Thursday, 28 August 2014

Government to allow a rental floor, but it will be set at -2 per cent

Landlords lose rent cuts battle

Housing associations face rent cuts of 2 per cent next year after closed-door negotiations failed to persuade the government to keep rents flat.

Sources close to the discussions this week said that the argument had been lost, and the government was set to unveil a rental floor of -2 per cent.

Government rules require associations to set their rents in line with the retail price index of inflation, which is expected to fall to between -2.5 and -3 per cent this September.

Associations have been lobbying for months to be allowed to set a ‘rental floor’ at 0 per cent, warning that rent cuts could stymie social home building programmes.

But a source said: ‘The Treasury view is that £109 million savings on housing benefit is a prize sufficiently worth having that the costs associated with it are worth bearing.’

The Communities and Local Government department confirmed an announcement on a rental floor was expected but refused to confirm or deny the details.

Associations are expected to set their rents within 0.5 per cent of RPI as it stands in September, meaning they would be expected to make a 2 per cent rent cut. The fear is that this loss of income could threaten some associations’ viability.

In January, Tenant Services Authority chief executive Peter Marsh said: ‘We need to take a very cold look at whether or not association business plans could weather a reduction by 1.5 per cent in rental streams. Some probably could not.’

But it is implausible that the regulator would compel an association to make a rent cut that would trigger financial collapse.

When contacted by Inside Housing this week Mr Marsh refused to comment on any plans for a rental floor.

But he observed that the TSA had a legal duty to ensure associations’ viability, and ‘if the consequence of us taking a course of action was that an association became unviable, we would be in breach of our statutory objectives.’

If an association was unable to meet rent targets without threatening its viability, the TSA would discuss ‘what other approaches there might be to rent setting in 2010/11,’ he added.

As Inside Housing went to press, the CLG was unable to make any comment. It was due to issue its direction on rents this week.

An announcement is also anticipated suggesting the TSA will start charging associations for regulation in April next year.

Readers' comments (6)

  • Your statement, "Government rules require associations to set their rents in line with the retail price index of inflation" is incorrect. Associations are required to INCREASE their rents in line with the RPI - there is a significant difference.

    The Housing Corporation Circular 27-01 says:

    "The rent influencing regime will continue to seek to bear down on rent INCREASES through the issue of a guideline limit for rent INCREASES and influence rent levels through the rent restructuring framework."

    "the guideline limit for HA rent INCREASES will be 0.5% a year in real terms from 2002/2003 onwards."

    "Over the 10-year implementation period, target rents will INCREASE by RPI+0.5% a year."

    And the circular specifically deals with protection of the public and private investment in associations' stock:

    "In deciding whether to challenge an HA’s rent levels, or their rate of increase, our paramount concern will be to protect the public and private investment in its stock and to retain the confidence of lenders."

    Dangerous Darling and Crash Gordon have got the UK into a right mess by overspending, and borrowing beyond their means. Their build targets seem to have gone out of the window as they look to plunder the finances of the housing sector to pay off their credit card bills.

    Shame on you Mr Brown.

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  • Apart from "savings on housing benefits", why should tenants NOT on benefit be paying more than inflation? If an RSL can't meet rent targets in line with RPI "without threatening its viability" there must be something wrong with the model, surely?

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  • The Housing Associations will just increase the Service Charges more or find another way to gain it! Just like the Airlines did!

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  • Joe Halewood

    If only rate 'increases' are tied to this formula, does that mean landlords can maintain the status quo by not setting a rent increase?

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  • Why should tenants be paying more than inflation? Well, for a start, it depends what you mean by inflation. The RPI figure is pretty unrepresentative, as it includes mortgage interest payments.

    There are better measures of general price inflation (e.g. RPIX, which excludes mortgage payments, or CPI, which is more up-to-date and used by the Bank of England as an inflation target). CPI is still rising at over 2% a year.

    The only people who are experiencing price deflation are homeowners with floating-rate mortgages: a lucky few. For the rest of us, prices are still going up, in case you hadn't noticed.

    There's an argument that since RSLs borrow against property their costs are more likely to follow the RPI trend (i.e. benefiting from falling interest rates). However, most RSLs have a sizeable proportion of their borrowing at fixed rates, and the new rates charged by lenders haven't fallen nearly as much as the Bank of England rate, so RSLs aren't benefiting from cost deflation as much as the RPI figures might suggest.

    RPI is still used as an inflation measure for all sorts of things aside from rent (e.g. pay deals, rail fare increases). For a long time it suited a lot of people (employees, pensioners and thus politicians) to keep RPI as the measure rather than switch to CPI, as RPI had always been higher than CPI. The boot's on the other foot now.

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  • The article claims "rent cuts could stymie social home building programmes" - it could do a lot worse than that, especially in the current economic climate. Many HAs' loan agreements are likely to contain a clause stating that rent level do not decrease. If this happens, then the lenders are likely to pounce and demand re-pricing of the Association's facilities, which could be disastrous for the sector!

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