CIH responds to the government's consultation on future rent policy

Chartered Institute of Housing response to the Ministry of Housing, Communities and Local Government’s consultation on future social housing rent policy

December 2024

Introduction

Chartered Institute of Housing (CIH) is the professional body for people who work or have an interest in housing. We are a registered charity and not-for-profit organisation, and as holders of a royal charter, we have a duty to act in the interest of the public as well as our individual members. We welcome the opportunity to respond to the Ministry of Housing, Communities and Local Government’s consultation on future social housing rent policy.

As part of our consultation response, we have co-commissioned analysis from Savills to examine the potential impacts of the government’s proposed rent policy and possible mechanisms to strengthen financial capacity (Annexes one and two).

Summary

We welcome the government’s commitment to a long-term rent settlement, which is crucial for the housing sector’s financial capacity and sustainability. The essential purpose of social housing is to provide good quality, affordable homes for those who need them. However, through a series of unexpected changes to rent policy in the past, the sector has faced a prolonged period of instability and uncertainty, which has impacted upon its ability to invest in existing homes and develop new homes. This consultation stresses the importance of certainty, and the need to increase confidence for both registered providers (RPs) and investors into the sector.

Our headline responses to the consultation paper are:

• Whilst the government’s proposal of rent increases capped at CPI+1 per cent for five years is welcome, it is clear from discussions with our members that this will not go far enough to provide the stability required. We would therefore advocate a 10-year rent settlement, if possible set in statute or otherwise given additional certainty, to improve confidence and provide the necessary stability for the sector and for investors and allow for fully effective business planning. A 10-year settlement at CPI+1 per cent is estimated to provide an additional income of £5.6 billion for local authorities and £7.4 billion for housing associations, compared to a CPI-only settlement.
• We would strongly encourage the government to permit 'convergence' of rents to formula rents, as evidenced by our work with Savills. Without convergence, it is clear from our members that the additional capacity created by CPI+1 per cent for 10 years would be insufficient to meet the full range of investment challenges faced by the sector. We urgently need to increase our supply of new homes, particularly for social rent, to meet the government’s 1.5 million homes target, and this must be managed alongside continued urgent investment in existing homes to ensure their decency and safety and to meet national carbon reduction ambitions. Convergence is essential both to ensure fair and consistent rents and to create the capacity for the sector to achieve the government’s objectives. This would increase the total additional rent income over 10 years to £11.6 billion for local authorities and £10.7 billion for housing associations, again including CPI+1 per cent rent increases, and compared with only CPI increases without convergence.
• It is important to note the broader financial challenges facing the sector. With the turbulence in previous rent policy, rising material and labour costs, and high levels of inflation, the sector’s financial capacity has been considerably eroded in recent years. Therefore the government’s recognition of the need for consistency and stability in future rent policy is very welcome, and we hope that the new certainty will maintain confidence in the sector and improve the climate for investors.
• Finally, we argue that a more holistic review of what rents should cover is needed which sets the objectives for the sector in terms of standards and new build targets against the required resources in terms of rents, grant, borrowing and sales receipts. This is likely to show that rents cannot cover all the costs of achieving the government’s objectives for the sector and a significant increase in grant funding is required. We hope to see a review of this kind in the upcoming housing strategy and Spending Review, and would welcome an opportunity for further discussions with the government on this wider issue.

Contact: Megan Hinch, senior policy officer, CIH, megan.hinch@cih.org

Question one - Do you agree with our proposal that the government should set a rent policy that will remain in place for at least the next five years, from 1 April 2026 to 31 March 2031?

Yes. It is clear from member feedback that five years is the minimum level of certainty required for effective and accurate business planning. A long-term rent settlement is necessary to create clarity for development plans, fulfil tenant commitments, and provide high quality affordable homes and services. Five years is a positive start, and CIH is supportive of this proposal, however a longer-term rent policy would provide a much greater level of certainty and consistency (see question two below).

Question two - What impact would a longer settlement have, and what alternative length should a settlement be? (e.g. seven years / 10 years?)

