The rent settlement 2020+

The Government is still working through its housing policy. There has been a degree of reshaping since the policies introduced following the 2015 General Election.

Initially the focus was on:

(a) major boost in home ownership;

(b) significant increase in new housing output, and;

(c) reduction in housing-related costs borne by the state.

This set of positions has moderated: there is still a desire to reduce public spending on welfare (especially in the light of the Brexit decision and the effects on the economy that are working through in different ways), and there remains an acknowledgement that housing delivery has to increase. However, the overriding commitment to increase home ownership at the expense of rented housing is dissipating.

According to well-informed sources, before opting for the 1% annual rent cuts, the Government was also considering a 2% annual rent cut. Following analysis, they were advised that, whereas HAs (and arguably LAs) could weather a 1% annual cut, if a 2% cut were introduced, this would lead to a significant reduction in development programmes. The decision was therefore for 1% cuts.

Although Government initially claimed, when introducing the rent reductions, that there would be a return at the end of the four years to CPI +1% annual rent rises, nobody truly believes this will happen. Apart from any other considerations, the rent reductions came just two years into a 10 year settlement at CPI +1%. So the suggestion has no credibility, and even if it had, the present Government, while of the same party, is seen as quite different from that elected nearly two years ago. Moreover the political and economic environment has shifted considerably since the EU referendum.

HAs in their business plans have been modelling different rent scenarios for the post-2020 settlement. The principal options being examined are zero rent rises and CPI flat. Neither is seen as sufficient to fuel significant growth in output. In order to make up the difference therefore and enable continuing development by HAs (and perhaps LAs), we are seeing registered housing providers pursue a number of approaches: increasing market sales; using the proceeds from sales of existing stock to fund new development; developing shared ownership; market renting; potentially using the proceeds of voluntary Right To Buy; developing non-housing activities of a commercial nature. These approaches are going alongside: expenditure cuts achieved through reconfiguring services (moving increasingly to digital self-service); sharing services with other organisations; and pursuing mergers and acquisitions.

In London, the Greater London Authority’s new programme includes the ‘London Living Rent’: rents for new homes funded through this initiative are to be linked to notionally one-third of average gross household incomes in a particular area, hence creating an ‘intermediate affordable rent’. This is expected to come out at 40-45% of market rent. Similar approaches are being explored in other areas.

Government is considering whether it can link the post-2020 rent settlement to development output. It is unclear whether new legislation would be required to provide for a differential approach, whereby RPs developing new housing beyond a certain level would be allowed to increase rents by a higher level than those failing to do so. A vehicle for such legislation, if required, could be the anticipated Housing Bill to give effect to provisions flagged in the January 2017 Housing White Paper. However, it would be a difficult measure to legislate coherent triggers, and would be liable to prove bureaucratic and contentious in its application. For instance there would be major objections from tenants of developing housing associations whose rents were increased – unless the provision applies to new housing stock only. Unless Government can come up with a workable formula, such a provision might prove controversial at a time when all available parliamentary time is being dedicated to Brexit-related matters. Moreover, it might not help the Government’s desire to get HAs declassified and returned to their former status as private bodies.

2020 – when the new rent settlement is due to take effect – will be after the next General Election. While at this point no serious commentators anticipate the Conservatives losing power, it is perfectly possible that there will be shifts in policy. For one thing, the UK will by then be either outside the EU, or at least embarked on a transitional exit. It is very hard to forecast what that will mean in practice for new development. However, some of the factors that will have a bearing include the weakness of sterling fuelling building materials inflation, and the large numbers of UK construction workers who come from the EU (on some estimates 25% of building workers in London, and 10% outside). Meanwhile there are the sort of factors in play identified in the Farmer Report, such as the large numbers of builders due to retire over the next decade, the low levels of new entrants to the industry, and the low levels of new housing delivered by off-site manufacturing (just 1% of current output).

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