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Executive Summary
Introduction
Changes in legislation, finance, the supply of property and the level and nature of demand for housing have led to a revival of the private rented sector ( PRS) in Scotland over the last decade. The PRS is now playing an increasingly important role in the housing market. This change has occurred at a time when there have been a number of important regulatory and policy developments. These have aimed to provide better safeguards for tenants, whilst avoiding excessive regulation which might discourage responsible private landlords.
With these policy, market and regulatory changes in place, it is an appropriate time to look in depth at the views and experiences within the sector, in order to inform future policy development. This review of the private rented sector was launched in 2007 by the Scottish Government's discussion document Firm Foundations: The Future of Housing In Scotland.
The review had three main aims: to undertake a general stock take of the sector and provide a detailed primary evidence base on the sector's circumstances in Scotland; to look at the role of the sector in housing low-income families and individuals on benefits, including those presenting as homeless; and to consider good practice in relation to strategic and operational engagement between local authorities and the private rented sector.
A range of analytical work was undertaken by Scottish Government analysts for the review and additional research and analysis was commissioned from a range of experts in the university and commercial sectors. The full Key Findings and Policy Implications report along with an additional four volumes of research are available from the website: www.scotland.gov.uk/publications.
These reports provide a vast array of evidence on the sector. This summary limits itself to ten key findings, detailed below.
1. The PRS is a diverse sector with a range of tenants and landlords forming varied sub-markets which are likely to require different policy approaches.
The material gathered by the review shows that the PRS is primarily a localised shallow market of individual landlords, who play a crucial role in housing a wide range of people in different social and economic circumstances.
The sector accommodates approximately 233,000 households who constitute a broad customer base, including lower income households, students, young professionals and migrant workers. The core demand comes from households requiring transitional accommodation with the length of this transitional phase varying in accordance with housing aspirations and preferences, as well as the supply and affordability of accommodation in other sectors.
There are also households for whom the PRS provides a long term home, particularly in rural areas. Given the diversity of tenant households it is imperative to consider the impact of policies on all sub-markets of the PRS to ensure that certain groups are not being unfairly disadvantaged.
In particular, the Scottish Government is concerned about the impact of reserved housing benefit policy on the affordability and supply of private rented housing for low income households in some areas of Scotland. Evidence also suggests that the housing conditions of migrant workers in the private rented sector requires targeted action.
2. Landlords are largely individuals or couples investing for capital growth rather than rental income.
The PRS has always included a large number of individuals operating as small scale landlords, and the review has shown that the growth in the sector as a whole has been led by further growth in individual ownership. Over 9 in every 10 landlords in 2008 were private individuals, couples or families, owning in total three quarters of all registered properties. Most of these landlords own just one property and nearly all operate on a part-time basis.
Landlords say that they generally have a business or investment motive for letting. However, when this was probed further, only half the sampled landlords thought that their rents were sufficient to cover their costs and give a reasonable return, one quarter were not looking for a return and one quarter said that rents were insufficient to cover costs. This suggests that many landlords are seeking investment growth from rising house prices rather than income returns.
The nature of the majority of landlords in Scotland has implications for the policy approach taken to the sector. For example, it may be that such landlords are less likely to have the time and resources to undertake training and keep up to date with changes in housing law. Methods of consulting and engaging with landlords will need to take into account the part-time and small-scale nature of the industry. The evidence also suggests that there may be limited capacity for growth among existing landlords. The concentration on capital growth combined with the debt-funded nature of the sector could leave them exposed in the current down-turn with falling house prices and restricted access to credit.
3. The vast majority of tenants are satisfied with their landlord, agent and accommodation.
The review has shown that the vast majority of PRS tenants are satisfied with their landlord, their agent and their home. 85% of tenants were either 'very satisfied' or 'fairly satisfied'. Whilst these findings suggest a relatively well-functioning sector, it is important not to be complacent. There are also around one in twenty households actively dissatisfied with their landlord and property and one in ten dissatisfied with their agent.
