have their views considered.

As discussed above,^[136] in the context of stakeholder feedback that uncertainty relating to the exact form that rent controls will take is causing BTR projects to stall, it should be acknowledged that there is a trade-off between having the flexibility to respond to conditions which may vary by location and over time and providing greater certainty to investors.

Overall, it is the Scottish Government’s view that the package of provisions being taken forward for rented sector reform strike a reasonable and proportionate balance between increasing protections for tenants and providing appropriate safeguards for landlords.

It is also worth noting that there is evidence that the cumulative impacts of different types of legislation can interact in positive ways and help to mitigate potential negative impacts of individual regulatory elements. A recent review of evidence on rent controls by CaCHE found that:

“while rent control might reduce the incentive for landlords to incur maintenance expenditure, it can increase the incentive for tenant self-maintenance, particularly where rent control is accompanied by strengthened security of tenure”.^[137]

When considering international evidence related to rent controls, Whitehead and Williams found that, despite mixed results internationally,

“nationwide approaches to registration, longer term and often indefinite tenancies, rent stabilisation, and improved enforcement procedures is generally seen as the better package than other options – and certainly better than unfettered market determination - both for tenants and mainstream landlords,”^[138]

but they note that much of the success of individual policies is related to policy detail, information quality and transparency related to rights and responsibilities.