Last week’s Programme for Government reaffirmed the Scottish Government’s commitment to introducing long-term rent controls. The pledge follows the publication of the Housing (Scotland) Bill in March 2024 which, if passed, would grant Scottish Ministers to designate ‘rent control areas’ based on recommendations from local authorities. Within these areas, increases on private tenancies could then be restricted for a fixed period.

The inclusion of rent controls in the Bill marked a significant victory for activists and Living Rent, Scotland’s tenants’ union, who have long demanded that the Scottish Government take bolder action to control soaring rents. But rent controls are not just popular among activists – they are also popular among the general public. Recent Future Economy Scotland polling with YouGov found that 82% of Scots support the Scottish Government setting caps on what private landlords can charge. This is perhaps unsurprising: since 2010, rents in Edinburgh and Glasgow have increased by over 75%. With homeownership a distant pipe dream for many young people, and social housing in short supply, growing numbers of Scots have found themselves reluctantly stuck in the private rented sector facing eye-watering rents. 

However, just because something is popular does not necessarily mean it is a good idea. Although rent controls have a long history in many countries, including in the UK, their effectiveness is hotly contested. Opponents of rent controls frequently assert that “all economists agree rent controls don’t work, and they’ve failed in every country they’ve been tried in”. But is this actually true? In reality, the evidence on the effectiveness of rent controls is far more nuanced than is often acknowledged. 

The idea that rent controls are unpopular among economists is not completely unfounded. Many undergraduate economics textbooks use rent controls as an example of why government attempts to control prices don’t work. This is typically demonstrated by referring to basic models of supply and demand. These diagrams – familiar to any first year economics student – show the relationship between the quantity of a good or service that producers wish to sell at various prices, and the quantity that consumers wish to buy. 

The price at which the supply and demand curves meet is referred to as the ‘equilibrium price’, or the price at which the quantity of goods supplied and demanded are balanced. According to this argument, rent controls will artificially reduce prices below the equilibrium price, which will reduce supply and choke off investment – leading to fewer, poorer quality homes. 

Rent controls are not the only form of price intervention that economists have railed against citing such models. Although it might sound unlikely today, many economists used the same arguments to oppose the introduction of the minimum wage. Before the minimum wage was introduced in 1999, a large majority of academic economists disapproved of the policy on the basis that it would increase unemployment. The rationale was the same: “because our supply and demand diagrams say so”. Many textbooks also continue to use the same justification to oppose the existence of trade unions, which allegedly also increase unemployment by raising wages above the ‘equilibrium price’.  

25 years later however, the empirical evidence is now unequivocal that the introduction of the minimum wage did not in fact cause unemployment to soar. Why did the economics textbooks get this wrong? The answer is that these simplistic models of supply and demand are based on the standard assumptions of neoclassical economics: that markets are perfectly competitive, and that consumers have access to perfect information. 

In practice however, labour markets are not perfectly competitive – they are characterised by various market frictions, and in practice firms often have a degree of wage setting power. As a result, the minimum wage did not increase unemployment as the textbooks predicted.

In the case of housing, the neoclassical assumptions are even more detached from reality. Housing markets are one of the least competitive types of markets there is. This is because the market for housing is in practice a market for land (i.e. locational space), which typically makes up the majority of any property’s value. Land’s unique properties – scarcity, permanence, irreproducibility, immobility – mean that the land market does not function particularly well, and is replete with market failures. Because the supply of land in any given location cannot be increased, landlords exercise monopoly power over a spatially fixed location. Information in the housing market is also highly asymmetric and imperfect. Prospective tenants do not have access to all relevant information for the property they are looking at – far less all other properties on the market. 

In other words: the textbook model of rent controls is based on assumptions that bear no resemblance to the real world. When these assumptions are altered to better reflect the real world, studies show that well-designed rent controls can be theoretically welfare enhancing. 

It is a well established principle in economics that price intervention can be justified in markets with monopoly characteristics. For example, most modern economies – including the UK – use price regulation to limit excess returns that arise in the water, energy networks and rail sectors, because it is recognised that these returns are both inefficient and unjust. To date however land – described by Winston Churchill as “by far the greatest of monopolies” – has had a free rein. The result – ballooning rents and house prices – has created an ever widening gap between those who own property, and those who do not.  

So that’s the theory, but what about the real-world evidence? Once again, the empirical evidence on rent controls is more nuanced than is often acknowledged. It is undoubtedly true that there are examples of rent controls creating negative unintended consequences in some countries. However, it is crucial to recognise that not all rent control regimes are the same. Although regimes vary widely around the world, rent controls are often placed in two distinct categories. 

