Welfare Reform and Work Bill

Written evidence submitted by the National Housing Federation (WRW 23)

Summary of key points:

· The rent reduction requirement in the Bill will have a substantial financial impact on housing associations. Not only will it undermine their business plans, which are based on a regime of CPI + 1% rent increases to which Government committed itself as recently as last year; it will undermine confidence in the sector on the part of lenders. The impact will make it more challenging for associations to deliver new homes.

· The rent reduction requirement should be amended to exclude certain categories where the impact will be particularly severe, such as some stock transfer organisations and certain types of supported housing.

· Rent regulation mechanisms are increasingly complex, confused and unfit for purpose. Government should withdraw from rent setting altogether and put that responsibility with the boards of housing associations.

· The reduction in the benefit cap to £20,000 (£23,000 in London) will make it harder for thousands of households to find suitable housing. The application of the cap to temporary housing will be especially damaging and will make it far more difficult to provide emergency and short-term accommodation for homeless families. Temporary housing should be exempted from the overall benefits cap.

1. Introduction

The National Housing Federation is the trade body for housing associations in England. Our members are independent non-profit social landlords, housing between them some five million people.

In this submission, the Federation focuses on two elements of the Welfare Reform and Work Bill that have a particular impact on the work of housing associations: the proposed rent reduction programme, which will result in a substantial fall in associations’ projected rental income; and the reduction in the benefits cap to £23,000 in London and £20,000 elsewhere.

2 Executive Summary

Britain is in the midst of a housing crisis that has been a generation in the making. As a nation we have failed to build enough homes for decades and we are currently building less than half the number we need each year. This is having an impact on people of all walks of life and all parts of the country. It was no surprise that housing was a top five vote-deciding issue at the last election. The public are demanding action from government and politicians are responding. We were delighted that housing was front and centre of all the political parties’ election campaigns and that the Prime Minister highlighted the vital need for more homes outside Downing Street in his first speech after the General Election. This offers a once in a generation opportunity to tackle the housing crisis and deliver the homes the country so desperately needs.

Housing associations have a crucial role to play in working in partnership with government to achieve this. They are amongst the most successful public private partnerships in England’s history, securing £75 billion in private investment for new homes. For every £1 invested by government, associations put in £6 of their own money. This has allowed them to deliver desperately needed affordable homes in every part of the country and add £13.9 billion to Britain’s economy every year. Housing associations currently house 2.3 million households in England and last year they built one in three of all new homes – 40,000 houses. They want to do even more and have an ambition to triple that number by 2033.

Housing associations are already having a big impact and are committed to doing even more. However, recent announcements in the Summer Budget and Queen’s Speech will make this significantly more challenging and this submission sets out how government can mitigate the impact of a number of these measures. This includes:

· The extension of Right to Buy to housing association tenants

· The reduction in social rents by 1% a year for four years

· Pay to Stay

· Universal Credit and the lowering of the benefit cap

The Bill requires a reduction in rents of social housing of 1% in 2016/17 and in each following year until 2019/20. This is in contrast to the Government’s former policy of a ten-year rent settlement that was to have run from 2015/16 to 2024/25, under which social rents were due to increase by CPI+1% each year. This therefore represents a very substantial reduction in associations’ anticipated rental income. Although most associations have the financial strength to withstand the impact of this loss of income, it will inevitably make it more difficult for them to deliver planned developments, although they will strive to do so.

The rent reduction requirement adds a further layer of complexity to what is already a rigid and confusing mechanism for regulating social rents. There is a strong argument for allowing associations to set their own rents, within an overall rent envelope.

There are a number of specific types of provision (such as some forms of supported housing), and types of organisation (such as recent stock transfers), for which the rent reductions are likely to prove particularly difficult. In addition, the current drafting of the Bill creates a number of ambiguities and unintended outcomes.

Turning to the benefit cap, we anticipate that its proposed reduction (to £23,000 in London and £20,000 elsewhere) will means that thousands of families will find it harder to afford suitable housing, which in turn will hamper claimants’ ability to enter the labour market. The application of the lower benefit cap to temporary housing will have an especially damaging effect on emergency and short-term housing provision for some of the most vulnerable households in the country.

