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The new rent formula – what does it mean? Matthew Warburton - 27/06/2013

Inflation_300Social landlords have been pressing for the government to provide long-term certainty about rents policy beyond 2015, and, as expected, the Chancellor's spending round statement included a new rent formula.

 

Target rents from 2015 will be pegged to the increase in the Consumer Price Index, plus one per cent for the next ten years. Councils and housing associations are among those trying to work out exactly what effect this is likely to have on business plans, borrowing and future investment.

The self-financing settlement assumed that rents would increase annually according to the retail price index plus a half per cent plus a convergence factor. With convergence in theory achieved by 2015, rents would rise after that by RPI plus 0.5% for the remainder of the 30 year business plan period. So what are the implications of replacing RPI + 0.5% with CPI + 1%?

The Treasury spending round documentation predicts that the change in formula will save the government over £1 billion in benefit spending by 2017/18. This implies that social landlords would see rent income cut by around £1.5 billion over the same period.

It is generally accepted that CPI will rise more slowly than RPI, since it does not include housing costs, but by how much is debatable. Between 1989 and 2011 the average annual rise in CPI was 0.7% less than RPI, although in 2009-10 the relationship was reversed, with CPI over 3% more than RPI.

A deeply technical paper published by the OBR in 2011 argues that the future gap is likely to widen to a long run average of 1.4%. If this is true, the long run effect of the new formula would be a cumulative reduction in rent income by 0.9% a year compared with current business plan assumptions, with a significant impact on the scope for new building. However, the composition of CPI is due to be reviewed, putting a question mark over any long run prediction.

Councils will need to spend time modelling the impact of the new formula on their individual business plans. It will take some time before it is possible to make a measured assessment of the overall impact on council plans. What we can say is that the Government's announcement is bad news; it will take some time before we know just how bad.

 

See also, 'A "modest" programme of new (un)affordable housing'

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ARCH Member Comments 3 people like this

  • Darrell Campbell, North Tyneside MBC - 03 July 2013

    Of course Matthew its not just the impact of the difference between RPI and CPI that has to be accounted for over the 30 years. Implementing the change from 2015 means those authorities that were on the steepest convergence path, among which most of the N.E authorities are numbered, will lose out by approx. 2.5% of rent in 2015-16, which we estimate will lose us £1.4m in rental income in 2015-16 and up to £50m over the life of the plan, depending on your CPI and RPI assumptions of course! We all know that OBR have predicted a significant widening between RPI and CPI. Two years in to self-finaning and the goal-posts would appear to be moving again! The whole transition to self-financing was predicated on RPI linked rent increases. Will this mean they will be re-opening the settlement?

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