The reasons for dissatisfaction were generally related to landlords and agents taking too long to deal with repairs or having poor standards of customer care, as well as minor and major repairs to the property not being satisfactorily undertaken. Problems with tenancy deposits were also given as a reason for dissatisfaction.
There are regulatory frameworks in place to check the suitability of the landlord through Landlord Registration and to allow tenants to enforce repairs through the Repairing Standard and Private Rented Housing Panel, as well as national and local voluntary schemes to improve management practice, such as Landlord Accreditation Scotland. However, there remain cases which are falling through these regulatory and voluntary nets, which points to a greater need to enforce existing regulation and to raise awareness across the sector of the rights and responsibilities of both tenants and landlords, including awareness of the Repairing Standard.
4. There is evidence that a small minority of tenants are subject to poor standards of property and management and that rental affordability for particular groups is an issue.
Although the review found that, on the whole, practice and standards appeared satisfactory, there were instances where tenants experienced serious problems.
There was evidence that around a quarter of tenants struggle to pay their rent in that they pay more than 25% of their income on rent, with one in three stating that they found it fairly or very difficult to meet rent payments. More than a quarter of households living in the private rented sector were also experiencing fuel poverty.
Evidence suggests that more vulnerable groups on lower incomes are much less likely to be seeking short-term accommodation; for example, 1 in 3 of households receiving housing benefit had been in their homes for more than 5 years compared with just 1 in 7 of those not receiving housing benefit. This suggests that these problems could be relatively long term and particularly critical for people in part-time work, people on partial housing benefit and lone parents.
There was also some evidence of poor practice. Three percent of households did not have a written tenancy agreement; 7% said that they strongly agreed that they did not understand their tenant rights and 4% said they had problems finding out about their rights; 3% were very dissatisfied with their home; 2% had never had their gas serviced; and 5% felt that there was no point in taking action about a problem because they felt that nothing would be done. There was some evidence that households who were born outside the UK had experienced greater problems in accessing housing and were more likely to be charged fees to do so; and there were rare but serious incidents of breaches in health and safety and inappropriate behaviour by landlords towards tenants.
Although rare, these issues are highly distressing to tenants when they do occur and must be taken seriously. Improvements have been made to the landlord registration system, and the implementation of Part 5 of the Housing (Scotland) Act will increase local authority powers to enforce licensing of houses in multiple occupation ( HMOs). It is essential that local authorities make full use of enforcement powers to tackle the minority of landlords who fail to comply with housing law.
5. The tenancy regime appears to be operating satisfactorily.
The short assured tenancy ( SAT) is by far the most common rental contract in the PRS and is popular with both landlords and tenants. It offers a minimum six month contract between tenant and landlord, after which the tenancy can be renewed and either tenant or landlord can end the tenancy by giving appropriate notice.
The tenancy regime has to suit a diverse range of tenants with some looking for long term, or even life-time accommodation, whilst others seek flexible temporary accommodation while they are students, forming new households, new migrants to an area, establishing careers or saving money to buy a home. Landlords felt that SATs offered them valuable flexibility in managing properties and risk. Most tenants also valued the flexibility, with one in two tenants preferring to keep the minimum six month period, although one in five would like the minimum period increased to 1 year and one in ten would like it increased to 2 years. No preference was found for longer tenancies by household type, for example, families with children.
Length of minimum tenancy was by no means equal to length of stay. It was generally of benefit to both landlord and tenant to find a long term sustainable arrangement and, whilst 2 in 5 households had lived in their home for less than one year, a further 1 in 5 PRS households had lived in their home for more than 5 years. The review found that in most cases it was the tenant who decided to leave the property and end the tenancy rather than the landlord. Interestingly, those who had lived in a tenancy for longer than 2 years were more likely to wish to have the comfort of a longer minimum period for their tenancy, despite (or because of) having been able to remain in their accommodation well in excess of the minimum period.
