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7. The Affordability and Supply of Private Rented Housing

Introduction

7.1 The Scottish Government wants to see an increased supply of good quality housing across all tenures, including the private rented sector, in order to meet the range of housing needs in Scotland. As has been explained, one of the main objectives of this review is to examine options for increasing the supply of affordable PRS housing for people in housing need, including homeless people, but we recognise the importance of the sector in providing housing for many groups, including young professionals, students, BME households and migrant workers.

7.2 This chapter looks at the affordability of private rents and the possible implications of the credit crunch on the private rented sector. The review has found that the growth in the sector over the last decade has not increased the overall supply of new housing in Scotland, with landlords preferring to buy from existing housing stock. This transfer of property among tenures impacts on others in the housing system, including first-time buyers. The Scottish Government believes that it would be particularly valuable to see new building in this sector. However, new challenges are presented by the current economic conditions, which limit access to new capital for investment and have led to a decline in new building. As we have seen, the PRS in Scotland is dominated by small landlords, who tend to rely on debt-finance, which is now more difficult to obtain, and have other characteristics that make many of them less likely to be interested in expanding their portfolios. Options to encourage growth through the tax regime are examined, with a particular emphasis on targeting larger, business landlords. However, it may be that more encouragement needs to be given to institutional investors and other funding models in order to expand the sector.

7.3 Another option for increasing supply in the sector is to bring back into use houses that are currently empty. The review has considered methods of encouraging this.

Affordability and the impacts of the credit crunch

Rents have increased, but the PRS remains more affordable than owner occupation

7.4 In comparison with the alternative of becoming an owner occupier, the PRS remains a more affordable option. Work done by Steve Wilcox on 2007 Scottish data from Hometrack shows that the cost of paying a private rent was around 73% of the cost of paying a mortgage, although this varied somewhat across the country ⁴⁵.

7.5 Indeed, the PRS has become more affordable in relative terms in recent years. Between 1997 and 2007 Scottish house prices increased by more than 150% (in nominal terms). The local reference rent ( LRR) ⁴⁶ increased from £59 per week in 1997 to £90 per week in 2007 - a nominal increase of 53%. Over the same period Scottish full-time earnings rose by around 47%. ⁴⁷

7.6 The recent fall in interest rates means that average mortgage rates have become cheaper, while at the same time they have become more difficult to obtain. It will be important that more analysis of the affordability of the PRS in changing circumstances is carried out, taking into account the full costs of home ownership (such as repair and maintenance costs, as well as the cost of borrowing).

The PRS continues to provide for those on low to moderate incomes but these tenants may be squeezed as demand increases

7.7 The median weekly income level of PRS tenants is £300 ⁴⁸, higher than that of households in the social sector, but below that of those buying with a loan or mortgage. (Compare the small navy dashes for each tenure in Chart 7.1).

7.8 The range of household income within each tenure differs significantly across the tenures with social renters tending to have more similar income levels while owner occupiers have more diverse incomes, and PRS falling somewhere between the two ⁴⁹.

7.9 There is a sizeable overlap in income levels between the tenures with the least affluent PRS tenant households being comparable to social rented tenants while the most affluent PRS tenant households are more comparable with owner occupiers ⁵⁰.

Chart 7.1⁵¹Comparison of median weekly income and income range by tenure

Source: Scottish Household Survey, 2007

7.10 The PRS, in terms of affordability and income level of households, lies between social renting and owner-occupation.

7.11 Hometrack has undertaken various analyses on the affordability of housing across the UK⁵². Within these studies affordability is defined within the 'intermediate housing market'. Two definitions are used but in essence they relate to working households ranging from those who cannot afford to buy a house at below the lowest quartile (£95,000 in Scotland in 2007; £97,500 in 2008) to those who cannot afford social rents without housing benefit. The analysis examines the distribution of house prices and household earnings in each area, and provides a measure of the proportion of younger working households unable to buy in their local market. ⁵³

7.12 The Scottish Government's Housing Market Review shows that, by this measure, house purchase in Scotland is more affordable than in the UK as a whole ⁵⁴.

