Rent hike could prompt Bank to raise interest rates
Finance review predicts plan for market-level rents would cause inflation and hurt the economy
A sharp hike in social rents along the lines recommended by Tory thinkers would trigger inflation and put extra strain on the public purse, government research has revealed.
Pushing housing association and council rents up to market levels would add 1.41 per cent to the retail price index of inflation, according to a study commissioned for the government’s review of council housing finance. This would be likely to prompt the Bank of England’s monetary policy committee to raise interest rates in an attempt to contain inflation.
‘The costs to government of higher rents can be seen as the likelihood that the MPC will need to increase interest rates,’ the report states. ‘This in turn will have a deflationary impact on the wider economy.’
Report author professor Steve Wilcox, from the University of York, concludes that this would result in a net increase in public spending, ‘particularly in terms of the [Department for Work and Pensions] budget related to unemployment’.
In April, a controversial paper for think tank Localis by Stephen Greenhalgh, Conservative leader of Hammersmith & Fulham Council, called for social rents to rise to near-market levels (Inside Housing, 1 May).
John Moss, the joint author of the Localis report, described concerns about the effect on RPI of a rent hike as a ‘red herring’. The basket of goods which determines the index could be altered to take account of a major policy change, he added. ‘Given where RPI is now, people would be pleased by that [an increase in RPI]’.
Professor Wilcox’s research goes on to question whether social rents should be pegged to RPI, as is currently the case. It says: ‘The sharp fall in inflation levels during the course of 2008/09 and the particular fall in the RPI measure has led to an ad hoc departure from the established policy of annual upratings and raised concerns about the stability and future appropriateness of the RPI as part of annual uprating policy.’
Housing associations face having to cut their rents next year by 2 per cent, because the RPI is predicted to fall as low as -3 per cent in September, when rent levels are set.
The research recommends using the alternative ‘Rossi index’ to set rents, because it excludes mortgage interest costs, and private and social rents.
Speaking to Inside Housing, Professor Wilcox discounted the Local Government Association’s idea that £18 billion of council housing debt should be written off in the upcoming reform of authorities’ housing finance system. The LGA is pressing the government to foot the bill rather than split the cost between stock-holding authorities - the option put forward by ministers.
‘The LGA’s demand for the government to wipe out debt has a very significant net cost to the Treasury,’ Professor Wilcox said. ‘It might make life easy, but it is just not plausible.’
Amounts council rents were subsidised by in 2007/08
| REGION | SUBSIDY |
|---|---|
| East midlands | £294m |
| East of England | £464m |
| London | £1.2bn |
| North east | £170m |
| North west | £231m |
| South east | £459m |
| South west | £223m |
| West midlands | £306m |
| Yorkshire & Humber | £284m |
| ENGLAND TOTAL | £3.7bn |
Monetary policy
How social housing affects inflation
5.9%
Contribution of all rents to the way RPI is calculated
43%
Proportion of this 5.9 per cent which is made up of social sector rents
1.4%
Increase in RPI if social rents raised to market levels
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Readers' comments (1)
John Moss | 31/07/2009 6:55 pm
I also pointed out that in the Localis paper we specifically linked increased rents and Housing Benefit to falling capital subsidies, so the overal level of Government spending would not rise.
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