Considerations on rent

At the most recent Finance Policy Advisory Group (FPAG) meeting, one of the main areas for discussion was rent changes for April 2022. Rather than any regulatory or legislative change, the main concern that sparked discussion this year was the current high inflation environment. Social housing rent increases are linked to the Consumer Price Index (CPI), and a high September CPI figure will result in a potentially significant rent increase for the following April.

FPAG is made up of housing associations that all differ in terms of size and geographical locations, and we usually see different opinions on all matters. On this topic however, the discussion focussed first and foremost on the challenge of affordability.

In line with the rent standard, housing associations are required to set rents that are affordable to the local markets they serve. Affordability is a core purpose of social housing, and it is something that housing association boards have always grappled with. Whilst the introduction of target rents in 2002 helped boards with decision making, the ability to charge up to 80% of market rents since 2015 (with the introduction of affordable rents) has led many boards to proactively charge lower than the policy maximum rents, in particular across London and high value areas where affordability is most challenging. For instance, many organisations use Local Housing Allowance (LHA) levels as maximum rent threshold.

Rent setting is a difficult balancing act. While affordability remains an imperative, rents are also the main source of income that enable housing associations to maintain and improve existing homes, and invest into much needed new homes. Government grants for new social housing have significantly reduced, and the sector is facing considerable cost pressure. This includes overall quality of homes as well as building safety and decarbonisation costs.

The rent context this year is particular, following four years of 1% rent reduction from 2016-2020, and a low 0.5% CPI last year. Since our meeting we have seen the publication of the September 2021 CPI at 3.1%. This keeps the past two years inflation average below 2%, which is a frequent assumption in business plans and reflects the Bank of England’s forecast that inflation will continue to rise before policy measures bring it back in line with the long term stability target of 2%.

Taking this context and the above arguments into account, the group wide agreed on the following:

• It is advisable to follow the rent standard maximum as starting point, i.e. increasing rents by Sept CPI+1%.
• It is crucial to consider affordability in local markets and be as flexible as possible in this area, analysing local housing market measures such as the LHA rate or market medians.
• The additional income generated by the inflationary uplift should be considered in the light of increasing material and labour costs.
• We need to plan sufficient reserves for hardship type or tenant affordability funds to support some of our residents who will be most impacted by the increased cost of living, and their own personal circumstances following two years of pandemic. This type of arrangement can provide a range of options to assist tenants from rent credits to white goods.

Since our meeting, the publication of the Registered provider social housing in England - stock and rents highlights that current rents in the social housing sector are the same as 2016 levels. Certainly in most parts of the country, the last five years have not seen market rents remain static.

Taking the rent standard as a starting point, and then considering a detailed and localised analysis of rents compared to LHA levels, market medians and wider regional housing markets should help to give some reassurance about the continuation of your organisation’s overall levels of affordability in your local markets.