How to solve a problem like social rents

By Alistair McIntosh and Ian Parker.

The cost-of-living crisis is coming home to roost. Our government is trying to get prices under control and now it’s our turn. For most of the summer well-informed rumours of a rent cap have been circulating. And so, it’s come to pass. Here are the main points from the government’s consultation paper:

• The options for rents are to do nothing and leave the consumer price index (CPI) +1% policy in place or to keep going with CPI +1% subject to a 3%, 5% or 7% ceiling

• The preferred option is the 5% ceiling to strike a balance between what tenants can afford while keeping landlords viable

• The 5% ceiling will run for 2023/24 only or for an additional year

• Housing associations will lose an estimated £4.9bn over a five-year period based on a 5% rent ceiling for 2023/24 only, if the cap runs into 2024/25 the loss rises to £8.4bn

• Councils will lose an estimated £2.5bn over a five-year period based on a 5% rent ceiling for 2023/24 only, if the cap runs into 2024/25 the loss rises to £4.3bn

• The one-year 5% ceiling will yield welfare savings of £4.6bn over a five-year period while a two-year ceiling saves £7.9bn

• The ceiling applies to social and affordable rents

• Landlords should “endeavor” to keep service charges within the cap too

• The CPI increase is based on the September figures which will come out on October 19 – CPI for July was at 10.1%

• The consultation on the rent cap ends on October 12.

“…housing associations are required by law to present five- and 30-year plans, not because their executives believe that these are accurate – in private they roll their eyes – but because old habits die hard, you have to start somewhere and an old broken system offers security, however false.” Uncharted: How to map the future together, Margaret Heffernan

The government agreed a deal with landlords to allow annual rent increases for tenants at the rate of CPI + 1% to bring stability to housing. The idea was that landlords would go on to make firm plans for net zero, regeneration and development. As it turns out, the government has as much ability to predict inflation as King Canute had to stop the tide.

The consultation paper gives us the big figures for the losses against a CPI+1% rent hike of around 11%. But according to the financial forecast returns sent to the RSH, most landlords hadn’t been planning for an increase anything like this. In fact, the 5% ceiling will give them more cash than they were expecting. Here’s a chart showing the significant boost the 5% rise gives a sample landlord:

So, you could say that was one step forward for the business plan – but it’s two steps back when you factor in a modest 5% increase in operating costs and a mere 1% increase in arrears. Don’t forget that research for the NHF finds that repair and maintenance material costs went up by 14% in the year to July. See how the graph flips and huge losses arise.

1. Model the options

Find out what the 5% ceiling does to your finances. Would you still be viable? What would you have to cut? Is safety compromised? Will your services stand up to scrutiny from the Housing Ombudsman and RSH “Ofsted-style” inspection?

Given the cost-of-living crisis, tenants won’t welcome any rent increase at all. You need to plan for zero or a 3% ceiling, as a 5% price increase is very steep. Will the government and social housing sector be able to ‘sell’ 5% to the four million households in social housing? You can just hear the Martin Lewis comments.

2. Help the tenants

If it’s a 5% increase, that will be a blow to tenants on top of other price rises for essentials. What support can you give tenants? Do you know who’s likely to need help? Early and personalised interventions work best. Could you offer up disused offices as heat banks for tenants? Good communications will be vital. Residents need to know you are pulling out all the stops to help them. What are you doing to save money? How do your costs of service compare to others? People may be desperate and use alternative forms of heating and cheap e-bikes to get around. So, there should be a campaign to alert residents to the fire risks here. Make sure tenants know who to talk to and that staff are watching out for people. If tenants switch off heating then damp and mould problems will only get worse.

3. Help the shared owners

Shared owners could be looking at a double digit rent increases. Why’s that? It’s because these rents move in line with the retail price index. Right now, RPI is at 12.3%. Usually, it sits a bit higher than CPI. This increase will arrive at the same time as mortgage payments go up. You know what’s coming! An avalanche of bad publicity and perhaps lasting damage to shared ownership. The consultation says nothing about a cap on shared ownership. But landlords need to think carefully about what levels of rent and service charges are realistic to pass on.

4. Make sure you comply with the rent standard

The rules get more complex every year and the RSH is there to make sure that councils and housing associations stick to the letter of the law. So, take care here. There’s some flexibility over rents for new lets and for charging higher rents to higher income tenants. It might be worth exploring these options.