3 Main text

Reduction in Social Housing Rents

Housing associations are committed to building the homes the country needs and will do all they can to continue with this vital work. However, it is important not to underestimate the impact of the rent reduction announced in the Summer Budget on the business plans of many associations.

Housing association rents have been subject to some form of regulatory control since 1998. Prior to this, during the period from 1991/92 to 1998/99, the government substantially reduced the level of capital grant for new development and encouraged HAs to introduce higher rents to allow development to continue. As a result, HA average rents increased by just over 40% in order to support increased social housing development; during the same period, the average Government grant per completed home fell by 68%. In other words, associations increased rents in order to maintain their development programmes despite cuts in Government subsidy. Fundamental decisions about the level of rent remained with boards.

Although this policy was followed by the government in the full knowledge that the Housing Benefit bill would grow (famously, a government minister of the time said that rents should rise and ‘housing benefit will take the strain’), the level of growth in HB was deemed unacceptable. The incoming Labour government in 1997 was also concerned that HA rents were out of step with local government rents and wanted to bring the two regimes more closely into alignment. Accordingly, in 1998, for the first time on the entire history of HAs, the government played a direct role in rent setting through the regulator and introduced "rent convergence". This limited housing associations’ rent increases to the Retail Prices Index (RPI) + 1%. At the same time a system of "target rents" was laid down using a formula based on local wage levels and the local housing market.

In 2002, the policy was revised to RPI + 0.5%. This level could be varied by plus or minus £2 per week to achieve convergence between the local authority and housing association sectors and to ensure that target rents could be reached. The timetable set for full convergence was 2012.

In due course, this whole process became a key intervention mechanism for ministers. Although convergence could only be achieved over a period of time, and only if the formula was followed, ministers from time to time intervened in ways which made convergence more difficult. For example, in 2009, ministers imposed a rent freeze on local government rents, thus at a stroke making convergence almost impossible.

Meanwhile, beginning in 1988 and continuing to the present, a large number of homes have been transferred from local government ownership to housing association through the process of large scale voluntary transfer. This was carried out primarily as a means of financing significant repair and reinvestment requirements. Rents in these cases were negotiated between the selling local authority and the purchasing housing association. The rent was then part of the 30 year business plan which was the basis for the purchase price paid by the HA to the council. In many cases, rents rises were restricted for the first five years, meaning that most rents were below target rent. Critically, the business plans then assumed that the rent formula, and rent convergence criteria would kick in to allow rents to rise towards the target. Large scale 30 year borrowing was then organised on these assumptions. These contracts required formal approval by government.

In July 2013, the coalition government announced that rent convergence would end from 2015. This created significant problems for LSVT HAs whose rents remained far below target as they would lose the ability to add the plus £2 allowed under the convergence rules. This, of course, was not just a problem for one year as the rent increase was lost in perpetuity. Contracts that had been signed off by the government were, as a result, put under extreme pressure causing severe problems to many of these business plans. It should be noted that this decision was made without the benefit of any sector consultation.

Separately, in the 2010 Comprehensive Spending Review, the government reduced new capital investment in housing associations by 63%. However, the government wished to see the same level of new supply, so it introduced an entirely new rent regime to support new supply. This regime, known as affordable rents, set rents at up to 80% of market levels, with the express purpose of allowing housing associations to use the additional rental income to fund the development of new housing, minimising the level of capital subsidy. These rents were not subject to the convergence formula or target rules as they were set as a specific proportion of market levels. Rents were to be rebased at relet or at the renewal of a tenancy granted for a fixed term (typically, five years) to ensure they remained responsive to changes in the market. For social rents, the government continued with the rent setting process with a revised (but unachievable) target convergence date of March 2016.

In the May 2014 the government announced that from 2015/16, social rents would rise by CPI + 1% each year for 10 years (i.e, until 2024/25). The specific government announcement said

"Overall, in coming to a decision on our new rent increase policy, we have tried to balance the need to ensure that rent increases are manageable for tenants, and not excessive, with the need to ensure that landlords have the income needed to invest in new affordable homes and services. We remain of the view that CPI + 1 percentage point strikes the right balance.

