Introduction
In the Autumn Statement on 17 November 2022 the government confirmed they would introduce a one-year 7 per cent rent ceiling in 2023/24. This rent ceiling would set an upper limit on the maximum amount that providers of social housing will be able to increase rents by next year and has been brought forward by Government in response to the inflation-driven cost of living crisis that is severely impacting residents.
The government consultation, launched in August, initially proposed to set the ceiling at 5 per cent.
With the Consumer Price Index (CPI) increasing by 9.6 per cent in the year to October 20221, and Bank of England forecasts showing CPI is expected to remain high throughout 20232, next year’s rent ceiling represents a real-terms reduction in income for local authority Housing Revenue Accounts (HRA). This comes at a time when councils are already having to re-evaluate HRA business plans in light of a number of compounding factors.
- High inflation within the construction and housing management sector has in many areas outpaced CPI inflation over recent months, with evidence from the housing association sector showing:
- 16 per cent annual inflation in repairs and maintenance cost
- 9.6 per cent annual inflation in construction costs
- 12.3 per cent annual inflation in the cost of building new housing3.
- The 1 per cent annual rent reduction policy that was in place for four years from 2016/17 left rental income across London HRAs £459 million lower in 2021/22 than would have been expected if the previous CPI+1 per cent policy had remained in place.
- The impact of Covid-19 reduced HRA resources by around £100 million4, while no support was provided by government to compensate for this impact (unlike for council general funds).
- £108 million compared to CPI+1 per cent in the first year (2023/24),
- £223 million over first two years,
- £598 million over five years,
- £8 billion over a forty-year period.
Further to the rent reduction policy of 2016/17, the 7 per cent rent ceiling is the second significant intervention by government in local authority rents policy since the introduction of self-financing arrangements in 2012 and runs counter to the principle of local decision making that underpins the approach. Without additional support from central government to address the real-terms erosion of investable income, councils face a significant challenge to maintain adequate investment in their housing services, including in the delivery of day-to-day services and property standards, and on strategic priorities such as decarbonisation and building safety.
From improving standards to supporting economic growth (for example, through investment in building new homes), the local authority housing service plays a key role in delivering locally on the government’s wider priorities. Financial support from government to help councils deliver on these priorities is critical if the sector is to deliver against these priorities.
Impact on London HRAs
The HRA is the ringfenced account that supports local authorities’ landlord functions (i.e., the activity related to managing properties owned by the local authority). While support for tenants is vital at this time, introducing a rent ceiling from 2023/24 will also have significant implications for councils’ ability to deliver on their basic housing management responsibilities and strategic investment priorities.
In summer 2022 the London Housing Directors’ Group commissioned Savills to model the financial implications of the various rent scenarios, including those put forward in the government’s consultation. It is welcome that councils have been given greater flexibility around rent policy compared to the proposal set out in the consultation earlier this year. However, the one-year 7 per cent rent ceiling still creates an estimated funding shortfall of £8 billion over the next forty-years when compared to the position that would have been expected if rents were to rise by the current CPI plus 1 per cent formula. This 40-year impact is equivalent to double the value of London’s 2021/26 Affordable Homes Programme allocations (£4 billion)5.
To mitigate the impacts of the rent ceiling, London Councils’ consultation response put forward several options for DLUHC’s consideration.
- Greater flexibility around the use of Right to Buy receipts. Providing additional short-term flexibilities to councils regarding how this money is spent, including through relaxing the restrictions on combining receipts with other forms of grant funding for new development (e.g., Affordable Homes Programme funding), timeframes for spending receipts and enabling spend on wider range of HRA services. This is particularly important given the current macroeconomic challenges facing social housing providers, which has made the viability of new development more challenging.
- Creating a rent catch-up period: Enabling social housing providers to implement a catch-up period following the rent ceiling period so that rents are able to gradually rise to the position they would have been under the CPI+1 per cent formula. Under a one-year 7 per cent rent ceiling, a ten-year catch-up period would reduce the financial impact of the policy on London HRAs from £8 billion to £2.5 billion over a 40-year period and help to maintain a greater level of investment in the housing stock.
- Temporary revenue supportT. Government could provide short-term revenue relief for the HRA (for at least two-years) to mitigate some of the financial impacts of below inflation rent increases.
- Capital grant support. Capital funding to support works such as fire and building safety, energy efficiency and Decent Homes would help to maintain funding on critical investment and reduce the pressures on HRA funds.
- Public Works Loan Board (PWLB) borrowing rates. Government could consider reducing PWLB rates for long-term debt, which have increased to over 5 per cent6. A temporary write-down of rates to reduce the revenue burden of investments in building safety and new build would support continued investment in the short-term.
- Expand Discretionary Housing Payment (DHP) allocations. The government could increase support for tenants and residents impacted by the cost-of-living crisis by providing more funding for boroughs that are establishing hardship funds. This could be achieved through increasing DHP allocations for 2023/24 and introducing specific criteria and proportionate additional funding within the DHP allocations formula to reflect the increasing challenges that social tenants are experiencing. This would supplement the programmes that have already been established by councils across London.
Commentary
While the 7 per cent rent ceiling gives councils greater discretion compared to the lower cap outlined in the consultation earlier in the year, the real-terms reduction in income will have an impact on long-term investment in the council housing stock.
London’s boroughs have already developed significant long-term business plans aimed at improving their existing housing stock and developing thousands of new affordable homes, with councils accounting for 40 per cent of all allocations made, and half of all allocations for social housing, under the Mayor’s 2021/26 Affordable Homes Programme.
The reduction in available investment poses a particular challenge for London local authorities, where property standards are poorer primarily due to the higher density of development and a greater proportion of flatted properties within the housing stock. A 2021 Housing Ombudsman report found that 57 per cent of all damp and mould maladministration cases were recorded in London, compared to 19 per cent of the total social housing stock being situated in the capital7.
The introduction of a rent ceiling will compound previous government decisions that have left council HRAs in a challenging financial position, and mean less funding is available to deliver adequate property standards. Without financial support to compensate for this impact, tenants will experience less responsive repairs, cuts to management services (impacting councils’ ability to deliver on their forthcoming new regulatory requirements), and an under-investment in buildings (including building safety and energy efficiency works).
Further government intervention to impose a rent policy on social housing providers undermines the principles of local sovereignty that underpinned the self-financing model for council housing that was introduced in 2012 and enables long-term planning by councils. Financial support is needed to address the funding gap caused by the intervention. Housing is central to many other government priorities, from delivering net zero to economic growth. Reducing the funding available to local authority landlords will limit the role that they can play in delivering on these agendas.
The reduced investment available for developing new affordable housing can be expected to also place greater pressures on local authority finances, including through the additional funding required to keep older existing stock that may otherwise be redeveloped at an adequate standard. The lower levels of new affordable housing supply will also place greater pressures on local housing markets and increase the need for homelessness support by local authorities.
Many councils have taken significant steps to provide additional support for residents currently struggling during the cost-of-living crisis. This includes increasing investment in Council Tax Support schemes to lower bills for the poorest households, providing support funds for residents struggling to pay bills, and boosting resources for local advice services and food hubs. A fair settlement will ultimately need to ensure the long-term financial viability of council HRAs and their ability to maintain investment to ensure adequate standards within the housing stock, along with support for tenants during a cost-of-living crisis.
Footnotes