7.13 The private rented sector, almost by definition, is the tenure of choice (or necessity) for many households in the IHM. Over time, especially since around 2002 when Scotland began to experience its house price boom, it is likely that the size of the IHM will have increased. The rapid increases in house prices, over and above income growth, will have left increasing numbers of households unable to buy at the lower quartile (or decile) house price level. It is likely that this group will continue to grow as a result of the credit crunch and this may have implications for supply and affordability.

7.14 We can see that the size of the sector grew from around 5% to 8% ( SHS) in response to demand over this period, and the sector became more important in meeting housing needs. In the short to medium term at least, it is likely that further growth in the sector will be needed to meet demand.

7.15 The review has also found that the proportion of private rented tenants who pay more than 25% of their income on rent is relatively high. This figure is also rising, from 32% to 39% over the period 2004-06 ( SHS: 2002-06). The Tenants Survey found that 29% of tenants found it "fairly difficult" or "very difficult" to pay their rent ( TS:67). These tenants tended to be younger, included lone parents, flat-sharers and students, people in part-time employment and those on partial housing benefit.

7.16 With the exception of students and some young professionals, many of these tenants will have limited earnings potential and a number also believe that their next move will be into social housing ( TS:42). For example 49% of those with a disability and 44% of older people (65+) had an income below £10,000 per year ( TS:27). This group will be vulnerable to rising rents. If demand increases from higher earners unable to purchase a house, this group may find it harder to find affordable rented housing that meets their needs.

7.17 The Scottish Government believes that the PRS should play a bigger part in providing appropriate accommodation for homeless and low income households. As explained in Chapter 6, the Good Practice Resource Pack sets out a range of options for achieving this. However, these options are, in the main, about increasing access for such households to the PRS, rather than boosting overall supply. If demand continues to increase it may be that councils find it harder to attract landlords to such schemes and different housing options are needed.

The credit crunch has resulted in unpredictable rent levels

7.18 The downturn in the housing market that has occurred since autumn 2007 has clearly had an effect on the affordability of different tenures. The particular circumstances of the current 'credit crunch' are unique in the history of the UK housing market. The primary factor causing the downturn - demonstrated by reduced market activity and falling house prices - is the lack of availability of credit.

7.19 The impacts of this on affordability in the PRS are determined, in large part, by the impacts seen in the market for house purchase. The credit crunch has two primary effects in this area: first that, whilst falling house prices may make housing more affordable for, in particular, first-time buyers, people build expectations of these price falls which encourage buyers to 'hold off' until they believe that the bottom of the market has been reached. Secondly, problems accessing credit, and an increased aversion to risk by lenders, means that, for example, many first-time buyers are unable to get the finance to purchase property.

7.20 Evidence suggests that the overall effect is to reduce purchases by first-time buyers, which will reduce purchases and sales further up the price ladder. All of this has two effects on the PRS:

7.21 The interaction of these two effects will determine the overall impact on the cost of housing in the PRS. Intuitively it seems likely that the increasing demand would outweigh the increase in supply, as not every potential seller would have the option of renting out their property prior to selling (e.g. because they live in it) whereas nearly every potential buyer could choose to spend time in the PRS. At the Uk level, rents have fallen for the first time since 2003 as new supply outstripped new demand. In Scotland there is emerging evidence that rents may also be beginning to fall in certain parts of the country ⁵⁵. Average rents in the final quarter of 2008 were marginally higher (2.1%) than the same period in 2007.

7.22 It is also the case that people forced to rent out property because they can't sell are less likely to be well informed about the law and their responsibilities as landlords, though some may use letting agents. This is not a particularly stable basis upon which to grow the sector as supply is closely linked to short-term changes in individual circumstances.