"We have committed to this policy for ten years. We have made this commitment so that tenants and landlords have long-term clarity and stability, and landlords are able to benefit from this in terms of planning for future investment, accessing funding and achieving value for money."

This announcement was warmly welcomed by the sector because it provided housing associations and their funders with certainty over long-term income streams and the clarity and confidence to make long ranging strategic investment decisions. Significant volumes of long term debt were organised as a direct consequence of the certainty implied by a clearly stated commitment by government.

As a consequence of all of this, rent policy in the HA sector is a shambles. We still have a few historic fair rent tenancies. We have assured rents, formula rents, a convergence strategy in tatters, affordable rents (many of which are unaffordable and almost none of which is affordable to people who are not in work). We have LSVT organisations who entered into long term contracts and funding commitments in good faith and with the full knowledge and approval of government whose business plans are now impossible to deliver and for some of whom the ending of the +£2 was a severe financial setback. We have some rents that are only around 50% of target, others that are as much as 30% above target. And for tenants, rents appear to be (and indeed are) random and inexplicable.

This, then, is the context in which the government decided to legislate to impose rent cuts of 1% pa compound for each of 4 years. This is a clear breach of a strongly stated commitment made only one year ago, which calls into question the strength and validity of any further commitment now made. Although it is a single measure, it has a hugely different impact on individual rents and organisations. All of this is a direct consequence of 16 years of government involvement in rent setting.

This is now clearly not fit for purpose. Government should, at the earliest available opportunity, withdraw from rent setting altogether and put that responsibility back where it belongs, with the boards of HAs. They are best placed to balance their mission and objectives with their long term fiduciary obligations. They know the neighbourhoods and communities where they work and are able to set rents (sometimes higher, sometimes lower) to reflect the needs of these customers and places and support their tenants’ aspirations. As regulated organisations, they are accountable for the rents they set to their customers and to the public via the regulator.

We estimate that the rent reduction imposed by the Bill will result in a loss of more than £3.85 billion in rental income over the four-year period. This has delivered shockwaves throughout the sector – undermining the ambition of housing associations and confidence of many of their delivery partners. Moody’s, the sector’s principal credit rating agency, has interpreted Government action as a signal of its withdrawal of support for the sector, and has put the sector’s credit status on negative watch. A systematic downgrade in the credit standing of housing association could result in an increase in the cost of funds of housing associations.

Uncertainty about the future of rents from 2020/21 means the sector will appear increasingly less attractive to potential new investors.

The damage to lender confidence and the reduction in rental income will make it more difficult for housing associations to achieve their ambition of significantly increasing the number of homes they build. It will also threaten other vital work including investing in revitalising local economies, providing supported housing for vulnerable people and creating jobs and helping more people into work.

Meanwhile, however, we are keen to work with the government to mitigate the most significant impacts of the rent reduction policy embodied in the Bill.

In this submission we set out a range of limited categories of housing to which it is inappropriate or unnecessary, for policy reasons, to apply the rent cut and for whom the proposed cut would have a fundamental impact on the viability of the organisation.

Supported housing

Supported housing caters for a wide range of tenants with specific needs that require a greater or lesser degree of support. This type of housing is already subject to very tight margins across the board; it relies on contracts for care or support services, and there are no alternative models for housing provision of this kind. Between 2011-2015 funding for housing related support was reduced by 45% on average according to the National Audit Office, at the same time as demographic changes have led to greater demand and more complex needs. It is thus a part of the sector that is particularly vulnerable to any reduction in its income. As it stands, the rent reduction measure would lead to a loss of existing supported housing schemes for people with particular needs (eg older people, people with mental health problems, people fleeing domestic violence, people with learning disabilities and others). There would also be a reduction in the number of schemes developed for this range of client groups, with members already reporting that they are pulling out of planned development. The loss of these services would have a major impact on public spending.

