Rent Caps

Rent Capping

a VOLA position statement.

Context:

The Mayor of London, the Green Party and some renter's advocacy groups have campaigned for powers to implement strict rent controls in the capital that go beyond the provisions of the Renters Rights Act 2025 (RRA).

Under RRA, landlords are prohibited from agreeing contracts with rents above the advertised rate, and permitted afterwards to increase rents once per year to the market rate; the price that would be achieved if the property was newly advertised to let. Tenants can challenge whether an increase is at market rate through the First-tier Tribunal. Contractually defining annual rent increases to occur on an inflation-index basis is no longer permissible.

Temporary legislation was in effect in Scotland from 2022-25 capping rent increases at a maximum of 12% to help deal with a cost of living crisis, enforced by Rent Service Scotland. That has now come to an end. Views on the effectiveness and impact vary widely.

Mortgage costs are generally by far the largest expense for private rented sector (PRS) providers. Inflationary pressures and economic uncertainty led to the doubling of typical BTL mortgage rates over the course of 2022 which translated into substantial cost pressures spread over the following few years as fixed rate mortgage deals ended for large numbers of providers. That is, there has a sharp increase in the marginal cost of supply which naturally fed through market rents since 2022.

VOLA Position:

Fundamentals in economic theory imply any form of price control is only ever suitable as a temporary measure. The strains in the housing sector across all forms of tenure are structural long term issues and not temporary situations that justify temporary measures. Whatever the short term advantages, the disadvantages of rent-capping will outweigh the advantages over the medium term.

This can be readily understood through Alfred Marshall's well-respected 'Principles of Supply and Demand' which states, for the general case at equilibrium, Market Price must be equal to the Marginal Cost of Supply. That is, supply will naturally expand or contract to meet the point where adding one more unit than is supplied makes no supplier any profit. Thus, if the market price is artificially restrained through rent-capping for any extended period, PRS supply will certainly contract as a consequence; worsening rental availability, worsening homelessness.

Some commentators have observed that the overall number of existing homes will not reduce if PRS shrinks, it only implies a portion of both supply and demand transferring to the owner-occupied sector. They assume the balance within the remaining PRS will not be affected. That

analysis is deeply flawed as it ignores two crucial factors:

1. Average occupancy levels are higher in PRS than for owner-occupier housing stock. When renting privately, householders rarely occupy a home with more rooms than they need in the present, but householders will buy bigger for anticipated future needs if they can afford to. As housing stock shifts from PRS to owner-occupiers, overall occupancy levels can be expected to fall, and homelessness rise.

2. The PRS market is tiered. The relative size of each tier varies area to area, but for illustrative purposes here, it can be that 50% of PRS stock (of any given size) is presented as mid-market offering in terms of rent and standard, 20% as premium and 30% as budget. As the PRS shrinks, stock will be lost disproportionately from the budget tier, and renters lost disproportionately from the premium tier. The market will become more homogenised around a median price point.

Without a corresponding increase in the availability of social housing, PRS shrinkage whether driven by rent-capping or other factors will negatively impact private renters on the tightest budgets most.

Furthermore, price constraints impact on investment, particularly in the premium tier. This is an important part of the mechanism that drives improvement in standards over the medium to long term. Improvements introduced to attract renters with the biggest budgets become the new norms over time through competition. Properties of mid-market standard become the norm in the budget sector. The lowest standard properties periodically get complete renovations and come back to market in premium or mid-market positions. It's an ongoing improvement process driven naturally by market forces. Any constraints on rents in the premium tier will act to slow investment and the general rate of improvement in standards across the whole of the PRS.

References and Useful Links:

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Document History:

• Version: 0.1.1

• Authored by: S.Fletcher

• Approved by VOLA Board on: <this is a draft version>