Council housing rent reductions: Estimate of national impact 23/07/2015

25/2015

Key points

• Imposition of a 1% rent reduction will reduce aggregate local authority rent income by £153 million in 2016/17, £381 million in 2017/18, £649 million in 2018/19 and £936 billion in 2019/20, compared with the previous policy of raising rents by CPI + 1% each year.
• By 2020, the cumulative loss of income will be £2.1 billion and rents will be 11.8% lower than was previously expected.
• Assuming that rent increases return to CPI+1% from 2020, there would be a further loss of income of over £30 billion over the remaining 22 years of the 30 year business plan.
• To accommodate these reductions through efficiency savings would require a 22% reduction in spending on management and maintenance over the next 4 years.

Background

The Summer Budget issued on 8 July included proposals to cut local authority and housing association rents by 1% a year for four years beginning April 2016. The Welfare Reform and Work Bill, published on 9 July, includes provisions to impose these reductions, as detailed in ARCH Briefing 22/2015. To raise awareness of the likely impact of these proposals and inform Parliamentary debate on them, ARCH has prepared an estimate of their overall impact on council housing in England. Although there is still some uncertainty on the question, it seems likely that the proposals will not apply in Wales.

The estimated impact on local authority rent income each year is set out below:

By 2020, the cumulative loss of income will total £2119 million and rents will have been reduced by 11.8% (£936 million) compared with previous policy. Even if rent increases return to CPI+1% from then on, this reduction in the base rent will strip over £30 billion from rent income over the remaining 22 years of the 30 years from 2012 when self-financing was introduced.

The assumptions used in this calculation are:

• A local authority stock of 1,647,349, 2% voids and an average rent of £87.05 p.w. at 1 April 2015. These are based on the latest CLG data.
• Estimates for increases in CPI of 0.1% in 2015, 1.1% in 2016, 1.6% in 2017 and 1.8% in 2018, as given in the OBR Economic and Fiscal Outlook published on the same day as the Budget.

The CIH and the LGA have issued rather higher estimates of the cumulative impact of rent reductions over the next four years - £2.56 billion and £2.63 billion respectively. This appears to be because they have used higher estimates for CPI increases, particularly for this year and the next. While there is room for skepticism about the OBR's inflation estimates, we have chosen to use them to avoid any accusation that ARCH is overstating the impact of the Government's change of policy.

The Budget report states that the rent reductions will encourage landlords to look for efficiency savings. The scope for savings in the cost of servicing and repaying HRA is negligible; on the contrary, interest rates are expected to rise from the end of this year.  At the time of the self-financing settlement, management and maintenance expenditure equated to 55% of rent income. Consequently, to accommodate an 11.8% reduction in rent income through savings on management and maintenance would imply a 21.5% reduction in spending per unit.