Our members’ financial modelling shows that major viability question marks apply to all types of housing association, large providers as well as small, who are looking at viability of supported housing on a scheme-by-scheme basis. This means the question facing us is about the future of supported housing for vulnerable and older people, not merely the future of individual organisations. Examples of the impact on existing services and future development that housing associations have modelled include

· a large national provider of supported housing who estimates this change would lead to the loss of 104 schemes, removing 1969 support spaces for clients including 228 spaces in domestic violence services

· a small specialist learning disability provider who will have their operating margins reduced to 0.2% and will be forced to cancel all their proposed development of learning difficulty schemes

· a large national organisation who will be forced to reduce planned development of extra care by 400 units, including units built specifically to help people home from hospital

We recommend exempting "specified accommodation" from this policy measure, in order to avoid large numbers both of waiver requests and of lost schemes. The Government has already recognised the value of supported housing and the importance of exempting this part of the sector from the potential adverse effects of welfare reforms such as the benefit cap and direct payments. "Specified accommodation" is the definition used by DWP for these purposes, and was developed in consultation with the sector over a number of years.

This is hundreds of thousands fewer units than an exemption for the entirety of supported housing. There is already a process for identifying housing that meets this definition, and this serves to limit the amount of supported housing that qualifies. In order for a unit of supported housing to be classified as ‘specified accommodation’ there must be a certain amount of care and support provided to the tenant, and the tenant must need it. Supported housing that meets this definition will therefore be the housing where tenants require greater levels of care and support, and would be harder to replace once lost.

Although exempting "specified" housing will involve a compromise in the overall cost saving from this measure, we know that by securing the provision of this housing there are cost benefits to the public purse. The HCA has previously estimated its investment in specialist housing results in a net cost benefit of around £640m per year. Some of these cost benefits would be lost if the rent reductions result in a loss of provision. It is unclear what would happen to the people currently living in supported housing, those who are already waiting for specialist homes, as well as the increased numbers of people needing supported housing in the future. The impact could be more A&E visits for homeless people, more people with learning disabilities unable to move out of care institutions, and older people stuck in hospitals for longer. Housing associations would rather be helping these people to get on, stay healthy, and stay independent.

Recent Stock Transfer Organisations

Stock transfer organisations generally start out with a business plan that involves increasing rents in accordance with HCA guidelines and using this anticipated revenue to underpin borrowings that will allow them to undertake much-needed improvements to the stock they inherit from the sponsoring LA. This business model means that the organisation’s finances are typically extremely tight in its early years of operation. Moreover, during this initial period, the rents are typically well below HCA formula rents. There is, therefore, a very strong case for a targeted exception for relatively recent STOs to protect their position during a vulnerable phase in their business and to safeguard their ability to fund improvements promised to tenants at the time of transfer.

The alternative is that these organisations will struggle to deliver improvements promised to tenants at the time of transfer. In some cases, indeed, their financial viability could be at risk, meaning potentially a number of compelling cases for a waiver. We should be happy to work with CLG to devise a suitably targeted exemption.

Affordable rents

We also argue that there is a very strong case to be made, in both operational and policy terms, to exclude affordable rent housing from the rent cut requirement. Affordable rent currently accounts for less than 5% of the housing association sector (and much less of the local authority sector), so its exclusion would have only a very minor impact on the Government’s projected benefits savings. And this cost is far outweighed by the benefits.

· The only landlords allowed to charge affordable rents are those doing so as part of an investment agreement with HCA: in other words, developing associations (and a few local authorities. Thus the exclusion of affordable rents from the rent reduction regime will target additional resources very accurately on organisations that are building additional homes to meet the country’s pressing housing need.

· The exclusion of affordable rents would off-set the drain on the income of developing associations caused by the ‘minus one’ regime, thus making it less likely that they will have to withdraw from or scale back on development.

· Affordable rents are designed to be ‘rebased’ against the private market after a set period (often 5 years). The Rent Standard provides for them to be increased annually by CPI+1% between rebasing, which should keep the rent roughly in touch with the wider market and should reduce the uplift that rebasing is likely to involve. But if the affordable rent has been cut by 1% each year instead, it will have lost contact with the private market and the eventual rebasing is likely to result in a very high increase for the tenant.

Although we believe the case outlined here is a strong one, we argue that even if it were not accepted, it is necessary to amend the Bill to allow scheduled conversions to market rent in accordance with development agreements between associations and the HCA.

Other issues relating to rent reductions

We also urge amendments to clarify the legislative intent where this is not clear from the current drafting of the Bill. Key issues include the following.

