What’s the point in sub-market rents?

Second, for most groups that rely solely on the state or are in very low-paid employment, pretty much all the available evidence says that capital subsidy (grant) to pay for sub-market rented homes is more cost effective than revenue subsidy (housing benefit) in the long run. The case becomes even more compelling if the macro-economic benefits of building new homes, rather than paying to rent existing homes, is factored in. 

Third, there are some subtle but important advantages in having a sector focusing on offering sub-market rents, rather than relying on the market alone. For example, the social housing sector makes an important contribution to overall supply and can act counter-cyclically – which has at times been crucial in sustaining housebuilding during market downturns.

“The social housing sector makes an important contribution to overall supply and can act counter-cyclically – which has at times been crucial in sustaining housebuilding during market downturns”

The sector also lends itself to effective regulation – in part because providers wish to access subsidy – which means strong levers can be created to ensure appropriate quality of accommodation and services. Regulation also provides a means to ensure that taxpayer funds (capital or revenue) delivering value for money and, in the case of the not-for-profit sector, are reinvested appropriately. These benefits would be much harder to achieve via a regulated private rented sector. 

Existing rent policy does not perform as well as it should against these objectives.

Social rent ticks the boxes in terms of work incentives and long-term value (at least for most groups on very low incomes). However, it falls so far below market levels that huge levels of subsidy are needed to fund new homes in high value areas – where, inevitably, need is greatest.

This limits supply and means that there is a very sharp divide between those who get a social rented home and those who don’t, which in turn creates risks around manipulation of the system – for example via illegal subletting. There is also no real incentive to invest in stock quality over and above the basic Decent Homes standard. 

So-called ‘affordable rent’ creates different problems – again principally in higher-value areas. It requires less subsidy because rents are driven only by market levels. But this also means that even tenants on good wages may not taper off benefits, while some of those who rely solely on benefits cannot afford the rent at all thanks to the benefit cap.

In the long run, using this blend of capital and revenue subsidy to support the poorest households is unlikely to be such good value for money as social rent. It also creates a long-term problem in terms of supply, because the level of debt providers take on to fund affordable rent has and will continue to erode balance sheet capacity. 

“Whatever else the government does, it needs to set rents that are at levels that enable providers to meet regulatory standards, plan ahead with confidence and attract private finance at competitive rates”

So, what should the government do?  

Social rent should be reformed by using recent values, not values from 1999. This would reduce the subsidy gap in high-value areas, supporting supply.

I would also link rent levels to the thermal efficiency of properties, which would be fairer for residents and would both incentivise and help pay for necessary improvements. Ideally this would be informed by a more reliable measure than Energy Performance Certificates – which is badly needed for other reasons.

Rents for existing residents would need to converge on the new ‘formula rent’ over time. 

Affordable rent needs to be fundamentally reformed in two respects. First, homes need to be allocated to households for whom higher rent levels make sense – essentially people in reasonably well-paid employment.

Second, some sort of labour market factor needs to be introduced, because absent that rents set at 80% of market levels are, in some areas, still not affordable. The last point might also help to create some welcome consistency. 

Finally, whatever else the government does, it needs to set rents that are at levels that enable providers to meet regulatory standards, plan ahead with confidence and attract private finance at competitive rates. Recent policy has failed on all three counts, mostly because government keeps reneging on its own commitments.  

That might mean keeping politicians out of rent-setting – a topic perhaps worthy of another article. 

Matthew Bailes, chief executive, Paradigm