5. Look after your staff and contractors

Many staff will be struggling with the cost of living too. What are you planning to do? Attempts to hold down wages may result in staff leaving or going on strike. Contractors are feeling the pinch also. How are you supporting the good contractors that you need to keep?

6. Examine solutions – critically

• Can you get finance on better terms? This will be difficult as interest rates are rising. Funders may agree to soften covenants – but the RSH will disregard this and use their own interest cover test when assessing your viability

• Will better IT and transformation programmes ride to the rescue? It’s a possibility. But these can backfire and result in large impairments. This is an option only open to landlords that are highly skilled in this area and/or exceptionally well advised.

7. Should you apply for an exemption from the ceiling?

This is indeed a possibility according to the consultation paper. We expect the bar to be set high. You will need to show that:

• The data you rely on for stock condition and viability is rock solid

• You have looked at every conceivable option to save money

• There will be serious adverse consequences if lower income halts things like fire safety work.

For housing associations, it’s likely that any exemption will be time limited. Perhaps it will be conditional on saving money through a merger. But beware: any wise merger partner will look under the bonnet to make sure they’re not taking on a liability that will get them into trouble down the line on financial or consumer regulation.

Councils will face pressure on all services. This may result in a drive to combine departments to save money. That is fine so long as the HRA ring fence holds tight and there is a controlling mind making sure you’re up to the challenges of the Housing Ombudsman and consumer regulation.

8.Work as if you live in the early days of a better nation

Stephen Fitzpatrick the founder of OVO Energy has called for action. He wrote in The Telegraph: “One of the biggest blunders of the last 10 years is how little we have done to tackle energy waste… we have some of the least efficient housing in Europe…but improving energy efficiency will save money, improve our energy independence and will create tens of thousands of jobs.”

Let’s hope the new PM listens and puts cash into making our homes warmer and cheaper to heat.

All our networks have been taking steps to address the impact of the cost-of-living crisis. We can assist with stress testing the business plan, complying with the rent standard, income collection, value for money exercises, resident consultation, stock condition and asset management.

Contact Anna Pattison to discuss by calling 01904 557195 or emailing anna.pattison@ hqnetwork.co.uk

If we do get a 5% cap on rents that’s a huge increase for hard pressed tenants. But at the same time, it falls well short of the price rises landlords are seeing for goods and services. How will you square the circle? Let’s not forget the shared owners who could well see double digit rent hikes. So, with rising costs and falling incomes it’s a tough time all round. And life is set to get even more demanding with the introduction of ‘Ofsted-style’ inspections for our services.

Overall, the government calculates that a 5% ceiling for one year will take £4.9bn out of housing association business plans with councils set to lose £2.5bn.

What can HQN do to help you? Here are a few examples of what we’re already doing with members. If you want something not on the list – please ask us.

• Events, training, and health checks to give you vital information on complying with the Rent Standard

• Sharing good practice with peers on income collection and supporting residents through our Rent Income Excellence Network and Residents’ Network

• Confidential stress testing to pin down the impact of the rent ceiling versus rising costs on your business plan (including considering the pros and cons of applying for an exemption from the ceiling)

• Interactive board and councillor training on stress testing so they can make better-informed decisions

• Membership of our Finance Network gives access to our easy-to-use downloadable model to assess the cash impact of merging

• Access to professional advice on treasury and financing deals from Adrian Jolliffe at 2tix

• Sharing good practice on driving VfM across our Leasehold, Asset Management and Estate Services networks.

• Events, training, and self-assessment toolkits for all aspects of consumer services

• Indicative ‘Ofsted-style’ inspections: HQN has thoroughly road tested our methodology across

– London boroughs

– northern and southern stock transfer associations

– a national association

– a specialist association

• Briefings for councils on the expectations of the RSH at their in-depth assessments

• Sharing good practice on health and safety through our Health and Safety Network

• Training courses on all aspects of housing management and maintenance to boost professionalism

• Pooling live information on setting and monitoring service standards across the Housing Quality Network and our service specific networks

• Reviewing complaint handling by experts with long track records of working at the Housing Ombudsman Service.

To find out more contact Anna Pattison in confidence on 01904 557197 or anna.pattison@hqnetwork.co.uk