Managing the cost of living crisis for housing associations and residents

Hugh Swainson, 13 July 2022

Rising costs are continuing to place housing associations under financial pressure. Housing associations are already balancing increasing costs of new development, building safety, decarbonisation, general maintenance, and debt servicing against tenant affordability when setting rent increases for 2022/23.

Inflation breaks 9%

Inflation hit 9.1% in the 12 months to May 2022 (based on the Consumer Price Index), the fastest rate increase in 40 years.

Many forecasters predict that the rate could peak at the end of 2022 due to increases in the energy price cap (also known as the Default Tariff Cap) in October 2022, which is likely to see a further rise in fuel bills. While the predicted level of inflation varies, expectations for the peak level of consumer price inflation (CPI) typically is between 8.5% and 11%.

There is consensus that by the end of 2023 inflation levels are likely to have reduced, with CPI forecasts for October to December 2023, averaging 3%.

Energy prices are the largest contributors to the high levels of inflation currently seen, alongside other household costs. The basket of goods for furniture, household equipment and maintenance rose by 11% in the year to May 2022 – the largest increase since the Office for National Statistics began to accumulate this data in January 2006. These are areas in which providers have significant costs, and the above inflation rises should be factored into forecasting and risk assessment.

Increases to interest rates

Bank of England interest rates have also risen – up to 1.25% in June 2022, the highest rate for 13 years.

Based on 2021 Financial Forecast Return submissions, the sector anticipates a 34% increase in debt drawn down (to a total of £114bn) by 2025/26. These increases to base interest rates mean that this increased debt will be more expensive to service.

Many housing associations hold variable debt, but the impact will also be seen on the interest rates achievable on new or renewed fixed rate borrowing.

The rent setting dilemma

The current Rent Standard allows most housing associations to increase social rent from April 2023 by a maximum of CPI for September 2022, plus 1%. In determining the increase to apply, housing associations should seek to balance the impact of cost increases on tenant affordability against their own capital requirements.

Impact on residents

As with housing associations, tenants have not seen increases to their income relative to the increased cost of living.

Changes to Universal Credit are typically confirmed by early December of each year, however this only provides an indication of affordability for a proportion of tenants. For others, affordability will remain hard to ascertain and setting rents too high risks increased tenant arrears and reductions to the welfare of tenants.

Impact on housing associations

When considering the level of rental increase, housing associations are encouraged to model a greater range of inflation assumptions in budget and forecast planning, alongside varying rates of increases to rent charges, to take into consideration the squeeze on resources.

The 2016 Rent and Welfare Reform Act saw a 1% reduction in social rents each year between 2016 and 2019. This meant income from social tenants was below inflation rates of the previous September by 0.9% (2016), 2% (2017), 3.8% (2018), 3.2% (2019). Housing associations can look to lessons from this period as part of their response to the emerging risk of cost increases.

Housing associations should also consider the costs required to run day to day operations, maintain the standard of homes and ensure lending facilities will not be recalled. Inevitably to facilitate these rising costs, discretionary investment will be an area of focus for managing budgets, and we are likely to see housing associations reduce investment in new stock, and for decarbonisation investment to be deferred slightly until such time that the economy is more stable.

Showing consideration of a broad range of scenarios in this planning will allow time for early discussions to be held with lenders.

The complex task of setting rents is even more challenging at present, with increases in 2022/23 likely to vary more than over recent years. Detailed consideration is therefore required to ensure that housing associations conclude on a rate which justifiable to all stakeholders.

This blog represents the views of the author and not the NHF. The NHF has been working closely with members on the 2023 rent increase. If you would like to discuss this in more detail, please contact Will Jeffwitz.