Social 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'