It is likely that the PRS will play a bigger role in the housing system, at least in the short to medium term

7.23 As discussed above, the role for the PRS going forward is in large part determined by affordability in the wider housing market and the availability of credit. Table 7.1 suggests that affordability will remain an issue. By way of illustration, the table shows that a household with the income of an average PRS tenant ⁵⁶ would be able to get a mortgage for a property for around £58,300, assuming a return to more modest lending ratios of 3.5 times earnings and a 10% deposit. This is below the bottom 5% of Scottish house prices in 2008 (£64,000). As the affordability of house purchase remains a problem, the increased pressure on the PRS could result in affordability problems in this sector as well. In addition, with owner occupation seeming less of an investment opportunity in the economic downturn, some households may be less attracted to home-ownership and remain in the PRS for longer. In the longer term it is possible that economic circumstances may result in a structural shift in attitudes and preferences for renting, compared to owner-occupation.

Table 7.1: Mortgage calculations for typical PRS tenant

7.24 All of this suggests that the PRS will play a bigger role in the housing system, at least in the short to medium term. The Scottish Government therefore wants to consider interventions that increase the overall supply of private rented housing and provide appropriate housing options for different households. In doing so, it is important to consider the PRS as part of the wider housing market; encouraging an increase in the supply of PRS housing from the existing housing stock is not necessarily desirable, as it would result in landlords buying up property that may otherwise be suitable for first-time buyers, thus contributing to ongoing supply and affordability constraints elsewhere in the market. The Scottish Government wants to increase the supply of new housing across all tenures in Scotland.

The future supply of private rented housing

The tax system impacts differently upon landlords and owner-occupiers and could be used more effectively to maintain existing PRS stock

7.25 Table 7.2 sets out the position in relation to a number of taxes for landlords (companies or individuals) and compares this to the situation facing owner-occupiers.

7.26 What the table demonstrates is that there are a number of fiscal issues which affect owner-occupiers and landlords differently, and the system tends to favour owner-occupation. Two particular issues affecting landlords, be they individuals or companies, is the upkeep and maintenance of the properties they let and how the transfer of property is treated in tax terms.

Table 7.2: UK tax position of landlords vs. owner-occupiers

7.27 As we have seen in Chapter 4, there is a higher prevalence of poor property condition and disrepair in the private rented sector, compared to the owner-occupied and housing association sectors. There is evidence that this may be due to the types of property landlords own, rather than landlords failing to act on repairs and tenants failing to notify them. Nevertheless, maintaining Scotland's existing housing stock, and preventing further deterioration, is essential to a well-functioning and efficient housing system. A recent report by the Communities and Local Government Select Committee of the UK Parliament found that the high rate of VAT makes it too expensive for many landlords to maintain or refurbish their properties and encourages neglect, which can lead ultimately to demolition. It has been argued that the financial disincentive to repair and maintenance work caused by the high rates of VAT often causes homes to fall into disrepair in the first place. ⁵⁷ The costs of refurbishment have also been identified as disincentives to potential investors in private rented housing ⁵⁸. The Scottish Government believes there is scope to look at aspects of the tax system in order to introduce targeted measures that would encourage higher standards of property repair and maintenance in the private rented sector, promoting greater investment in Scotland's existing housing stock.

7.28 The Landlords Survey also noted concern among landlords about the impact of Inheritance Tax ( IHT) on the supply of rented property ( LS:84). This is because the size of the IHT bill for larger portfolios on the transfer of ownership is likely to be large in comparison to the size of the rental income stream. The concern is that landlords have to sell off parts of their portfolio in order to pay the tax bill associated with the transfer of property title. IHT affects larger landlords in particular (as their property portfolio is likely to be valued in excess of the threshold) and can be seen as a disincentive to growth in the sector. This issue can particularly affect rural landlords, many of whom may let a considerable number of properties to local people, often at below-market rents ⁵⁹. In some rural areas, the private rented sector is the main provider of rented housing, with little social housing provision.

7.29 IHT is currently payable at 40% on the amount over the nil rate band, currently £312,000 for an individual and up to £624,000 for a couple (if one partner dies the remaining unused inheritance threshold is transferred). It is likely that many rural landlords in particular will have estates with a value in excess of the threshold. As part of this review, the Scottish Rural Property and Business Association undertook a survey of its members to see whether IHT liabilities would have an impact on the supply of affordable rented housing for its members. The SRPBA has stated that its members let in excess of 20,000 properties, and often at affordable rents (defined for the purposes of the survey as rents equivalent to a Registered Social Landlord's rent in the area). The findings illustrate that, while more work is needed to explore this issue in depth, rural landlords do think that IHT will require them to sell property and this will impact upon the supply of rented housing. Further, a number of respondents stated that they may sell properties let at affordable rents to pay the tax bill.