The evidence points to a tenancy framework that is working satisfactorily, with those who want to stay in the sector for longer periods often able to do so and those looking for flexible accommodation able to find it.
The review has, however, highlighted key issues which may lead to tenancies breaking down such as rent arrears, poor repairs practice by landlords or agents, and difficulty in landlords gaining access to carry out repairs. Some landlords also have concerns about being able to regain possession if problems do arise. The Scottish Government believes that policy development should focus on these issues and look at how tenancies can be sustained.
6. A significant minority of tenancy deposits appear to be withheld, whether legitimately or not.
A landlord can require a new tenant to pay a returnable deposit (of no more than two month's rent for an assured or short assured tenancy), all or part of which may be legitimately withheld at the end of the tenancy if the tenant has failed to meet his or her obligations, e.g. having caused damage or left bills unpaid.
A range of evidence was collected on this issue and it would appear that a significant minority of tenants have deposits withheld, in full or in part, at the end of a tenancy. The main reasons given by both tenants and landlords for the withholding of deposits were damage to property, furnishings or fittings, property left inadequately clean, rent arrears or unpaid bills.
Where deposits are withheld, evidence suggests that around three quarters of tenants consider that the landlord (or agent) behaved unfairly in withholding the deposit. This would suggest that between £3.7 million and £6 million is considered by tenants to be unfairly withheld each year, affecting between 13,000 and 19,000 tenants. However, this does depend on reporting by tenants whose perception of unreasonableness may be very different from the landlords'.
Evidence from the statutory schemes in England and Wales suggests that between 40 and 50% of complaints by tenants are unjustified and the landlord had acted reasonably by withholding their deposit. If this figure was similar in Scotland then it would suggest that the actual amount of wrongly withheld deposits may be between £2.2 million and £3.6 million per annum, due to between 8,000 and 11,000 tenants. Where tenants did dispute deposits, the frequency of resolution between landlords and tenant was relatively high (around 40% to 50%).
The Scottish Government presented the evidence from the review to the Tenancy Deposit Working Group representing landlord, tenant and other stakeholders. There continued to be conflicting views on the significance of the problem and how it should be addressed, but all were interested in exploring the possibility of using some form of alternative dispute resolution ( ADR) to deal with disputes over tenancy deposits. The Scottish Government will work with stakeholders in doing this, before coming to a final decision on the most appropriate method to improve tenancy deposit practice. Whatever other action is taken, it is crucial that tenants and landlords are aware of good practice in relation to tenancy deposits, such as making a detailed inventory.
7. Some landlords have limited knowledge of housing law but are not interested in training.
The review found that a small but substantial minority of private landlords is not well informed about the residential lettings market or about landlord-tenant law. One in three agreed it was difficult to find out how the law affects them. Further, landlords have a legal duty to inform tenants about the Repairing Standard, as well as ensuring that the property complies with it at the start of and during the tenancy, yet two fifths of landlords were not sure whether the requirements of the Repairing Standard are reasonable or not. Worryingly, given this patchy awareness of legislation, very few landlords use professional organisations for advice, information or support, and almost half of landlords said that they were not interested in training.
Clearly, there remains a job to be done communicating effectively to landlords and agents to ensure that they understand their rights and responsibilities under the law. The Scottish Government will consider how best this can be achieved; it may be that a strategic approach to improving the dissemination of information about and within the sector is required. Likewise the local authorities' role in providing housing advice and assistance to private sector tenants and landlords is critical. The review includes a Resource Pack that includes advice to local authorities on doing this.
Training provided by Landlord Accreditation Scotland is another method of promoting knowledge and good practice. There is a need to target appropriate training to small scale part-time landlords.
8. Tenants have a low understanding of initiatives to improve standards such as HMO licensing, landlord registration, landlord accreditation and the Private Rented Housing Panel.
