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Treasury rent plot for councils? Matthew Warburton - 20/06/2013

Treasury300Two weeks ago Inside Housing ran a story revealing what it described as a Treasury plot to allow developing housing associations to charge higher rents than those not building.  Non-developing housing associations would see rent increases pegged to inflation.  The aim would be to encourage associations to make greater use of their balance sheets to develop more homes, but an important side effect might be that the housing benefit bill rises a little more slowly.

There has been growing speculation that a similar approach might be taken to council and ALMO rents.  The self-financing debt settlement was calculated on the assumption that rents would rise by half a percent more than RPI for 30 years.  ARCH and others have been pressing for council debt caps to be removed so that councils can build more homes because the settlement provides the financial capacity for them to do so. 

Councils' circumstances differ, but nearly have been looking at scenarios which involve a growing rent surplus over the business plan period once the needs of the existing stock are met.  In most cases these surpluses are more than enough to repay debt over the business plan period.  Additional resources are available for investment in new housing, the rate at which debt is repaid just affects how they are distributed over the business plan period.   The darkest cloud over this rosy scenario has been the impact of welfare reform on the rent income stream, which remains a major risk.  An adverse intervention by the Treasury next week could, however, wreak serious disruption.

Limiting future council rent increases to RPI would have a major impact on business plan assumptions and take a sizeable bite out of the resources available for investment.  The worst case is that campaigning for removal of debt caps has convinced the Treasury that self-financing has handed councils control of much too much money, and the rent increase assumption should be cut to claw it back. 

In theory, changing the rent assumption should be grounds for re-opening the self-financing settlement and adjusting council debt.  But it cannot be assumed that such an adjustment would fully compensate for the impact of the rent changes.  A particularly hard-nosed government could argue that the original settlement was too generous.  Compared to this nightmare a policy that only pegs the rents of non-developing councils doesn't look so bad. 

The great majority of councils want to build and where they have the resources are planning to build.   Only a small number might be affected - and they might be prompted to rethink their plans.   On the other hand, a much better policy for the government to pursue would be to lift council debt caps so that council housebuilding could deliver its full potential boost to the economy.  This time next week we will know what the government has decided.

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