Housing associations and the Right to Buy Contents

7The 1 per cent rent reduction

85.In the Summer Budget 2015, the Chancellor announced that all rents in social housing would be reduced by 1 per cent a year for four years, with housing associations and local authorities expected to meet the shortfall in income through more efficient use of their grant funding.79 The reduction in social rents is expected to lower the housing benefit bill by £165 million in 2016/17, rising to £1.45 billion by 2020/21, a total saving of almost £4.3 billion.80 The announcement came within months of the start of a ten-year rent settlement, and caused significant concern to housing associations and their funders. Since 2013 they had been working on business plans and development programmes based on rental income including inflationary increases linked to the consumer price index plus 1 per cent until 2025. David Orr described the 1 per cent rent cut as being “an existential threat” for some housing associations and believed others would be forced to stop doing a range of work with community benefits.81 David Montague, Chief Executive of L&Q Housing, told us:

“For L&Q, the annual loss by year four is almost £60 million. That goes straight from our top line to our bottom line. For g15 [a group of London’s 15 largest housing associations], the annual loss by year four is £500 million; for the sector, we estimate that the annual loss is £1.6 billion. Imagine what we could have done with that money if we had borrowed against it. That is a lot of homes. We have lost a very significant amount. The sector is determined to recover those losses to maintain its ambitions, and that means we will have to make some tough choices.”82

The impact of the rent cut on lenders

86.The unexpected reduction in income for housing associations could adversely affect their capacity to develop. Nicholas Harris from the Stonewater housing association told us that his organisation was scaling-back its development programme from around 7,500 homes to 5,000 over ten years, as well as reconsidering the geographic spread of where development would take place.83 We were also told by David Montague that other associations, such as his organisation L&Q, were seeking to maintain their development ambitions and to find savings elsewhere. Mr Montague told us:

“We have committed to £12 billion worth of investment over the next 10 years to deliver 50,000 homes. That commitment on 9 July is the same as it was on 7 July so we have maintained that ambition, but we have had to make some changes and compromises.”84

87.For some associations, such as Stonewater, the number of new homes being built could decrease as a result of the rent cut, and areas with higher costs will be especially affected. The abandonment of the ten year agreement has created significant uncertainty in the sector, not least among the lenders who facilitate the development. Mr Orr told us:

“CPI plus 1 per cent for 10 years was described by the Government as a fair settlement for housing associations and for tenants, which gave clarity, stability and confidence to go to the markets and borrow money. One year later, a 1 per cent per annum cut, which in comparison to that, is 14 per cent out of people’s expected income. That is not just a problem, a challenge, in terms of the lost income, but it is a real challenge in terms of the extent to which housing associations feel confident about future commitments made by Government. We have 1 per cent per annum cuts for the next four years and then CPI plus 1 per cent. I do not know anyone who is modelling for CPI plus 1 per cent in year five, because they are not certain that they can properly rely on that commitment and that is a problem.”85

88.David Montague of L&Q Housing said:

“There has to be an answer to what happens in year five. We have just been out to the bond markets. The first question everybody asked was, “What on earth is going on, and what is going to happen to your rents in year five?” At the moment we do not have an answer to that, so we need some certainty. We have limited choices.”86

89.Paul Smee, Director General of the Council of Mortgage Lenders, confirmed the lenders’ perspective:

“For lenders as well, the question that I am most often asked is what happens post 2020, because lenders are lending for 20 to 25 years, and they require to have that long-term perspective as well, much more than a knee-jerk reaction to the actual events of the next few years.”87

The impact of the rent cut on services

90.We fear that the first consequence of the rent cut will be reduction of non-statutory services. A survey of housing association chief executives conducted by Inside Housing found that 72 per cent of 129 chief executives are likely to consider cutting back or scrapping non-core activity as a result of the rent cut. This activity includes all the extra non-housing services that associations provide, such as helping people into work, financial inclusion advice and health initiatives.88 Jenny Osbourne, Chief Executive of the Tenants Participation Advisory Service, told us that:

“[Tenants’] immediate concern is a cut to the services they have come to know. Tenants are always concerned about repairs and maintenance. That is their big issue. You will know that. There is a real concern about that… [Another concern is] tenant involvement—that investment, that training, those skills and that worklessness agenda that has been happening so successfully in housing associations over the last few years. They are going to see jobs going, staff who they work with, and that is starting to happen now, and they are concerned about that.”89

91.Housing associations often do much more than simply build and provide housing for those in need. The work of many providers, in delivering training, support for those seeking employment and encouraging community cohesion, is hugely important to their communities. We are concerned that the 1 per cent rent reduction could impact on housing associations’ ability to provide services which help people find work and get new skills, in addition to their development programmes and delivery of new homes, while recognising that it will also mean a reduction in rent payments for some tenants.

92.It does not seem likely that the 1 per cent rent cut will benefit tenants significantly. As Ms Osbourne explained:

“I do not think any tenant is really going to see the benefit of that. It might be a couple of hundred quid over the four years. I do not think that is going to be a benefit the tenants are going to see particularly, because of the other issues that might be happening to the finances that are coming into their home, and because of what they see as potential cuts to services that housing associations are going to make.”90

93.The Institute of Fiscal Studies (IFS) also found that the 1 per cent reduction in rent would result in a £2.3 billion reduction in rents nationally. However because many tenants receive Housing Benefit, and their entitlement to this would decrease as their rent decreases, £1.7 billion of the reduced rents would equate to reduced housing benefit expenditure by the Exchequer. The IFS therefore found that the reductions in social rents announced in the July Budget will be of little or no direct benefit to most social housing tenants. Most of those renting their home from councils or housing associations have low incomes and hence receive housing benefit to cover all or part of their rent and entitlement to housing benefit will typically be reduced pound-for-pound as their rent falls.91

94.This policy has caused significant uncertainty in the sector, and has the potential to restrict development.