So called ‘first generation’ rent controls are the most aggressive form of rent regulation. This refers to blanket nominal rent freezes that typically lead to a fall in real rents (rents adjusted for inflation) to a level that is significantly below the market rate. This is broadly the form that rent controls took in the early years of the twentieth century, including across Britain from 1915. There are some obvious problems with this approach: if landlords can’t increase the rent to recoup the cost of refurbishments (e.g. a new kitchen/bathroom), where is the incentive to improve the property? When economists and journalists say “all evidence shows rent controls don’t work”, they are most often referring to examples of first generation rent controls. 

Today however, few people advocate for a return to first generation rent controls. By contrast, advocates are generally referring to so-called ‘second generation’ rent controls. These controls tend to try and regulate rent increases, rather than the absolute level of rents. They also seek to provide mechanisms to adjust rents to reflect real costs to the landlord, such as the costs of refurbishment, changing market conditions, and cost inflation. Second generation rent controls therefore aim to protect tenants from unwarranted rent hikes without creating some of the adverse consequences associated with first generation controls. To successfully achieve this, careful policy design is crucial. Just as there is a point at which increasing the minimum wage would start to increase unemployment, there will also be a point at which stringent rent controls would start to create a shortage of rental accommodation. Rent controls should therefore be carefully designed, based on accurate data, to prevent unjustified rent hikes without significantly undermining the quality or supply of housing. 

The international empirical evidence on rent controls is mixed, and should be treated with a degree of caution. A recent comparative study by the OECD found that advanced economies without rent controls are in the minority – while 23 countries have regimes that restrict regular rent increases, only 18 countries have no form of rent control. However, the design of rent control policies varies considerably, and it is difficult to untangle their effectiveness from wider policy and regulatory factors, as well as local market dynamics. While there are examples of rent controls that have been poorly designed and short-lived, many of Scotland’s neighbours in Northern Europe have longstanding rent control policies that have stood the test of time. Similarly, numerous US cities also have rent controls which do not conform to the predictions of basic supply and demand models. In a comprehensive review of the international literature for the UK Collaborative Centre for Housing Evidence, Professor Kenneth Gibb, Dr Adriana Mihaela Soaita and Professor Alex Marshy conclude that “a combination of later generation rent stabilisation along with stronger tenancy conditions, can make a modest positive contribution”.

Many critics point to the Scottish Government’s recent experiment with the temporary rent cap as evidence that rent controls don’t work. Despite Scotland being the only part of the UK to introduce a rent cap, rents in Scotland increased faster than any other part of the UK when the cap was in place. However, Scotland’s rent cap was an example of first generation rent controls – blunt nominal freezes that were only intended to be temporary. Moreover, the rent cap included a significant loophole: it only applied to in-tenancy rent increases. This meant that many landlords sought to compensate for the rent cap by jacking up rents considerably between tenancies, which in turn pushed up nation-wide rents. Once again, this illustrates the importance of ensuring rent controls are carefully calibrated to avoid unintended consequences. 

The debate over rent controls must also recognise the enormous cost that sky-high private rents have on the public purse. Since 2010 the UK Government has spent a staggering £274bn on housing benefits – nearly half of which has been to support private renters, ultimately ending up in the pockets of private landlords. Moreover, over the past five years Scotland's local authorities have spent £720m on temporary accommodation as Scotland’s homelessness crisis has intensified. The Scottish Government also currently spends nearly £100m a year on Discretionary Housing Payments to help people who are struggling with housing costs. As such, skyrocketing private rents are not simply a financial burden for tenants – they are also increasingly a monumental drain on the public finances. 

Overall, critics are right to point out that poorly designed, blunt rent controls can be counterproductive. But as with minimum wages, it is not outwith the bounds of possibility to design tailored rent controls that can enhance the welfare of tenants while minimising adverse consequences. 

Importantly however, the Scottish Government should be cautious about trying to simply duplicate rent control regimes from other countries. As noted above, the impact of rent controls heavily depends on the wider institutional, legal and policy context, which varies considerably between countries. Cutting and pasting from elsewhere won’t work – therefore it is critical that rent controls are tailored to Scotland’s unique circumstances and needs. 

Perhaps the biggest concern voiced by critics of rent controls is that they will reduce the supply of available housing. According to economic theory, when prices are artificially held below the equilibrium market price, suppliers will respond by reducing supply. Once again however, it is important to recognise that housing is not like other goods and services. Uniquely, the vast majority (over 90%) of housing transactions take place in the second-hand market. In other words: most people buy and rent houses that already exist, not homes that are newly built. 