7.30 The Scottish Government believes that providing an exemption from Inheritance Tax for a specified period of time where properties are let at affordable rents would preserve the supply of existing affordable rented housing in rural areas of Scotland (and other areas where property is let at affordable rents). If the property is sold within the specific period, the tax would be payable. This would both prevent landlords from selling much-needed affordable rented housing, and may encourage other landlords to let at affordable rents.

The current structure of the sector leaves it exposed to the credit crunch

7.31 As we have already seen, there are certain features characterising most landlords in Scotland:

7.32 The review has found that a third of part-time non-investor landlords said that they had no income from lettings ( LS:67). 28% of part-time investor landlords said that they received no net income from their current letting. The review estimates that the median gross rental yield ⁶⁰ that landlords earn is 4.9%. Only half of landlords think that their rents were sufficient to cover their costs and give a reasonable return. The rest were not looking for a return or said that the rents were not sufficient.

7.33 All of this indicates that many small-scale landlords are in the sector solely as an investment opportunity. They hope to realise returns by seeing growth in the value of their capital asset (i.e. rising house prices), rather than by generating a sizable ongoing income stream. The dominant features of most Scottish landlords suggest that they are less likely to be interested in expanding their property holdings in the present economic situation.

7.34 The small-scale nature of the sector in Scotland may also make landlords vulnerable given the contraction in the supply of buy-to-let mortgages, shifts in interest rates and a lack of capital. As the credit crunch intensifies, the financial stability of the sector may increasingly become an issue. The Council of Mortgage Lenders ( CML) expects repossessions to increase substantially as people struggle to make mortgage repayments - from an estimated 45,000 in England and Wales in 2008 to 75,000 in 2009. The sector made up of buy-to-let mortgages will be no exception to this general trend. In fact, recent CML figures for the UK show that, at the end of September 2008, 1.58% of buy-to-let mortgages were in arrears, compared with 1.44% of all mortgages ⁶¹. In the past, the former have performed better than the market as a whole. Tenants may also face difficulties in paying their rent with rising unemployment.

7.35 The Rugg Review of the PRS in England has argued that existing landlords of all sizes have potential for growth and that larger-scale institutional investment required less attention. However, the evidence gathered here suggests that, in Scotland at least, the situation is different. The Landlords Survey conducted as part of this review has found that very few landlords are interested in growing their portfolios, particularly small landlords, who own three quarters of Scotland's PRS. While larger, business landlords were more likely to consider growing their portfolios, the survey concludes that this would lead to only modest growth, at best. Expansion among small landlords in particular is also limited by the fact that most want to own property within a familiar locality. The same source also demonstrates a lack of interest from around half of landlords in taking up offers of training and advice.

7.36 The credit crunch has created a degree of financial insecurity in the PRS and this, combined with the lack of interest from small-scale landlords in expansion or in professionalising their activities, suggests that this is not a solid base from which to go about growing the sector.

Steps should be taken to attract institutional investment into the sector to increase supply

7.37 There is an institutional appetite for long-term investments of a sort that could provide a reliable, low-risk, steady income stream for investors, and this could apply to investment in private rented housing ⁶². Investment in residential property may allow certain investors, including those currently investing in commercial property, to diversify their portfolios and spread risk, or to invest in products that would act counter-cyclically to their other market interests. As investments would be for the longer term, the focus among existing landlords on the vacant possession premium of their stock, which, arguably, maintains the transitory and short-term nature of the sector, would be reduced. Instead risk and income would be spread over the lifetime of the investment along with the possibility of capital growth at the end of the development period. This desire to look after income stream should promote a professional residential property management service and lead to consistent property maintenance. It may also be the case that longer leases would be provided as a result. (The fact that some lenders place restrictions on the length of leases that can be granted also places limitations on small landlords.) Attracting large scale corporate and institutional landlords could bring much needed investment and new funding models into the housing market at this difficult time.

