Could the government cap rents at the advertised rate?

17 July 2023

Oli Sherlock, Goodlord's Director of Insurance, delves into the topic of capping rents at the marketed rate, to discourage bidding on rental properties.

Rents have skyrocketed for tenants in recent months. That's no secret. It's also no secret that mortgage rates are soaring for landlords, sitting at nearly 7% on average for new fixed-term buy-to-let mortgages. The government has worked with lenders on a mortgage charter, helping alleviate some of the pressures on the homeowner market - but that's only for residential mortgages

A lack of stock pushing up rents

Earlier this year, I was lucky enough to host several focus groups with landlords, agents, and tenants as part of our Renting Done Right initiative. We delved into the rent crisis, to better understand what's driving it and how all three stakeholders feel about it.

The base rate - affecting mortgage interest rates - is predicted to jump again to 5.5% in August. Landlords have to cover their costs somehow, so rents are likely to stay high.

But we all know that the fundamental issue at play here is the lack of available stock. The direction of market forces suggest that, although we're still expecting the summer months to be busy, some tenants are sitting tight as the availability of properties to move into runs dry - which is likely to contribute further to increased rents.

Among solutions for incentivising landlords to stay in the sector - you can read more about these in our Renting Done Right report - our research showed that thirty percent of the agents and landlords we surveyed felt that rent controls would encourage more landlords to leave the sector in England. This sentiment is reflected in the reality of the ongoing rent cap experiment in Scotland.

The rent cap in Scotland

In Scotland, the government chose to implement a rent freeze, transitioning to a temporary rent cap. Rent increases have been limited since September 2022, with a rent freeze for five months until March 2023, and a 3% rent cap in place in most instances since then. This cap has now been extended to March 2024.

However, the latest data from PropertyMark shows that this experiment didn't keep rents as low as expected. Its data shows that 50% of its agents based in Scotland saw rents increase month-on-month on average at their branch in April 2023. Those same agents also saw 12% less stock on average in May 2023 versus May 2022.

The rent cap only limits rent increases on an existing tenancy. Rents on new tenancies can be set at any rate, pushing up the average market rates across the country.

One agency has seen an increase of 12.8% on average for rents on new lets in April 2023, £96 more than the year before.

An alternative to rent controls

So, rent caps are a no-go. Even Labour's Shadow Housing Secretary, Lisa Nandy, has now said that the she doesn't back rent controls or a regional freeze on rents.

An alternative solution that came out of our focus group talks - proposed by tenants with 83% supporting the concept - was banning bidding on rents. In this scenario, agents and landlords would instead set rents at a fair rate from the outset when marketing the property.

In Australia, banning bidding on rental properties is already in place in some jurisdictions. That means that landlords and agents can't advertise properties with a rent price range, auction properties for rent, or "solicit offers" above the advertised price. 

A campaign called "Ban the bids" launched back in January in Bristol with a similar aim - and the biggest agency in the region has reportedly pledged to stop asking applicants to bid more than the advertised amount.

However, this still leaves space for tenants to choose to offer more - with some also offering to pay rent in advance - which results in "secret" bidding wars.

Could banning rental bids still drive up rents?

New South Wales in Australia did propose that agents should have to disclose how much another tenant has bid on a property. But that has since been dropped as commentators said that it would give renters the chance to outbid each other - resulting in "rental auctions".

So, on paper stopping rental bids seems a fair solution, as it would simply require agents and landlords to set the price according to the local rates which should slow the rate at which rents increase.

However, it isn't a clear-cut solution, unless any and all offers above the advertised rental amount were banned. And, of course, I'm not saying that all agencies or landlords encourage bidding, so it would likely only affect a small proportion of the rental market.

The campaign in Bristol has targeted councillors, with the region's Housing Chief, Tom Renhard pledging to look into what more Bristol City Council could do to discourage or stop landlords and letting agencies from making tenants outbid each other.

We wait to see what the results of that may be and if this could become a topic of discussion across more local councils in the UK, as they search for new solutions to balance the market and slow the rate at which rents climb. 

Further reading