The case for a 10-year settlement

As stated, a long-term rent settlement is crucial to ensure that providers can plan ahead, both for investment in existing homes and building new homes. Five years is a minimum level of certainty, but it is evident from member feedback that a longer settlement would have a significant impact on their capacity to effectively manage, maintain and build affordable homes. Whilst there is a range of views on the most effective length of settlement, CIH has previously expressed the need for a 10-year rent settlement, which would empower housing providers to make longer-term commitments to improve quality in existing homes, as well as planning for new development.

Development plans for new homes often span five years, which means that longer-term certainty will be extremely helpful in contributing to the government’s target of 1.5 million homes. A 10-year settlement could also make borrowing cheaper, given that the Regulator of Social Housing recently noted that “sustained higher interest rates [are] increasing the cost of debt”, a problem which may have been exacerbated following the Autumn Budget. Our research with Savills notes that ten years of certainty may also lead to cheaper debt costs, and indicates that there may be greater potential for private financial investment in the sector with this increased level of certainty as it reduces the risk and increases investment value.

For housing associations, the impact of CPI+1 per cent for 10 years is an additional income of £7.4 billion. For local authorities, the use of CPI+1 for 10 years means an additional income of £5.6 billion. However, our analysis shows that this increase in resources is still insufficient without the introduction of rent convergence, which is outlined in our response to question eight.

Confidence in rent policy

It is also important to note that CIH members are concerned about the sustainability of the commitment to a long-term rent settlement: as the policy statement recognises, “a series of sudden and unanticipated changes” were made in recent years through rent reductions and other departures from the original settlement. The UK Housing Review 2023 highlighted the impact of rent caps/reductions, compared with fulfilling the previous rent policy at CPI+1 per cent, which showed a cumulative impact by 2022 of a 20 per cent loss in rental growth from housing associations alone over the eight years since 2016. CIH therefore welcomes the government’s proposals for increased stability and wants to ensure that the sector and its investors can feel confident in the new settlement.

We therefore recommend that the government considers putting the rent settlement in statute, or uses another parliamentary mechanism, so that changes to the agreed rent policy can only be made via parliament, which would increase stability and ensure more transparency before any changes can be considered in future. Some members have proposed creating an independent body which assesses and decides upon rent policy. However, having a parliamentary mechanism would deliver similar objectives, and would potentially achieve cross-party support for a long-term rent policy.

Question three - Would a rolling settlement of five years (where the sixth year is set five years in advance) provide additional stability or certainty?

To some extent, yes. It is clear from conversations with members that a five-year rolling settlement would be an improvement upon a straight five-year settlement, however ten years would be preferable (as outlined in our response to question two). A five-year rolling settlement would not necessarily provide additional certainty, and it has been indicated that investors are unlikely to provide better borrowing rates in response. However, there may be a case for a rolling 10-year policy, reviewed at five-year intervals. This would ensure that the benefits of certainty for 10 years would be repeated into the future, rather than the inevitable ‘cliff edge’ at the end of an initial 10-year settlement.

Question four - What impact would these alternative lengths of rent settlement have on providers’ willingness and ability to invest in new and existing homes?

Please see our response to question two for the impact of a 10-year rent settlement.

Question five - Are there rent policy measures that would provide confidence in the stability of our policy in the event of an inflationary spike?

We welcome the government’s consultation on responses to a future inflationary spike, which avoids potential unexpected changes for the sector. It is clear from discussions with our members that any policy measures used in this event would then need to be followed with the ability to ‘smooth’ income levels over a period of time to ensure no significant loss of income. CIH has previously supported the introduction of a rent cap when in an unprecedented period of high inflation, due to concerns surrounding tenant affordability and the cost of living crisis, although circumstances would need to be examined as they emerge. However, it would be important that the government has a contingency plan to give RPs the flexibility or funding injection required to ensure that no adjustment to the committed rent policy would result in reduced financial capacity that would affect business plans.

Question six - Are there other steps that the government should take to build confidence in the stability of its rent policy?

Please see our response to question two on increasing confidence in a long-term rent policy.

Question seven - Do you agree with our proposal that rents should be permitted to increase by up to CPI+1 per cent per annum?