This is very different to goods such as food or consumer goods, where sales relate to newly produced goods. Because these goods are perishable (i.e. they get consumed), there is not a significant second hand market, any reduction in supply could lead to a serious shortage of these goods. The same cannot be said for housing, which is a long-term fixed asset. If a landlord decides to exit the buy-to-let market, the home itself does not disappear – it is physically still there. As such, rent controls cannot be said to actively reduce the overall supply of housing. However, rent controls could potentially reduce the supply of private rental housing, for example if landlords decide to sell the property to an owner-occupier or to an investor as a second/holiday home – or if they convert it to a short-term let (e.g. AirBNB). 

While this is far from guaranteed, it is a prospect the Scottish Government should take seriously. Rent controls should not be designed in a way that would make the property unviable for landlords, or risk triggering a mass sell-off. However, the Scottish Government should take preemptive measures to turn landlords exiting the market into an opportunity to scale up other tenures, as will be discussed further below. 

Moreover, although rent controls do not reduce existing supply, some critics argue that they will disincentive future new development. It has been widely reported that the Scottish Government’s plans for rent controls have dampened investor appetite in Scotland’s nascent ‘build-to-rent’ sector. These are developments that are built specifically for private rental rather than for sale, which has historically been the norm in the UK. Although common across continental Europe, built-to-rent is new in Scotland, and did not exist as recently as a decade ago – although it still remains a very small proportion of Scotland’s housing supply. 

Whether these firms would genuinely abandon their plans if rent controls were introduced, or if they are simply posturing to deter politicians from implementing them, is impossible to tell – and will likely depend on how rent controls are implemented. However, empirical evidence indicates that rent controls do not lead to a guaranteed collapse in new housebuilding. Some countries with among the largest private rented sectors have rent controls in place, and also have build-to-rent sectors. A recent paper by the Social Market Foundation concluded that “a broad analysis of controls in Europe indicates that controls do not hold back the growth of the sector.” In a review of the empirical evidence of rent controls in a number of US cities, the economist J.W. Mason concluded that:

Once again, care should be taken to strike a reasonable balance between landlords’ and tenants’ interests. Rent controls should not be designed to make renting out property entirely unprofitable. Instead, they should be designed to prevent landlords from making excess returns at the expense of tenants. Just like price controls in the water sector don’t reduce the supply of water, well-designed rent controls shouldn’t significantly reduce the supply of housing. 

However, the concerns outlined above highlight the importance of not pursuing rent controls in isolation as a cure-all policy, but rather as part of a wider package of reforms to tackle the housing crisis. 

Scotland’s housing affordability problem is longstanding and deep-rooted, and cannot be fixed overnight. However, there are a number of measures the Scottish Government could take to accompany rent controls that would maximise their effectiveness and minimise negative unintended consequences.

According to landlord lobby groups, buy-to-let landlords in Scotland have already been exiting the market in recent years following changes to taxation, the withdrawal of mortgage interest relief and rising interest rates – although government figures suggest these claims are exaggerated. In the event of any upsurge in buy-to-let sales, local authorities could be empowered to acquire properties being sold by landlords to increase the social housing stock. The Scottish Government’s National Acquisition Programme already enables councils and social landlords to purchase private sector homes, and this programme should be broadened and scaled up. Empowering local authorities in this way would ensure there is demand for new properties being put up for sale, in essence providing a floor for the market. This would not only help to increase the social housing stock, it could also save public money over the long-term. Analysis from the New Economics Foundation found that if London’s councils purchase 10,000 homes over the next 10 years, this will reduce their temporary accommodation costs by £1.5bn, reduce government housing benefit subsidies by £340m, and generate additional indirect savings of £440m over the next two decades. 

The Scottish Government could also act to give tenants a right of first refusal to buy the property if a landlord does choose to sell, as it has already done with community land ownership. As many tenants are not in a financial situation to buy a property, the Scottish Government could offer support (e.g. interest-free loans for deposits). Just as the government helped tenants of council houses purchase their homes through Right to Buy, it could also help private tenants acquire their properties from private landlords. Across the UK it is estimated that four-in-ten council homes sold under Right to Buy are now owned by private landlords, with tenants paying substantially more than they would in a council house. This could be accompanied by reforms to the planning system to prevent landlords responding to rent controls by switching use to short-term lets, and tax reforms to discourage the purchase of second homes. 

