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

Annex C. Methodology for calculating foregone rent for private landlords from rent controls

In the discussion of the cost of rent controls to private landlords (see section on Foregone Rent), illustrative calculations of the impact different rent caps would have had on historic rental growth were set out in Table 21 and Table 22, based on the historic 5-year period when rental growth was highest in each BRMA (see Table 20). This Annex sets out the details of the calculations. Table 34 and Table 35 begin by showing the average rents for 2-bedroom properties, the most common size of property in the PRS, and Table 36 and Table 37 their annual growth rates, for the period that is covered by the Scottish Government private rent statistics publication.

Source: Private Sector Rent Statistics, Scotland, 2010 to 2023.

Source: Private Sector Rent Statistics, Scotland, 2010 to 2023.

Source: Private Sector Rent Statistics, Scotland, 2010 to 2023.

Example calculation – impact of a 4% rent cap on 2-bedroom property rents in Aberdeen and Shire BRMA over the period 2011-15

A worked example is given for the Aberdeen and Shire BRMA. The impact of different rent caps is illustrated for the five-year period when the cumulative increase in market rents was the greatest for each BRMA: for the Aberdeen and Shire BRMA this was the five years to 2015, with rents in 2015 36% above their level in 2010. (Table 21 and Table 22 also show the impact of other illustrative rent caps).

Table 38 sets out the details of the calculation. In the first year of the period (2011) the increase in market rents is compared to the cap, which is set at 4% in this example. Since the market increase was 4.4%, the increase is instead constrained to 4%, resulting in a capped rent of £668. In 2012, it is assumed that if unconstrained, the rent would return from its capped level in 2011 (£668) to the market level in 2012 (£701),^[185] which would result in an increase of 5.0%. Since this above the rent cap of 4%, the rent cap continues to bind, and the rent instead rises by 4% from £668 to in 2011 to £695 in 2012. A similar calculation is repeated for each of the following years.

It should be noted that due to the cap suppressing rents below their market level in prior years, the rent cap can continue to bind even in years when the increase in market rents (assuming a rent cap had never been applied) was below the level of the rent cap. So for example, in 2015 the market rent in the Aberdeen and Shire BRMA fell by 2.7%. However, if there had been a 4% rent cap in previous years, the level of the rent in 2014 would have been £752 instead of the market level of £898. If the cap had ended in 2015, rents would have risen from £752 to £874, an increase of 16.2%. Therefore if the rent cap had continued into 2015, rents would instead have risen by 4% to £782.

In order to show the impact of these historic examples of rent caps in today’s prices, the foregone rent is adjusted using CPI to express values in 2023 prices. This also facilitates comparison across different BRMAs in Table 21 and Table 22 since the 5-year period when the cumulative rental increase was highest occurred in differing periods across the BRMAs. For the example set out in this Annex of a 4% rent cap in the Aberdeen and Shire BRMA over the 2011-2015 period, the average foregone rent in real terms (2023 prices) of £91 calculated in Table 39 is the figure which is used in Table 21, while the average foregone rent as a % of average market rent in real terms of 8.5% in Table 39 is the figure which is used in Table 22. The remaining figures in Table 21 and Table 22 for other rent cap levels and other BRMAs are calculated in a similar manner.