The proposal of rent increases of CPI+1 per cent per annum is welcome and will provide greater consistency for the sector in business planning. However, it is apparent that the CPI+1 per cent proposal alone will not be sufficient to achieve the government’s aims to improve the quality of existing homes and develop 1.5 million new homes, without rent convergence. This is discussed in our response to question eight.

Question eight - What do you consider would be the impact of our proposed rent policy on affordability for rent payers and the willingness and ability of registered providers to invest in new and existing homes over the next five years?

Background and cost pressures

From our analysis with Savills, it is clear that CPI+1 per cent, while very welcome, is insufficient to fully address the pressures for work on existing homes and the government’s ambitions for development. This is even more the case for local authorities as for housing associations, because they face the added challenges with their Housing Revenue Accounts after the 2012 debt settlement, which leave them in deficit, as outlined in our response to question nine. CPI+1 per cent is characterised as 'survival' or even 'managed decline' for many local authorities, which will not provide the rental income necessary for investment or improvements in existing homes, let alone any new development. This is even more pertinent considering lower-than-expected CPI inflation in September and changes to the National Insurance levels paid by employers in the Autumn Budget (as outlined further in our response to question nine).

Providers from both housing associations and local authorities have indicated that CPI+1 per cent for 10 years would allow them to effectively plan ahead for investment in existing homes, but by itself is unlikely to allow for significant new development. The increased pressures and expectations in recent years for quality, building safety and decarbonisation are expected to increase still further with the introduction of regulatory changes such as the new Decent Homes Standard, Awaab’s Law, and the Competence and Conduct Standard, among others.

From our engagement with tenant representatives, it is also clearly important to tenants that any rise in rents is reflected in investment in improving the quality of existing homes. CIH have been strong supporters of the need for everyone to have a safe, decent and affordable home, as evidenced in our work with the National Housing Federation (NHF) on the Better Social Housing Review. Savills’ research demonstrates that CPI+1 per cent over 10 years would mean that social rents stay well below market rents in virtually all areas of the country, and would not fundamentally change the relative affordability of social rents compared to the private sector.

However, we urgently need to increase our supply of affordable homes, as highlighted by Glen Bramley in the UK Housing Review 2024. The government has given prominence in its Plan for Change to the target of achieving 1.5 million additional homes in the next five years, and it is vital that rent policy facilitates a strong contribution by the social sector to this target. Yet, the current level of housing starts shows that we are unlikely to meet these targets without additional financial support, with a six per cent decrease in net additional dwellings between 2022/23 and 2023/24, and overall housing completions falling well below levels required. This is particularly evident in London, where there is an 88 per cent drop in affordable housing starts.

The case for convergence

Convergence refers to the reconfiguration of historically low social rent levels to bring them into line with current formula rents. This would therefore ensure that all tenants of social housing are paying rents set at fair levels, and removes the inequalities and discrepancies of those paying different levels of rent in the same area or even in adjoining, similar properties. Convergence is not a new concept, as it was adopted by the previous Labour governments in 1997-2010. The re-introduction of this policy is supported very widely in the sector because it is absolutely vital to provide the additional headroom needed to develop new homes at the level the government requires.

Our analysis with Savills considers various rent policy scenarios, and their potential impacts on both housing associations and local authorities. We outline the key conclusions from this analysis below.

For housing associations, the reintroduction of convergence is crucial to improve levels of interest cover. At CPI+1 per cent for five years, interest cover stands at 114 per cent, and then improves to 137 per cent with a 10-year settlement. With convergence, this improves to around 157 per cent, which is more in line with the norms of 150 per cent interest cover for long-term financial capacity. Whilst it is clear that additional grant funding is also required to ensure that housing associations can both meet expectations for existing homes and build new homes, convergence allows for a clear stabilisation in interest cover and improves capacity.

For local authorities, convergence is essential to bring financial viability to Housing Revenue Accounts (HRAs). If convergence is applied to local authorities on the basis of rent increases up to £3 a week, on top of CPI+1 per cent, this is the only scenario in which local authority HRAs return to a surplus over a 10-year period. This shows the clear and urgent need to introduce convergence into rent policy, as this is the only way that the effectiveness of HRAs can be restored, rather than facing inevitable "managed decline" and continuing deficits. However, a projected rebalancing of HRAs will only be achieved from 2034, and therefore funding will be needed in the interim period to address the deficits. This would allow local authorities to respond to pressures for investment in existing homes, and an injection of additional resource in the interim would allow capacity for development of new homes earlier than expected.

