So how should we set social rents in future?

Today saw the launch of research on social rent policy commissioned by SHOUT, ARCH and the LGA and undertaken by the independent macroeconomic research organisation Capital Economics. The full report can be found here.

Lord Gary Porter speaking at the launch of the SHOUT/ARCH/LGA report. Photo: Rob Gershon

The idea of the research was to get an expert assessment of the options available for setting social rents in the future – so there can be a proper debate given the chaotic position of the current government, which first decided to cut rents for five years (designed to reduce the housing benefit bill, but only in the short run as more people are pushed into private renting) then decided to increase them by more than (consumer price) inflation.

There have been very few attempts to take an overview of all the implications of rents – to tenants, to the social security bill, and to the ability of providers to invest in the existing stock and new homes. There are even fewer attempts to examine the implication of rent policy at regional level – one size does not fit all and it is time rent policy reflected the very different conditions that apply in the different parts of the country.

The report sets the context for social housing in this country, contrasting the social sector ‘target rent’ regime that has been in place for 15 years with the current government’s ‘affordable rent’ regime which sets rents at up to 80% of local market rents. It emphasises why rents matter:

• to the disposable income of tenants (linked to benefits policy) whether in work or not, to future investment where rent income has a surprisingly large impact on the ability of landlords to invest.
• to the government’s fiscal position because significantly less housing benefit is needed to support a tenant living in social rented accommodation compared private rented housing – where a large slice goes to the profit of the landlord rather than being recycled into investment.
• to the business plans of social landlords because rents not only pay for management and maintenance but also service existing debt and underpin future borrowing for investment.

Capital Economics considered the long term impacts of various policy options taking account of the above factors and concluded that a policy of raising rents by CPI plus 1% is broadly appropriate across most of the country, but that no single policy is optimal across the whole country. It is important to note their caveat – the modelling depends on various  assumptions coming to pass, notably that the benefit cap and local housing allowance rates increase in line with rents. Under such conditions, tenants on benefits will suffer no loss in disposable income due to the proposed ‘optimal’ rent increases, although tenants who are not in receipt of benefit would see a negative impact.

London and the south east, where private rents are highest, would see the largest fiscal saving from being able to move tenants from private rented housing to new social housing. They calculate that a real annual increase of 1.9 per cent after 2020 would enable sufficient social homes to be built to house all housing benefit claimants in private rented accommodation.

The report includes a detailed assessment of the position in each region. For example, for the north east, higher social rents would facilitate greater house-building, enabling 4,000 private tenants to move to social housing at ‘CPI +1%’, rising to 48,000 at ‘CPI +3%’. However, the increase in the cost of benefits to cover these higher social rents would largely offset this, and the overall impact of different policies on government finances would be minimal.

So the overall conclusions reached by Capital Economics are:

• It was right to conclude that an annual cut in rents was unsustainable;
• A single national policy should be replaced by regionally-based assessments, with different rates of increase in different areas;
• A rent increase policy is only sustainable if there are corresponding increases in benefits and cap levels;
• And finally, that rental income is only part of the story in terms of generating more investment – it is vital that government resumes grant for social housing and allows councils to borrow for HRA development, subject to the prudential code.

The report raises some crucial issues for the sector and it is rare to see anyone try to link the issues of tenants’ disposable incomes, benefit costs and investment together in such a coherent way. I would have liked to have seen more consideration given to the implications of ‘affordable rent’. Although social rented homes remain the biggest segment of social housing by far, that is not true of the additions to the stock over the past few years, and the process of ‘conversions’ (switching homes from social to ‘affordable’ rents when they become vacant) has had a huge impact over the past few years. As more than 100,000 homes have been ‘converted’, it would be interesting to know what effect that has had on disposable incomes, benefit costs and investment using the Capital Economics model.

But the biggest challenge, whatever the logic of the analysis and the assessment of what is most optimal, is the question posed by SHOUT’s Martin Wheatley at the launch of the report:

“How do you explain to a hardworking low-income tenant that their rent needs to rise above inflation every year, shouldn’t government be investing in new social housing?”

As the Conservative chair of the LGA, Lord Gary Porter, made clear at the report launch: we have to let the state build and dispel the myth that state intervention is subsidy – it’s not, it’s investment in an asset, a security, and not just a debt.