Affordable Rent – the NAO report reveals a further hidden £5bn risk to SRS

Affordable Rent, (AR) the great plan of Shapps has today been assessed by the National Audit Office (NAO) which comes out with some headline figures that have just repeated in the media by journalists who have not bothered to read the 40-page NAO report the glaring mistakes become self-evident. This is sloppy journalism for which Shapps will be delighted as they massively understand the added costs of AR to the public purse.

Q) Why does the report look at 80,000 affordable rent homes when Shapps has announced the programme will deliver 170,000? (See here, here and especially here )

The added cost to the public purse of 80,000 properties appears in total much smaller than it is for 170,000 properties.

Q) Why does the NAO look at cost of the extra Housing Benefit this will have on just 80,000 properties and not 170,000?

This 80,000 AR unit report produces their estimate of an additional cost of Housing Benefit at £17,500 per property over 30 years or £1.4bn at today’s figures – the figure that is reported in Inside Housing, Guardian, 24Dash and everywhere else.

Let’s look at that figure shall we?  Section 1.8 on page 14 of the report says:

“Rents totalling around £500 million a year on new homes will be paid by tenants, approximately two-thirds of whom are supported by housing benefit.

What does this simple sentence tell us about costs?

  • £500m per year is the rental cost of 80,000 new homes which means that each one has an average rent of £6,250 per year or £119.86 per week.
  • Two-thirds of these 80,000 or 53,333 will be paid by Housing Benefit.

What do we know of current costs?

The current average HB paid to social housing the average of council, HA, ALMO etc is according to latest HB stats is £77.20. (See Table 5 cell D54 here).  This tells us the average increased HB amount per affordable rent property is £119.86 less £77.20 or £42.66 more per week

This means:

  • Each AR property is paid £2,226.10 per year more in HB.
  • Which means 53,333 getting £2226.10 more HB spent is £118,725,330 more in HB pa.
  • Over 30 years this becomes £3,561,729,911 or £3.56bn and not the £1.4bn the NAO claim it to be.

In fact it is 2.5 times what NAO claim it to be. Ergo the average higher HB per property is not the £17,500 that the NAO report states it to be; it must be £43,750 per property.

Let’s look at what this means and dig a bit deeper?

I say above this makes the average ‘affordable rent model’ rent figure £119.86 per week which I reference.  Note here that the average HB paid to private landlords is £107.24 (same Table 5 as above cell G54) and so affordable rent means paying £12.66 per week per property MORE in Housing Benefit than we pay private landlords.  Shapps denied this would happen and would cost more back in March 2011 yet he was wrong again.

Minister quick question for you – Is £119.86 higher than £107.24? 

Now let’s look at the definition of ‘affordable’ which is given in the NAO report to be at section 1.3 on page xx as: “The Department defines affordable housing as social rented or below market price housing for households whose needs are not met by the market

HB pays £107.24 for market rent as a national average yet now it will pay £119.86 so  by its own woolly and vague definition of ‘affordable’ this shows that the AR model is not affordable as it will be paid out at MORE than market price.

Finally and perhaps more highly significant than anything above is the fact that the NAO modelling is and must be much more sophisticated than my £1 calculator bought from Poundland.  If they are predicting only a £1.4bn added HB cost over 30 years than my simple workings above at £3.5bn where is the reduction in the HB cost I am missing? Or to put another way how come I can say the cost is £3.5bn extra yet NAO maintain it is only £1.4bn – It must mean that the HB cost is reduced by £2.4bn from a different mechanism and one no obviously apparent.

The answer is the welfare reforms and specifically the fundamental and systemic flaws in the overall benefit cap that I revealed a few weeks back.  The systemic flaw is that the overall benefit cap (welfare and housing benefit) of £500pw will capture larger families initially but will capture and cut the housing benefit of smaller families over time as rents rise faster than the cap.

The NAO report alludes to this when it discusses the impact of AR on real affordability.  It says on page 25:-

Impact on rent levels

2.21 The Department’s modelling assumptions were based on providers charging a rent level between 70 and 80 per cent of market rate, which proved accurate with providers planning to charge an average rent of 75 per cent. The 80 per cent rate was adopted by only 40 per cent of providers and in London providers typically planned for rent levels at approximately 65 per cent. The proposed rent levels took into account that tenants might not be able to pay higher rents, especially if subject to the proposed benefit caps.

I updated the original systemic flaw argument last week and applied it to AR which said that AR is a risk too far for social landlords even if working as the risk of arrears is too high.  That risk according to the NAO report on 80,000 AR units is the missing £2.4bn, which on 170,000 properties in the first phase of AR becomes £5.1bn.

Or simply the first tranche of AR as projected by NAO shows a risk of a further £5.1bn of arrears to social landlords who offer AR units.  The government has in effect transferred this risk from the HB bill to social landlords, the antithesis of ‘letting HB take the strain.’

As I said last week when I applied the systemic flaw to AR are the bankers and financiers aware of this risk or were they when they advanced the funding for AR developments?  Will they now wish to look again at the risk the overall benefit cap adds with its systemic flaw to the monies they have advanced social landlords?

This is especially significant as the AR funding model unlike previous capital grant schemes sees the government only pay on completion of the AR units and not mostly upfront as before.  The NAO report states this risk and gives it strong significance and says it is a key risk for providers (social landlords).  It even questions whether social landlords were aware of the risks.  On page 9 it says that government needs:

“To understand the impact of transferring financial and delivery risks to providers, the Agency should evaluate how far providers priced risks into their offers, and whether the price paid represents value for money”

Given the bids social landlords put in for AR units were many moons ago and before the overall benefit cap was announced and its process which sees to cut only housing and not welfare benefits and then the systemic flaw on top of that, then those financial risks are huge and add to the cost of money from social landlords having to wait until completion of the AR units before they receive government money.  Oh and the probable further transference of £5bn or so worth of added arrears from HB not taking the strain!

AR is not a risk too far it is far riskier than that!

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