David Alexander: Don’t lock market into rent control ‘straight-jacket’
David Alexander, managing director of property firm DJ Alexander, discusses the potential setbacks of introducing rent-controlled areas in Scotland.
When an economy is laid low by war, famine, pestilence or – most recently – by a global pandemic, one factor is crucial to eventual recovery: business confidence.
It is easy for governments to come up with all sorts of grandiose schemes, and even back some of them with public money, but such initiatives are usually doomed to failure, or at least go off at half-cock, without the basis of a business-friendly environment.
So wither the Scottish economy – and its recovery from the effects of Covid-19, following the deal announced last Friday between the ruling Scottish National Party and the Scottish Greens which will allow the latter a say in government for the first time anywhere in the UK?
While few would doubt the desirability of a cleaner, greener Scotland, I share the fears common among most Scottish business-owners about just how far and how quickly we should go, both of which is at odds with the Scottish Greens’ somewhat simplistic view that there need be little or no adverse effect on the manufacturing and service industries and, consequently, jobs.
Two areas of immediate concern are energy and road communications (will the deal mean cancellation of a flyover on the Edinburgh city bypass to replace the Sheriffhall roundabout, a major cause of congestion and – Greens please note – unnecessary carbon emissions?).
However, let me leave these issues to more expert minds and focus on a part of the SNP/Green deal of relevance to my own business sector – i.e. the pledge to “implement an effective national system of rent controls”.
In a way, this statement is woolly enough to be of little or no consequence yet private sector landlords – it seems for no other reason than they are private rather than public sector – are a favourite target of some Green politicians so it cannot be ignored out of hand.
However just as it’s too easy to say “public sector good, private sector bad”, I am not going to fall into the trap of damning rent controls in every circumstance. What could be workable, for example, is a light-touch system where, especially in areas of high demand, annual rental rises to sitting tenants are increased by inflation plus, say, 1% or 2% (assuming annual inflation was fairly stable and the landlord’s net rental return, after inflation, was not overtaken by swiftly rising costs).
My concern is rent controls of a more draconian nature. For example, before Covid-19 put many things on the back burner, it was being proposed that there should be a cap on all rental properties within a particular postcode. Consider the difficulties this would raise in, for example, EH1 to EH3, covering central Edinburgh, where rental accommodation ranges from studio flats to six-bedroom Georgian townhouses. Imagine trying to set up a scaled system of maximum rents for various types of property based type, square footage and location (e.g. whether it was located on Lothian Road or Heriot Row). And even if these difficulties could be overcome, the set-up cost and ongoing red tape (to government or local authorities) could itself be a barrier to implementation.
After a horrendous 15 months the rental market in central Scotland has started to bounce back but (contrary to what some believe) landlords are not making squillions. There is still a fine balance between rental income and capital growth on one side and operating costs and (increasingly so) taxation on the other. It wouldn’t take too much of a tilt in the wrong direction for many landlords to call it a day and sell up.
Some welcome this on the basis that returning rental properties to the owner-occupied sector increases stock and thus helps keep prices affordable (especially for first-time buyers). Fair enough but where does this lead those – up to 20% of the adult population - who need to rent privately either through choice or because of the shortage of public housing?
Those who wish to lock the private sector into a rent control straight-jacket – especially for ideological purposes – should remember the law of unintended consequences and be careful what they wish for.