More broadly, the Scottish Government should take additional steps to increase the supply of affordable housing. Across Scotland there are currently nearly a quarter of a million people on social housing waiting lists. There is no route out of the housing affordability crisis that doesn’t involve building new social housing. This could be significantly accelerated by replacing Scotland’s reliance on the speculative model of development with a new form of public-led development. Under this approach, public authorities would be empowered to acquire land at low cost (without having to pay 'hope value'), lay down the infrastructure and grant planning permission – capturing the significant uplift in the value of land that follows for the public exchequer. This cheap land would then be used to build affordable council housing, with some sold to private house builders for homeownership. This model was used in Scotland until in the 1960s, and was incredibly effective at keeping supply up, and house prices and rents under control. This would be accompanied by a tax on the uplift in the value of land for private development, to ensure landowners are compensated equally regardless of whether land is sold for public-led or private development. 

Over the long-term, the above approaches may result in a gradual shrinkage in the private rented sector, and an increase in homeownership and social housing – and that would not be a bad thing. The private rented sector will always have a valid role to play providing accommodation for those who are seeking short-term accommodation and flexibility. However, as a means of providing affordable housing for the majority who want long-term security, stability and affordability, it is never going to be an optimal solution. 

This is because there is a fundamental tension between the logic of private landlordism and the goal of improving housing affordability. From the perspective of the owner of a buy-to-let property, the priority is for rents to be increased and yield to be maximised. From the perspective of the tenant the priority is to ensure rents are stable and affordable. It is not possible for buy-to-let landlordism to deliver inflation-busting returns while also improving housing affordability – these goals are in direct conflict with each other. The rapid expansion of buy-to-let landlordism and the current housing affordability crisis are two sides of the same coin. 

For decades the financial interests of landlords have been prioritised over the prosperity and wellbeing of tenants. This has had a significant human cost – from plummeting living standards to deteriorating mental health. There is no viable route to tackling the housing crisis that does not involve redistributive measures. Well-designed rent controls can provide some much needed breathing space for those at the sharp end of the housing crisis while other policies are implemented to tackle the root problem. 

Some critics of rent controls maintain that they are profoundly “anti-business”. However, to equate the interests of landlords with that of wider business is a fallacy.

Soaring rents are not only unfair, they are also highly inefficient – and this can negatively impact other businesses in significant ways. When tenants have to spend up to 50% of their income on rent, they have less money left over to spend on other goods and services. Money that could otherwise be spent supporting productive local businesses is instead extracted by landlords and often syphoned out the local community. In practice, soaring rents suck purchasing power and demand out of the economy, reducing consumer spending and, in turn, decreasing revenue for other businesses. This in turn means local businesses can employ less people, and pay less good wages. 

Rent is also one of the biggest costs for many businesses. When rents go up, businesses have less money available to employ staff and invest in production. In other words: what is good for landlords is not necessarily good for most other businesses. The availability of comparatively higher returns from investing in property also diverts investment away from productive and socially useful activities. Today Scotland has one of the lowest levels of investment in the OECD – a fact that is closely linked to our lagging living standards and productivity. Imagine what could be achieved if the tens of billions invested in landlordism across the UK was instead invested in productive and socially useful activity? 

Ironically, the corrosive impact of landlordism was a significant concern for the intellectual forefathers of capitalism. The early pioneers of political economy – Adam Smith, David Ricardo and John Stuart Mill – recognised that land was a free gift of nature, and considered returns earned from landlordism to be unearned – referring to these windfalls as ‘economic rent’. Today economic rents are typically defined as income not derived from work or wealth creation – but from simply owning scarce assets. As a result, so-called ‘rentiers’ get wealthier not by creating new wealth, but by making others poorer. These early pioneers of capitalism worried that the ability to extract economic rent was so powerful that landlords could effectively usurp much of the value created in an economy. It was feared that this could undermine the political legitimacy of capitalism itself, and so they sought to limit the extent to which landowners could make unearned gains at the expense of the rest of society. 

In 1848 the political economist John Stuart Mill famously remarked: 

The truth is that landlordism is an unproductive and extractive form of economic activity. It is a zero sum game: every pound earned by landlords comes directly out of the pockets of tenants. It is not wealth creation – it is wealth redistribution. The idea that measures to moderate rent increases are ‘anti-business’ couldn’t be further from the truth. In reality, unchecked soaring rents are bad for business – and bad for the economy. 

Rent controls are not the silver bullet some advocates claim. But neither will they deliver the catastrophe many of their opponents assert. Designed effectively, and coupled with a range of complementary policies, they can make a modest contribution to tackling Scotland’s housing crisis, and moving towards a more dynamic and just economy.