Finally, the greater certainty and capacity provided by reintroducing convergence will help attract more private investment into the sector, adding to its ability to develop new homes.

Tenant affordability and additional investment required

Discussions with providers have indicated that longer-term certainty about rents would be beneficial for tenants. As a chartered professional body that works in the public interest, we are mindful of the impact of rent increases (including convergence) on tenant affordability. This has been particularly evident in recent years with high inflation and cost of living increases, which led to our support for implementing the rent cap in 2022. Providers work hard to support tenants, as evidenced in our best practice examples on the cost of living crisis. However, we know that increasing rents remain a concern, particularly for the most vulnerable tenants. Our members have shared the policies they use to try to ensure that all rents are affordable to tenants.

Our analysis with Savills therefore looked at the impact of rent convergence on tenant affordability, and found that, while the majority of social rents are covered by benefits of some kind, for those paying full rent without the support of benefits, the additional pressures arising from faster rent increases with convergence amount to less than £2 a week by 2030.

CIH therefore urges the government to re-introduce convergence, alongside the CPI+1 per cent rent policy for a 10-year period. It is clear that this is the only scenario in which local authorities’ HRAs will not be in deficit after ten years, and it allows all providers the necessary capacity to invest in existing homes and develop for the future.

Our work with Savills demonstrates that, whilst there will be some capacity created through CPI+1 per cent for ten years with convergence, rent policy alone cannot deliver the additional capacity required for new supply, without additional resources. This is further supported by previous research by Savills, NHF and Home Builders Federation, where it is evident that achieving the target of 1.5 million homes is only possible through additional funding and policy interventions. This point applies primarily to the Affordable Homes Programme from 2026 onwards, but also to access to building safety funding, an updated financial settlement for local authorities, and targeted help for supported housing (as reflected further in our response to question nine). With strong financial backing from government, the sector can play its part in fulfilling the government’s missions and ensuring that everyone has a safe, decent, affordable and healthy place to call home.

Question nine - Do you have views on other measures, outside rent policy, that could help to rebuild registered providers’ capacity to invest in new and existing homes?

Difficult financial environment

It is important to note the broader financial challenges on the sector, which are relevant to determining future rent policy and what rents should cover. RPs face increasing financial pressures on investment in existing homes, to ensure that they are safe and decent. With the frequent changes to previous rent policy, rising material and labour costs, high levels of inflation, and increased expectations around building safety, decarbonisation and repairs and maintenance, the sector’s current financial capacity is severely limited. The Regulator of Social Housing recently noted that “the risks to local authorities’ and private registered providers’ viability have intensified and their financial performance continues to weaken”. Further, it is difficult for providers to accurately portray the impact of the proposed rent policy without a clear understanding of upcoming expenditure, particularly with the introduction of the new Decent Homes Standard, Awaab’s Law and the Competence and Conduct Standard.

The financial positions of housing providers, and the potential effectiveness of the proposed rent policy, have been diminished since the changes to National Insurance rates paid by employers after the Autumn Budget. Our work with Savills demonstrates that these changes are estimated to cost £50-60 million annually for local authorities and £100 million annually for housing associations. Alongside these costs, the lower September 2024 inflation rate (1.7 per cent compared to the expected 2.5 per cent) is expected to reduce rental income by £65 million for local authorities and £105 million for housing associations, and reduce the effectiveness of only applying a CPI+1 per cent rent policy.

Whilst the majority of providers across the housing sector face similar financial pressures, local authorities particularly face acute difficulties related to limitations within their Housing Revenue Accounts. A recent report by CIH showed that the 2012 debt settlement continues to severely limit the capacity of local authorities, and a report led by Southwark Council outlined the wide range of financial concerns for the sector. The welcome reforms to the right to buy (RTB) policy will improve local authorities’ financial position and stock levels in the longer term, however the recent rise in RTB applications before the change in discount deadline means that current financial pressures remain. This is clear from our analysis with Savills, which demonstrated that without convergence, local authority HRAs will remain in deficit.