Housing association efficiencies

95.The Department for Communities and Local Government told us that as a means of reducing the national housing benefit bill, housing associations “have an important opportunity to find necessary savings and deliver a more efficient sector for social tenants and taxpayers.” The Department also notes that the housing association sector had a surplus of £2.4billion in 2014.92 We agree that, like all large organisations, housing associations can find more efficient ways of operating to save money. We noted for example the evidence from Ian McDermott from the Sanctuary Group that by 2020, his association expected to have a loss of around £55 million a year, but expected to be able to meet around 50 per cent of this reduction through efficiency savings.93 David Montague from L&Q Housing also described the measures that his organisation is taking, including greater use of online services and a more agile officer structure.94 However such measures alone are unlikely to meet the decreased income caused by the 1 per cent annual reduction in rents compared to the original figure of CPI plus 1 per cent. It was also suggested that housing associations should use their surpluses to meet any shortfalls. But as the G15 group of London housing associations argued, this was also not possible:

“The extensive commentary on the growing surpluses of HAs often does not recognise how they are derived, what they are for, or how our business models work. These surpluses were predictable because the accounting rules make HAs place any profits from development in their Revenue Accounts, but losses on rented homes are not crystallised. If, for example, an HA made £1m profit from housing for sale to compensate for a £1m loss on new social rented homes on the same site then the £1m profit would show in the accounts., The £1m loss would come through year by year, with an annual interest charge appearing in the accounts. When the housing market is buoyant this means the more you develop to cross subsidise your mission, the bigger your profits will show.”95

96.It is important that housing associations which generate surpluses apply them to delivering new housing.

Supported housing and setting rents

97.Many of our witnesses argued that rents in supported housing schemes should reflect circumstances, rather than be subject to national rent levels. Tony Stacey from the South Yorkshire Housing Association explained that the rent cut was particularly harmful for supported housing schemes, because 80 per cent or more of costs in supported housing schemes arise from staff salaries.96 Hugh Owen from the Riverside Group also emphasised the challenge for supported housing:

“If you look at our supported housing in purely financial terms, their operating margins are very slim to say the least. The rest of the organisation, effectively, cross-subsidise. We think that it is a really important part of what we do and we are dedicated to continuing to do that. However, when you apply the rent cut as well, effectively it becomes a loss making part of the organisation. We are going to have to make some really difficult decisions…We know a lot of other housing associations that probably have smaller supported housing businesses where I think it would be very tempting, looking for the less efficient areas of the business, to quietly stop doing supported housing. I think there is a real threat of death by 1,000 cuts and a real shrinkage in supported housing as a result of this.”97

98.The costs of supported housing are different to those of more mainstream providers. Their income should not therefore be treated as comparable; nor should the same measures be applied without exemptions. Smaller associations which only provide specialist housing are not able to cross-subside their work in the same way as providers such as Riverside. The effects of the 1 per cent rent cut therefore have the potential to force small, specialist providers to go out of business. The Government should consider returning supported housing rents to the pre-Summer Budget rent agreement of CPI plus 1 per cent annual increases. We welcome the announcement of 27 January 2015 that supported housing will be exempt from the 1 per cent rent reduction for 2016/17 while the Government carries out a review.

99.We believe that before the Autumn Statement 2016 Government should provide some certainty over rent levels post 2020, to assist long-term business planning and increase investor confidence. In the long term, housing associations should have the freedom to set their own rents, recognising that tenants’ ability to pay rents will be limited by the future application of Local Housing Allowance rates to Housing Benefit and Universal Credit claimants living in social rented housing. The Government is committed to deregulating the housing association sector: freedom for housing associations to set the rents for their tenants should be the next step, since housing associations understand their tenants and the local market and are best placed to set fair rent levels.

100.In the Autumn Statement 2015, the Chancellor announced that the amount of rent payable through housing benefit in the social housing sector would be capped to the relevant Local Housing Allowance, which is the level of rent paid to renters in the private sector.98 We believe that this strengthens the argument for allowing housing associations to set their own rents, since this will not increase the national housing benefit bill, but would give associations the freedom to manage their assets as private providers.

79 HM Treasury, Summer Budget 2015, HC 264, July 2015, para 1.140

80 Summer Budget 2015, table 2.1, line 46

81 Q15

82 Q74

83 Q82 [Nicholas Harris]

84 Q81 [David Montague]

85 Q34 [David Orr]

86 Q115 [David Montague]

87 Q34 [Paul Smee]

88Changing the mix’, Inside Housing, 16 October 2015

89 Q34 [Jenny Osbourne]

90 Q40

91 Institute of Fiscal Studies, ‘Social rents policy: choices and tradeoffs’, 5 November 2015

92 Department of Communities and Local Government (RTB 163), page 2

93 Q75

94 Q114 [David Montague]

95 G15 (RTB 130), para 3

96 Q129 [Tony Stacey]

97 Q129 [Hugh Owen]

98 HM Treasury, Autumn Statement 2015, Cm 9162, November 2015, para 1.125

© Parliamentary copyright 2015

Prepared 8 February 2016