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Welfare Reform & Work Bill: Provisions on social housing rents 23/07/2015

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.


Double Whammy:


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.

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