· Service charges: Current practice is that for secure rents, service charges (whether fixed or variable) are outside the rent envelope; whereas affordable rents are deemed to include the service charge. This distinction is established policy and should be maintained; but the current wording of the Bill does not differentiate between social rents and affordable rents.

· Relets of properties below formula rent: While most housing association properties are now let at formula rent, there are a number of exceptions to this, notably among recent stock transfers. Current rent policy allows these properties, when they fall vacant, to be relet at formula rent (also known as ‘target’ rent). The ability to relet at formula rent is important for the finances of organisations with, historically, very low rents. The Bill should be amended to allow reletting of vacant properties at formula rent (albeit the formula rent itself will decrease by 1% annually during the rent reduction period).

· Rent increases other than in April: Although the great majority of social housing rents are increased annually in April, a minority are increased at other times of year such as October. The Bill does not adequately provide for this situation and will generate unintended consequences unless amended.

· Housing excluded from the HCA Rent Standard: Certain specialised categories of housing are not subject to the HCA’s Rent Standard, even if they fall within the statutory definition of ‘social housing’. These include temporary housing, intermediate rent housing, housing developed under PFI arrangements, and specialised supported housing. This Bill should likewise provide for these types of housing to be excluded from the rent reduction regime.

To sum up, the rent cut requirement overturns a policy that was announced as recently as May 2014. Housing associations will do everything they can to continue to build the new housing that the country so urgently needs and share the government’s priority to deliver increased supply. However, the policy will make this task significantly more difficult.

Benefit cap

The most effective way of reducing the benefit bill is to support people into employment, rather than make blanket reductions in benefits that apply regardless of local rent levels and family circumstances. We share the government’s goal to reach full employment and believe that good quality and secure housing is the building block to achieve that ambition.

Housing affordability

A secure and decent home is often the starting point to help people back into work, however, the provisions in the bill to lower the cap to £23,000 in Greater London and £20,000 elsewhere will severely impact the affordability of housing for thousands of families.

This affordability challenge is not restricted to families renting in the private rented sector as our modelling shows that a couple with three children would not be able to afford the average housing association rent on a 3-bed property in any region. Under the £23,000 cap in London, families would face a shortfall between benefit and rent of £27.79 per week. The weekly shortfall under a £20,000 cap ranges from £37.40 in Yorkshire and Humberside to £67.35 in the South East, based on the current rent agreement. [1]

Temporary accommodation

We are particularly concerned about the impacts of a lower benefit cap on families living in temporary accommodation (TA). TA is a vital part of the homelessness safety net, and is used by Local Authorities to accommodate households who have been demonstrated to be vulnerable, at risk of homelessness, or in emergency housing need. Temporary housing costs more to provide because of management standards and the procurement process, but can deliver crucial savings to the public purse, minimising the need for more costly emergency interventions such as housing households in bed and breakfast accommodation.

Households placed in TA by local authorities have little scope to move to reduce their housing costs. They are also, because of the nature of their circumstances, likely to be further from the job market and often may have a history of arrears and financial struggles. If they are no longer able to manage to keep up with rent payments in temporary housing due to the cap they may find themselves homeless again, and it is likely that local authorities will struggle to rehouse them. People living in TA should be treated in a similar way to tenants in supported ‘exempt accommodation’ and have their housing costs omitted from the calculation of the cap.

Impact assessment

The impact assessment published on 20 July 2015 does not include the following:

- Breakdown by region: the impact assessment states that under the lower cap 24% of cases will be in London. No figures are provided for other regions.

- Breakdown by number of children in the household

- Breakdown by main benefit received (JSA, IS, ESA)

- Breakdown by tenure (private rented / social rented)

- Breakdown by amount of money lost per week (in £50 bands)

These breakdowns are available for the live benefit cap caseload and were included in the impact assessment [2] published prior to the introduction of the £26,000 benefit cap. We urge the committee to request the publication of this analysis for the lower benefit cap.

September 2015

[1] https://www.housing.org.uk/publications/browse/benefit-cap-modelling-13-july-2015/

[2] https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/220178/benefit-cap-wr2011-ia.pdf

Prepared 11th September 2015