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Balancing the bills

The greenest new homes cost more to build but much less to run. Richard Shrubb examines the case for increasing rents to help pay for them

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When I put the kettle on I notice the whole flat warms up,’ says Stephen Hansey, a 36-year-old former architectural technician.

Mr Hansey is one of 28 households living in one of 5,000-home housing association Hastoe’s Passivhauses - in other words, super-insulated homes designed to capture so much warmth they don’t need to be ‘actively’ heated.

Having lived in the one-bedroom flat in Ditchingham, Norfolk, for one-and-a-half years, since moving out of his parents’ home, Mr Hansey pays £60 a month for electricity, which meets all his energy needs - which are higher than usual for medical reasons. ‘I love the flat. Once you get your head around the lack of radiators, the design makes a real difference,’ he enthuses.

Mr Hansey’s experience has his landlord asking a tough question: given that these homes save tenants so much money on their energy bills - but cost the landlord more to build - should Hastoe be allowed to charge the tenant higher rents?

Under current regulations all new build homes will have to be ‘zero carbon’ by 2016, and although in reality that’s not quite as tightly sealed as a Passivhaus, this means in future homes will cost all social landlords significantly more to construct than those built to current standards. Social landlords are in a bind - how to meet demand for housing but avoid financial losses?

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Source: Jason Bye

Inside Stephen Hansey’s Passivhaus flat in Ditchingham, Norfolk

Housing providers in England already have the power to charge rents of up to 80 per cent of market rates for new homes built using Homes and Communities Agency grant, under the government’s affordable homes programme. But some social landlords argue that even this is not enough to pay for the super-efficient homes they want to build. Tenants can afford to pay even higher rents, they argue - and would even end up saving money, because their energy bills will cost so much less.

An informal survey by Sustainable Housing and housing consultancy Sustainable Homes, of 12 social landlords across the UK, revealed that eight agreed they should have the freedom to charge more.

Sally Hancox, director of Gentoo Green, part of the Sunderland-based social landlord Gentoo, says: ‘The cost of occupancy should be reflected in the cost of the rent, not just things like the number of rooms.’

Kevin Hartnett, business development director at Hastoe, argues for a simple formula. ‘We’d like to split the savings with our residents,’ he says. ‘If they pay £500 a year more in rent and still save £1,000 on the running costs of the home they are still better off and live in warm and comfortable homes.’

Construction costs
Building a Passivhaus development like the one Mr Hansey lives in costs money. Mr Harnett estimates that building a home that meets the stringent Passivhaus standard costs 15 per cent more than one built to level 3 of the code for sustainable homes - the minimum standard that social landlords must currently meet to secure grant from the HCA.

‘However, heating and hot water will cost £130 a year in a three-bedroom Passivhaus,’ he says. ‘Put in perspective, a code level 3 home of similar size will cost more than £1,000 a year to heat and provide hot water.’

Indeed, the savings were crucial in making sure one of Hastoe’s shared owners had the money to get a foot on the property ladder. Becky Walman, a shared owner, lives with her husband, two children and dog in a three-bedroom house, in Hastoe’s first Passivhaus development in Wimbish, in Essex. She says: ‘The energy savings involved enabled us to buy our home as opposed to renting. We pay about £30 per quarter on gas and electricity. The outgoings living here make the overall costs the same as renting a cheap two-bedroom house.’

One housing association which took part in our informal survey said the only way to achieve the government’s target that all new homes, across all tenures, must be zero carbon by 2016, would be to build fewer affordable homes and more houses for private sale.

The impetus for Hastoe’s campaign has come, ironically, from a change in the government’s grant regime for new affordable housing, which itself allows social landlords to make a big increase in the rents charged for new tenancies. But, housing associations argue, this grant regime has made it tougher for them to build new housing.

The £1.8 billion 2011/15 affordable homes programme has reduced the level of grant by 40 to 50 per cent per new home in Hastoe’s case, with housing providers expected to make up the difference by charging higher ‘affordable rents’ at up to 80 per cent of local market rates.

Gentoo Green’s Ms Hancox argues: ‘As a result, it is not at all financially viable to use revenue subsidy generated through the affordable homes programme to fund new build developments built to any standard above level 3 of the code for sustainable homes.’

Tenant support
Some tenants seem to support the idea of paying higher rents if they are to save overall. Gentoo ran a scheme to upgrade its existing housing stock and gave tenants the choice between paying more money through their electricity and gas meters, or paying extra rent for the modifications. The majority - 562 households of 594 - chose to pay extra rent rather than increased energy bills.

