Government sleight of hand on real rental costs - David Alexander

Governments and banks cannot stress too highly how important it is to control inflation. High inflation impacts wages, prices, transport costs, utility bills and causes markets and economies to race and, if left uncontrolled, to damage wealth and society.

The importance of understanding the impact of inflation on rising prices cannot be underestimated and needs to be understood in developing policy and imposing regulations.

The Scottish Government has recently published its quarterly Scottish housing market review for the third quarter of 2022 (https://www.gov.scot/publications/scottish-housing-market-review-q3-2022/pages/5/). In this report they state that “Private housing rental prices in Scotland increased by 3.6% annually to August 2022. Nominal private rental price growth had been relatively stable since June 2017, ranging between 0% and 2%, with an average of 0.9% to May 2022.”

The 3.6% annual growth in August 2022 was the second highest recorded since the index began, only surpassed by the 3.7% recorded in July 2022. But in real terms (adjusting for inflation, using the Consumer Prices Index), the annual change in August 2022 was -5.7%.

David Alexander

So, at the time the Scottish Government was thinking of freezing rents they already knew that they were falling in real terms. Equally, at the time that the paper on ‘A New Deal for Tenants’ was being devised they already knew that private rental price growth had been “stable” for many years, ranging between 0% and 2% or in other words, below or in line with inflation.

When people say that prices are rising – whether that is utilities, property rents, beer prices, the cost of the weekly shop – the scale of all increases must be viewed through the prism of inflation. Prices must rise each year to keep pace with inflation. As inflation rises so prices rise accordingly but, as we can see from the Scottish Governments’ Q3 housing review, rents have actually been falling in real terms.

Yet too many people engaged in discussing prices in the private rented sector have simply given examples of rent increases without taking into account inflation. Patrick Harvie, Scottish Minister for Zero Carbon Buildings, Active Travel and Tenants’ Rights, was recently guilty of this citing rental increases of 10,20, and 30% which is correct, if he is talking about the 11-year period cited in the ‘A New Deal for Tenants’ paper. However, inflation over the same period was just under 25% so in real terms this is a maximum increase of 5% over 11 years.

Under this logic the price of milk, petrol, a streaming service, or a suit would be the same price now as it was over a decade ago. Clearly this would never apply, and no government will be imposing a weekly shop price freeze on any supermarkets, yet this is the level of logic applied to the housing sector.

Inflation is undoubtedly a pernicious and destructive influence radically harming our lives and making our day to day living much more difficult and costly. It is imperative for all governments and financial institutions to bring it under control and anyone with sense can see that this involves restricting price rises, income increases, and helping individuals and businesses to achieve affordability through support, advice, and financial assistance.

My concern is that the current policy is the one which costs the Government as little as possible. Hence, we have private and corporate landlords, social housing landlords, housing associations, universities, the rural and agriculture communities, and Scottish land and estates footing the bill to help tenants in all these areas to cope with the current cost of living crisis. The rental sector is being hit with a windfall tax. As long as this is a short-term policy most individuals and groups in the sector will probably go along with it. If it turns into a long term, permanent situation then we may see the market respond less positively.

David Alexander is CEO of DJ Alexander Scotland Ltd