7.38 At a time when capital values are falling, yields are increasing in residential letting which should also attract increased investor interest.

7.39 In the past the PRS in Scotland, and the rest of the UK, has experienced very little by way of large-scale corporate or institutional investment, though previous initiatives like the UK-wide Business Expansion Scheme ( BES) in the early 1990s and GRO-Grants in Scotland (Grants for Rent or Ownership) ⁶³ demonstrate that it is possible to attract private money into the private rented sector to build new properties. It is crucial that the correct incentives are in place to encourage this investment ⁶⁴. There are a number of areas where the public sector could act to provide more incentives for activity of this sort. Many of these matters are reserved to the UK Government, the most critical of which are the lack of an attractive investment vehicle for residential property and the current stamp duty regime, which puts large-scale landlords at a disadvantage. This is discussed further below. The financial disincentive to refurbish and maintain rented housing caused by the high rates of VAT has been discussed above. This also applies to institutional landlords.

Investors may require incentives to let to certain groups of tenants

7.40 We have seen that certain groups of tenants in the PRS - those on low incomes or housing benefit, in part-time employment and lone parents - find it difficult to afford their rent. These tenants often also aspire to live in social housing. The review has also found that students find it difficult to afford their rent. It is likely that institutional investors would be more attracted to what they would perceive as 'lower risk' tenants: young professionals, those in full-time work and students. Investors are likely to value a stable income stream and what they would perceive as responsible occupiers. Indeed, investment in purpose-built rented accommodation for students is already established in the market by companies like Unite. As this review has found, students are generally considered to be good at paying their rent and a 'safe' option for landlords. Local authorities will want to continue to consider the role that purpose-built student accommodation can provide in their area to meet student demand as part of their Local Housing Strategy.

7.41 The Scottish Government wants to ensure that a range of housing options are available to households to meet their needs, particularly those on low incomes. We want to explore with developers, investors, RSLs, local authorities and others the potential to expand the provision of mid-market rent properties in Scotland, to meet the needs identified above.

7.42 A number of Scottish RSLs have established subsidiaries to provide properties at a mid-market rent, which lies somewhere between traditional social housing and renting from the private market, though numbers are relatively small to date. Properties are let on a short assured tenancy. In considering any expansion of mid-rent schemes, it is clear that these RSLs already have the management, accounting and administration structures in place to be able to fulfil this role. The aim would be to create a housing option with a lower subsidy than social housing to meet the needs of households who are increasingly finding themselves struggling to pay their rent, but, given the demand for social housing, in practice, have little prospect of gaining access to it. International comparisons looked at as part of this review also show that government incentives can attract large-scale private investment to build lower rent homes. The National Rental Affordability Scheme ( NRAS) in Australia is one such model, ⁶⁵ where investors have partnered with developers and also housing associations to provide property management services. The Scottish Government is interested in discussing these, and other options, with housing providers and their investors in Scotland.

7.43 The planning system has an important role to play in the supply of housing and we also want to discuss the role that planning authorities can play in encouraging new build accommodation for private rent.

Conclusions

7.44 The evidence suggests that the Intermediate Housing Market will grow, with more people unable or unwilling to buy their first house, leading to rising demand for PRS housing. The credit crunch may also result in a shift of attitudes towards private renting, compared to owner-occupation and, as discussed in Chapter 3, the Scottish Government will monitor housing aspirations over this period.

7.45 Although the PRS has been more affordable than owner-occupation, increasing demand from various sectors may lead to rising rents, if supply does not grow accordingly. The increased number of households renting out property they cannot sell in the current economic climate is not a stable basis from which to consider the future of the sector. The analysis has also found that there are particular affordability issues for certain groups of tenants.

7.46 The specific characteristics of existing landlords in Scotland make it less likely that many of them will expand their portfolios. For example, small landlords with buy-to-let mortgages may be affected by difficulties in obtaining capital, which is particularly likely to reduce the possibility of growth. In the present economic conditions, the PRS is relatively exposed and prone to financial instability, and may not provide a strong basis for growth.