Savills examined a range of scenarios and their impact on sustainable debt levels in HRAs. For example, a 10-year settlement at CPI+1 per cent, reverting to CPI thereafter, but with convergence over the 10 years, would leave a sustainable debt level of about £12.6 billion. For further details and other scenarios, see Annex two.

Supported housing

The financial pressures are particularly acute for providers of supported or specialist housing. This has becoming increasingly urgent because of the changes to National Insurance paid by employers, as many supported housing providers have responded that they are now at a ‘cliff edge’ in their ability to operate and are at risk of closure. CIH has long advocated for changes that would protect supported housing providers, including a national, ring-fenced funding stream for housing-related support to sustain existing homes and develop new housing schemes. Consistent investment is needed for critical support services within specialist housing. We hope to see the necessary investment in supported and specialist housing in the upcoming Spending Review, as it plays a vital role in protecting vulnerable people, as well as providing financial benefits for wider society.

In relation to the proposed rent policy, we support calls from others in the sector to:

• Allow for additional rent flexibility for supported and older people’s housing, up to 20 per cent, where necessary. This would be discretionary based on the provider and, although not all providers would need this, it would provide the necessary support for providers who are struggling the most.
• Remove the ‘without public assistance’ requirement for specialist supported housing. This would empower other traditional registered providers to deliver much needed housing in this area.

Question 10 - Do you have any comments on the detail of the draft direction and policy statement that are not covered by your responses to the previous questions?

A holistic review of housing and rents

We believe that CPI+1 per cent for 10 years with rent convergence is the most effective direction for the future of social housing rent policy, for the reasons outlined. However, it is clear from CIH members that there also needs to be a broader review of the basis for how rents are set. The current rent formula relies on outdated measures and is often inaccurate, with inconsistencies that will only partially be remedied by convergence. The introduction of Affordable Rents also created inequity regarding the percentage of income paid on housing costs (and hence the impact of a CPI+1 per cent increase).

It has been evident in this consultation period that a wider discussion is needed to determine what rents should be covering and how the gap between income and expenditure can be filled. A holistic view is needed, as part of the housing strategy, of what goals the government has for the sector and how these will be resourced from a combination of rents, grant, sales receipts and debt. Rents cannot be expected to cover all costs, particularly with the need to keep social rents affordable for tenants.

A re-examination of rent setting does not necessarily mean starting from scratch, as there is prior research on alternative measures, such as Joseph Rowntree Foundation’s Living Rents model. An updated analysis of what rents should cover, how this is constrained by the need for affordability, and how to provide greater consistency, would be supported by many in the sector, and CIH would welcome the opportunity to be involved in these discussions.

As well as a discussion on a potential change to how rents are set to ensure fairness and consistency, increased grant funding from government is needed, particularly for new development through the upcoming Affordable Homes Programme. It is crucial to align the long-term rent policy with the Affordable Homes Programme and the housing strategy, alongside other areas such as homelessness prevention, social care and welfare form, to ensure we have an effective and comprehensive system to support those who most need it. It is positive to see the government’s recognition of the need for consistency and stability for future rent policy, and we hope that this certainty will help to maintain confidence in the sector, being further outlined in the upcoming housing strategy and Spending Review.

Finally, it is clear that boosting sector capacity for new development will provide wider benefits, as an increase in supply of affordable homes will reduce homelessness and the use of temporary accommodation (TA). By building more homes, particularly for social rent, we will be able to provide more stability for those living without permanent accommodation, as well as reducing costs of TA for local authorities. This is key in achieving the government’s milestones, outlined in the Plan for Change, as it will raise living standards and give children the best start in life (compared with the 160,000 children in England currently living in TA). Additionally, there are clear economic benefits of building new social homes, as noted in research by NHF and Shelter, and such investment will be crucial in driving forward the government’s growth mission.

Visit the government website for more information about the consultation on future social housing rent policy.

For more information contact Megan Hinch, senior policy officer, CIH, megan.hinch@cih.org