The government has published the Welfare Reform & Work
Bill which includes new powers to require local authorities and
other registered providers to reduce rents and to enforce those
restrictions
ARCH has produced a Briefing Paper
for members on the provisions on social rents contained within the
Bill.
Stock retained authorities have expressed concerns about the
proposal and ARCH has been in discussion with the LGA (Local
Government Association), NFA (National Federation of Almos), CWAG
(Councils with ALMOs Group), SOLACE (Society of Local Authority
Chief Executives) and DCN (District Councils Network) regarding a
co-ordinated and informed response from the sector as a whole.
ARCH believes that the proposals to force councils to reduce
rents by 1% per annum over the next four years will mean a loss of
rental income in excess of £2.1billion. Also, when the full impact
is projected over councils' 30 year housing business plans the
proposal will have a profound impact on the long term
sustainability of those HRA Business Plans. Notably the government
seems prepared for the fact that some councils (and housing
associations) may find themselves in serious financial difficulties
and has included provisions in the Bill to allow the Secretary of
State to issue directions exempting them from the requirement to
cut rents!
Council's HRA Business Plans were developed on the basis of the
Self-Financing Settlement agreed with the government in March 2012
- a little over 39 months ago. This proposal to reduce rents
represents is a complete u-turn on the Social Rents Policy issued
little over 12 months ago in May 2014 when the government signalled
its intention "to set out a rent policy to apply for ten years from
2015/16... to enable landlords to plan for future housing
investment better... and to encourage landlords to invest in new
affordable housing, helping more people in need". The decision then
to move from rent guidelines based on RPI+1/2% to CPI+1% and
abolish "rent convergence" also took into account the need to
control public expenditure - principally housing benefit costs.
In the 2012 Housing Self-Financing settlement, the vast majority
of local authority landlords took on significant additional
borrowing in their HRA to fund the HRA self-financing debt
settlement payments to the Treasury. These debt settlement payments
to the Treasury were calculated by reference to the self-financing
valuation of each local authority's council housing stock based on
assumptions made by the government about the rental income and
expenditure required to maintain each council's housing stock over
30 years. A significant move away from the assumptions made about
social rent policy and HRA rental income, so soon after the
self-financing settlement, calls into question the validity of the
self-financing determinations made under the Localism Act 2011.
The proposal to abandon the current social rent policy and force
councils to reduce rents by 1% per annum over the next four years
will have a fundamental impact on councils' HRA Business Plans and
will result in the complete opposite of what the government said it
wanted to achieve in May 2014. If this proposal goes ahead, it will
inevitably discourage and prevent local authorities from investing
in new housing. For some authorities, it may mean cuts in planned
investment in improvements to the existing housing stock.
Since the freedoms of self-financing were introduced, councils
have responded positively and, despite the limits on investment
imposed by the HRA debt caps, have built more council housing in
the last three years than at any time in the recent past. However
this progress in assisting the drive to increase the supply of
housing will be put in jeopardy by these proposals.
It must also be remembered that the proposal to reduce rents,
set out in the Welfare Reform bill, is not the only threat to the
sustainability of HRA Business Plans - the government in announcing
the extension of the RTB to housing association tenants plan to
fund this policy by forcing councils to sell their "high value"
stock as it becomes vacant. The government have promised 1-for-1
replacement of any high value stock sold (along with 1-for-1
replacement of stock sold under the re-invigorated RTB) but the
loss of rental income due to the 1% rent reduction, coupled with
the loss of rental income from forced sales of high value stock and
increased sales of council housing under the re-invigorated RTB,
will impact on council's ability to invest in new affordable
housing.
The proposals to introduce a compulsory "Pay to Stay" policy is
also expected to lead to increased RTB sales of council housing and
add further rent loss to HRA Business Plans. Even if higher
earning tenants choose to pay a market or near market rent rather
than move or exercise their RTB, unlike housing association
landlords, councils will be forced to hand over to the Exchequer,
any additional rents charged. The costs of administering a
compulsory "Pay to Stay" policy will effectively mean the
introduction of "means testing" every tenant to assess their
household income - a significant additional administrative cost
burden to the HRA at a time of significant reductions in rental
income.
In terms of the impact of compulsory sale of high value stock,
one stock retaining district council (outside London) reported that
in 2014/15 they had 318 voids, 99 of which (32%) had a market value
greater than the proposed regional threshold and which they would
be forced to sell. That authority would face the double whammy of
the loss of rental income from high value disposals, coupled with
the four year 1% decrease in rents, therefore significantly
reducing their rental income from two sources. The loss of
anticipated rental income as a result of a 1% rent reduction would
be £8.5million (£149million cumulative over the 30 year business
plan). Add to this the loss of rental income due to sale of high
value voids and set it against the payment to the Exchequer of
£136million made by the authority three years ago to finance the
self-financing debt settlement payment to Treasury based on the
anticipated rental income stream at that time and the fundamental
impact on the HRA Business Plan agreed with their tenants becomes
clear.
The Housing Regulator has recently written to housing
associations, concerned at the impact that 1% rent reductions may
have on the financial viability of their Business Plans - local
authorities will be similarly concerned to model the cumulative
impact of these proposals on their councils' HRA.
ARCH will continue to argue the case for council housing as the
detail of the government's proposals emerge.