7.47 The Scottish Government wants to support those existing landlords who want to expand or maintain their portfolios, and a number of the tax measures considered above would assist with this. In particular, the Scottish Government believes that the UK Government should introduce targeted VAT reductions for specific works, including repairs to listed buildings, crofts and common parts of houses and assisting private landlords with the costs of repairing empty properties so that they are brought back into use as quickly as possible. These measures would assist private landlords in situations where it is particularly difficult to carry out repairs and refurbish property, such as common parts of tenements and empty houses in disrepair and so encourage investment in Scotland's existing housing stock. The issue of Inheritance Tax and the impact it has on housing supply, particularly in rural areas, should also be considered by the UK Government. The Scottish Government believes a cost-effective solution would be to provide an exemption from IHT where properties are let at affordable rents.

7.48 However, it may be that the most substantial - and stable and sustainable - growth is most likely to result from new institutional investment in the PRS, which looks to the long term and is more interested in a stable income stream than short-term capital growth. As well as bringing new sources of funding, the structure of residential letting means that money is more likely to stay in the sector long-term and corporate landlords are more likely to protect their investment by providing good quality accommodation and high standards of management. New-build rented accommodation would not reduce the stock available for owner occupation.

7.49 The Scottish Government would like to attract institutional investment into the private rented sector in Scotland, to bring stability to the market and to help the sector expand. However, the Scottish Government does not have the necessary fiscal levers to encourage this activity and therefore believes that the UK Government should take urgent action to work with the property profession to revisit the rules for residential REITs, along with other potential housing investment vehicles. The Scottish Government also believes that a root-and-branch review of stamp duty and its arbitrary thresholds is urgently required. In particular, action is needed to address the anomalous position of payment of stamp duty for bulk purchases of property, which puts large-scale investors at a disadvantage. The Scottish Government believes that changes in these areas would help the sector to respond in a sustainable manner to increasing demand for private sector housing.

7.50 The Scottish Government would like to work with the institutional sector (financial and property), local authorities and with RSLs who have an interest in the expansion of the PRS, in order to explore alternative investment and funding models that would produce new-build rented housing to meet a range of housing needs. This might include looking at options for incentivising mid-market rent products where these would help to meet an identified local need for such housing and offer demonstrably good value for any Government subsidy.

7.51 We have also asked the Scottish Property Federation to nominate a senior representative to participate in the Scottish Government's revised Housing Supply Task Force. They will provide experience and expertise on the potential future role of the private rented sector in the housing supply system, and a vital input on the scope to attract new models of investment to support that role.

7.52 The revised Task Force will be chaired by the Minister for Housing and Communities and will meet regularly over the course of 2009. Its remit is: "To build on the work undertaken by the Housing Supply Task Force to prepare for a recovery in house-building; strengthen relationships between key stakeholders; act as a cross sector forum for consideration of the implications for the housing supply system of the economic downturn; and champion new ideas and innovative solutions". ⁶⁶

Empty properties

Where there is a problem with empty houses, local authorities should consider ways of encouraging their owners to bring them back into use

7.53 There are many reasons why houses become empty, including occupants dying or going into hospital, and location can also be a reason, due to low demand or remoteness, for example. It is extremely difficult to quantify the number of privately owned empty houses in Scotland, and even if this could be done accurately there would be reasons why many of them could not be used, such as the disproportionate costs of making them habitable or their being situated in areas of low demand. However, the Scottish Government recognises that there may be areas of Scotland where bringing empty houses back into use could be a helpful way of adding to the stock of private rented housing and meeting a range of housing needs. There may also be other reasons for taking action on empty houses, such as the promotion of regeneration or sustainable development or dealing with a building that is causing a nuisance.

7.54 As part of this review, a study of ways of bringing empty houses into use has been carried out. This is intended partly to assist local authorities and it includes a number of case studies. It suggests in detail how local authorities could adopt a strategic approach to the issue, including partnership working and data gathering.