The review found that, although there is generally good communication between tenants and landlords on tenant rights, there is still work to be done making sure tenants understand these rights fully. It was also clear that tenants' awareness of specific initiatives remained quite low. Only 4 tenants in 10 had heard of landlord registration, 3 in 10 had heard of mediation as a means of resolving disputes between tenants and landlords and only 1 in 10 had heard of the Private Rented Housing Panel and the Repairing Standard.
Of considerable concern was the finding that 1 in 3 households living in a House in Multiple Occupation ( HMO) did not know whether the landlord had a licence.
Many of these schemes are relatively new, so it is not unexpected that awareness is low. However, this, combined with the finding that the majority of tenants did not report receiving any formal support or advice about private renting, suggests that there is a need to think creatively about how to increase awareness within the sector. As mentioned above, a strategic approach to improving information for the sector may be necessary, taking into account the roles of the Scottish Government and local authorities. This could include targeted information for vulnerable groups, such as migrant workers.
Looking forward, there were positive findings, with many tenants thinking that landlord accreditation would be important for them when choosing their next property because of the reassurances it gave about management and property standards. Around 6 in 10 tenants also said that they would be willing to use mediation if disputes arose with their landlord in the future.
9. The PRS can play a key role in helping local authorities discharge their homelessness duties.
The PRS is already used to accommodate homeless households. The review found that the PRS could play an important role in working towards the 2012 target and reducing pressure on social housing stock, providing both temporary and settled accommodation for homeless households. The PRS offers choice and flexibility of property type and location to homeless households, and a significant minority of landlords have said that they are willing to consider housing homeless households on the basis of particular safeguards.
Evidence from the review has identified that the key for both landlords and tenants is to have confidence that the tenancy is sustainable. A specific issue raised by landlords was the introduction of Local Housing Allowance and the loss of direct payment of rent to landlords, which many landlords said would put them off letting to low income households. The Scottish Government has asked the Department for Work and Pensions to review its guidance on direct payment to landlords where tenants are vulnerable, to ensure greater clarity among councils about its application.
The review includes a Good Practice Resource Pack to assist local authorities in engaging with the PRS. Among other things, this resource pack looks at the options available to local authorities to increase access to PRS accommodation for homeless households.
This work shows the need for a long-term commitment to build trust between landlords and statutory agencies to help accommodate homeless households and to help the sector to sustain those tenancies or end them if the arrangement is not suitable to tenant or landlord. This part of the review relates to the recent Scottish Government consultation on proposed changes to homelessness legislation, setting out the circumstances in which private rented accommodation could be provided for unintentionally homeless households in priority need.
10. The full impact of the credit crunch on the PRS is unpredictable, but evidence suggests that the capacity for growth among existing landlords is limited and new supply should be sought from institutional landlords
The credit crunch is likely to have opposing impacts on the sector. Demand is increasing as households who are unable to gain finance for house purchases, or choose to wait longer before buying, look for accommodation in the PRS. Supply is also increasing as people unable to sell their homes choose to rent them out until the market recovers.
The current structure of the PRS, dominated by individual landlords who have small portfolios acquired with loans or mortgages and are looking for capital growth rather than income returns, leaves the sector relatively exposed in the current economic downturn.
This financial insecurity, coupled with a relative lack of interest from small-scale landlords in expansion or professionalising their activities and a marked tendency to acquire properties only in a familiar locality, suggests that this is not a solid base from which to grow the sector.
The review therefore suggests that the Scottish Government should work with financial and property institutions, local authorities and RSLs to consider alternative investment and funding models that could lead to new-build private rented housing to meet a range of needs. We have already asked the UK Government to make changes to tax laws to encourage institutional investment in the PRS.
Another possible source of new supply in the PRS is the re-use of empty houses. The review includes a study of this topic, which is intended to assist those local authorities who have identified a problem with empty houses in their areas.
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