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Source: Jason Bye

Passivhaus buildings are designed so they do not need to be actively heated

A spokesperson for the social housing tenants’ campaign group No2 Bedroom Tax agrees with the idea in principle. He says: ‘If the correct safeguards are in place to ensure that savings are passed on to the tenant, we would support this scheme.’

And just in case the promised energy savings didn’t occur, Mr Harnett notes: ‘If energy savings were not as great as hoped for, we would obviously revisit the increase in rents accordingly so tenants were not overcharged.’
Yet, not all social landlords agree. One housing association that responded to our survey argues that tenants simply couldn’t afford to pay more. ‘Social tenants tend to live on tight budgets; the idea is to help them save money… If you raise the rents then they will need more money from the state,’ the association says.

Arguably, Hastoe could also be viewed as a case study on how to build hyper-efficient homes - without resorting to charging tenants more. The landlord has already made a commitment to exceed the minimum standards of energy efficiency set out in building regulations, and the criteria set by the HCA for winning grant funding.

To pay for its Passivhaus plans, Hastoe has restructured and implemented a 45-year business plan - as opposed to the normal 30-year horizon on which social landlords make decisions.

Mr Hartnett says: ‘Using the affordable rents scheme we are charging at the 80 per cent market value limit. We have had to find efficiencies in other areas of our business to pay for them [the Passivhauses].’

And it has found that rent arrears have vanished in its Passivhaus homes.’We have no rent arrears at all after two years of occupancy. This is against a rate of 4 per cent across our housing stock,’ Mr Hartnett reports from the landlord’s first Passivhaus development of 14 homes in Wimbish. The landlord has tracked its tenants’ energy use, and contends that none are in fuel poverty - tenants are spending around £100 a year for heating and hot water.

Keeping up with bills
Across the Atlantic, a 2012 study of mortgage defaults by the University of North Carolina tells a similar story. An examination of 27,000 households across the US found that the risk of default on a mortgage was on average 32 per cent lower in homes that meet that country’s energy star rating, a certificate of energy efficiency.

This, more than anything, will perhaps give other social landlords across the UK pause for thought as they brace for rent arrears to rise as welfare reforms take full effect. Evidence is already stacking up from pilot projects that the gradual roll-out of universal credit - under which several benefits are bundled together and paid directly to the tenant once a month - is causing arrears to rise.

As Mr Eagles puts it: ‘With the huge change to universal credit and overall reduction in incomes to those in receipt of it, housing associations will see rent arrears increase.’

But Mr Hartnett from Hastoe argues that the incentive of lower arrears alone is not enough to make Passivhaus financially sustainable, saying the landlord ‘will only be able to continue on this programme for the next two to three years at current rates, depending on the outcome of the next bidding round with the HCA, which began last month’. He adds: ‘If we cannot continue, we must reduce costs, or stop building Passivhaus developments, unless we are able to increase rents.’

But the government, in turn, seems unlikely to allow for a move to higher rents at present, a spokesperson for the Communities and Local Government department says. ‘The regulatory requirements are designed to strike the right balance between investment in new and existing stock and the interests of tenants and the taxpayer.’

In the meantime, landlords like Hastoe will continue to question whether, in a very high energy efficiency home, that balance of tenant affordability has changed. Back in Ditchingham, Mr Hansey takes the idea of being charged more rent in his stride. Would he pay more to stay in a Passivhaus, compared with a cheaper, less energy-efficient home? ‘Yes I would,’ he says. ‘Yeah. Even if it was a surcharge I had to pay out of the rest of my
benefits.’

To read more about fuel poverty click here.

Rent valuations

The Homes and Communities Agency sets English social rents through a complex formula laid out in the regulatory framework for social housing from 2012.

It states: ‘The formula for setting social rents should enable [housing associations] to set rents at a level that allows them to meet their obligations to their tenants, maintain their stock (to at least decent homes standard) and continue to function as financially viable organisations, including meeting their commitments to lenders.’

Affordable rents are calculated at 80 per cent of the standard rate of private rentals, as set out in the Royal Institution of Chartered Surveyors’ Red Book, which is a measurement tool used across the housing rental industry.

One problem is that energy efficiency is not recognised as something that increases the value of a home on the private market.

Andrew Eagles, managing director of Sustainable Homes, says: ‘RICS published guidance on adding 2 to 3 per cent on the rental value of energy-efficient homes, but the Council of Mortgage Lenders has not approved this yet. I’d be very surprised if this didn’t happen in the next four to five years.’

Peter Sherrard, chief executive of private housing consultancy Property Price Advice says: ‘As time goes on and energy prices continue to escalate, highly energy-efficient homes will become more sought after and in the next three or four years we will see an increase in the desire for these kind of homes.’


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