7.55 A survey conducted as part of the research found that the majority of local authorities have not identified empty houses as being a significant problem in their areas, although it seemed that there was sometimes a lack of data to justify these views. The report suggests that local authorities should establish an evidence base, at least in outline, in order to decide whether they should develop a specific policy on the re-use of empty houses. It may be that many local authorities do not find empty homes to be a high priority in the bigger picture of overall housing supply. If it is necessary to adopt an empty homes strategy, it should be included in the Local Housing Strategy.

7.56 The main source of data on empty houses is the Council Tax Register, but this is not tenure specific and data protection considerations may limit its use. The report suggests additional methods of data collection, such as area surveys and work with relevant organisations and other council services. It also outlines the organisational arrangements within local authorities that will facilitate work on empty homes, and suggests that partnership working with other local authorities and RSLs can increase effectiveness. These partnerships can take various forms, such as forums or consortia.

7.57 The case studies that have been considered suggest that the most effective method of dealing with empty houses is to adopt a dual approach towards the owners of the properties. Local authorities should provide the necessary support to them, while making it clear that (where appropriate) enforcement powers will be used. Such powers are likely to be available where there are problems of disrepair or lack of maintenance.

7.58 Dealing with disrepair is a frequent barrier to houses being brought back into use. The main reasons for owners keeping houses empty include being unwilling to take the responsibility of letting their houses, and also the cost and inconvenience of arranging repairs to bring them up to standard. Local authorities can already assist owners to address disrepair in order to bring houses back into use, including using Lead Tenancies ( LTs) and (in rural areas) Rural Empty Property Grant ( REPG). In LTs, an RSL leases the house from the owner, brings it up to standard using grant funding, and rents it out at an affordable rent. REPG allows the owner of a house in a rural area to improve it and rent it to a tenant who is usually economically active. Both schemes have been found to be well targeted, but it has been suggested that they could be more widely used if their conditions were less restrictive and they were less complex.

7.59 Other ways in which local authorities could support owners to bring houses back into use and to become landlords include rent deposit guarantee schemes, private sector leasing schemes, possibly loans under the Scheme of Assistance (where the rent received might repay the loan) and other financial incentives.

7.60 Local authorities also have enforcement powers which could be used to deal with empty properties. The implementation of the powers in the Housing (Scotland) Act 2006 to serve work notices on sub-standard houses and maintenance orders on houses with maintenance problems will increase the ability of local authorities to target such properties. Where work notices are served, assistance must be given, but it need not be monetary. Owners faced with being compelled to pay for repairs or maintenance are likely to be more inclined to dispose of the property to someone who will use it, or, if they pay the costs, to rent the house out in order to recover them. At the least, empty houses will be prevented from deteriorating.

7.61 If an owner does not carry out the work statutorily required, the local authority may do so and recover its costs, including the option of placing a repayment charge on the property.

7.62 Local authorities may also use enforcement powers under planning, environmental health and building legislation. There may be circumstances in which a local authority may compulsorily purchase an empty property.

7.63 In order to prevent empty houses from falling into disrepair, the report recommends that local authorities should engage with owners when they first apply for the council tax discount for empty houses. The local authority can then establish the reasons for the house being empty and establish at an early stage whether it would be possible to give appropriate assistance to the owner.

7.64 Other ways in which local authorities can approach the problem include publicising the fact that, when repairs are carried out on houses that have been empty for at least two years, VAT is reduced to 5%, and reducing the council tax discount for empty houses in order to dissuade owners from keeping then empty.

7.65 The report does not support giving local authorities formal powers such as the Empty Dwelling Management Order in use in England and Wales, which the research has found to be difficult, and costly, to use in practice.

7.66 The report makes 13 recommendations. Some of these are addressed to local authorities and relate to:

7.67 Six recommendations are addressed to the Scottish Government:

Conclusions

7.68 The Scottish Government recommends that local authorities who have identified a problem with empty houses should consult the research report to find information on methods of taking action.

7.69 As regards the recommendations for the Scottish Government on empty houses:

7.70 As discussed above, the Scottish Government also believes that the reduced rate of VAT which applies to the renovation of property which has been empty for at least two years should be available much earlier, so that empty properties are brought back into use as quickly as possible.

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