1% rent cut for English social landlords – £9.7bn cut and 500,000 fewer new builds

The rabbit out of the hat in yesterday’s budget was the 1% rent cut per year in social housing which nobody had predicted.  Here I look at what it means.

First. this only applies to social landlords in England and does NOT apply to Scotland or to Wales where housing policy is devolved to the Scottish Parliament and the Welsh Assembly.

The budget red book confirms this:

1% reduction england

UPDATE – inserted Friday 10 July 2015 after publication of the Welfare Reform and Work Bill which says:

welfarerefrom and work cock up

(An IDS cock-up as housing matters in Wales are the responsibility of the Welsh Assembly)

Secondly, this is for 5 years not 4 years.  This is due to the fact that rent changes, increases usually but now decreases, occur in April of each year and so the 2020/21 reduction of 1% occurs before the next election in May 2020 and applies until end of March 2021.

This policy therefore applies from April 2016 to the end of March 2021 and is 5 years not 4 years

Third, this is a very clever policy as 1% does not sound much does it?  Yet English social landlords had planned on the basis of the previous rent increase system of [CPI+1%] and therefore anticipated that their rental income would rise by CPI+1% for ALL tenants and each and every year.

English social landlords receive £13.3 billion in housing benefit per year and the official HB data shows this and Housing Benefit is received by 64% of all social tenants according to the Family Resource Survey of two weeks ago meaning this £13.3 billion of HB is 64% of all English social landlord rental income.  The total income of English social landlords is thus  £20.78 billion this year.

This £20.78 billion per year using the [CPI+1%] formula and using the OBR official CPI estimates used in the budget would have meant English social landlords would have anticipated and planned on the £20.78 billion per year being £23.28 billion in 2020/21.

Yet it will only be ceteris paribus  (all things being equal) £19.76 billion and in that final year alone some £3.52 billion less than the expected £23.28 billion

The cumulative impact is a £6.2 billion cut in housing benefit and a £3.49 billion cut in income from non housing benefit tenants making a total cut to English social landlords of £9.7 billion over 5 years.

This averages out at a £1.94 billion per year cut to English social landlords and is a £1.94 billion per year added financial risk from yesterdays budget from the seemingly innocuous 1% rent decrease per year.  By way of comparison the bedroom tax is a £300.9 million per year cut to the tenants of English social landlords this year and so ….

The 1% rent cut equates to 6.5 times the risk of every bedroom tax household not paying a penny. Put another way if 50% of the bedroom tax is paid this 1% actual rent cut equates to 13 times as bad as the bedroom tax for English social landlords.

£9.7 billion is a lot of money.  Social landlords are presenting the budget in totality along the lines of x number of social houses will now not be built and basing that on a £20,000 cut equating to 1 less new property being built and using that £20,000 figure this means the 1% rent cut per year equals 485,000 FEWER social housing properties being built over 5 years – or 97,000 fewer per year.

Remember that is just from the 1% rent cut.

When you add in the financial risks and actual income cuts from the benefit cap reduction, the pay MORE to stay, the tax credit changes and so on and so forth it is not hard to make an argument that yesterdays budget will see half a million fewer social housing properties being built as a direct consequence of the budget measures.

I will leave it there for the landlords reader except to say please please please and pretty please with cherries on the top, can we stop saying “Pay to Stay?”  Every tenant now pays to stay else they are evicted for arrears.  This rehashed foolhardy and unworkable policy which originated under Shapps is correctly termed Pay MORE to Stay.

By all means calls it PMS for short…oh and as that too is a housing policy it also does not apply to Scotland or Wales either and neither will the right to buy (also a devolved issue) and if the devolved authorities are clever they will abolish it and the Welsh Assembly has already cut the old maximum RTB discount down to £8,000 from £16,000 so at least getting there.

Tenants

I am sure English social tenants will be jumping for joy at a 1% rent reduction!!  That is a whopping 15 pence per week less in bedroom tax you will have to pay on average though in 2 years will be just a 14 pence per week reduction!

Yet what about Scottish and Welsh social tenants?  The powers to insist on a 1% rent reduction in social housing each year reside with the Scottish Government (SNP controlled) and The Welsh Assembly (Labour controlled) and not with Westminster.

The Labour Party in Wales could insist on this and as Welsh social landlords receive about £760 million per year in HB and extrapolated £1.18 billion per year this would be an £11.85 million cut in revenue to Welsh social landlords per year.

The bedroom tax in Wales is currently £22.46 million per year would be cut by 1% or £225,000 per year cut for tenants and Wales is one of the hardest hit areas in the UK for bedroom tax which Labour opposed and said they would abolish.

Note here the bedroom tax is welfare benefit policy (housing benefit) which is NOT devolved to Wales or Scotland.

The situation in Scotland is very interesting politically with the SNP vowing to fight for Scottish people and challenge Westminster at every turn.  Scottish social landlords would lose circa £26.78 million per year with a 1% rent cut in social housing imposed by the SNP and the Scottish Government would reduce the bedroom tax in Scotland by 1% of the current £45.15 million it costs Scottish tenants – some £451,500 per year.

This would also reduce the amount of DHP that the Scottish Government guarantee and pay on top of the DHP allocation they receive from Westminster so it is a transfer of cost from the SNP run Scottish Government to Scottish social landlords.  So while in the scheme of things this is a tiny reduction for the SNP run Scottish Government it clearly has wider political appeal.

That is a really interesting issue as if the Scottish Government run by the SNP impose say a 2% social rent cut and save themselves £900k per year it is still insignificant in savings terms yet they are simply transferring cost from central government in Edinburgh to social landlords in Scotland and Scotland very interestingly still has many local council landlords.

Of the 32 Scottish Councils the SNP is only in control of 2 and so the SNP at the Scottish Government imposing reduced social rents across Scotland could well be seen as a political vote winner and see them gain control over many Scottish local councils at the next local elections…hmm!!

UPDATE 22.30pm

Oh dear –  I wrote yesterday that social landlords – who are rapidly restructuring their business plans after the budget – would be idiotic if they believed the budget data as the figures are incredulous as their revised business plan would be built on sand, the same applies to the dahlings of the think tank world in the IFS.  I have just seen this:

ifsbullrebudget

As you can see I have highlighted the mistakes in red.

1. For 4 years – No it is 5 as I explain above so you are just 25% out there and hugely understate the cut to landlords. The cut is for 2016/17; 2017/18; 2018/19; 2019/20 and 2020/21 – a Bowie as it is known

oh a Bowie knife to cut…Nah that would only see IDS dressing as Davy Crockett  – God forbid!

2. The 1.2 million English social tenant not on HB will be £700 per year better off by a 1% reduction in rent.  Wow please advise which English social landlords charge £70,000 per year in rent as that would be the rent if the 1% saving was £700!

3. Net gain (ie saving) of £1.4 billion per year through reduced HB – The budget predicts a £1.445 billion HB I agree and tables the same saving and details this …in year FIVE (2020/21) and a year IFS seems to not see!?

4. £2.5bn in today’s prices – No as I have explained above the average (nominal) cost over the 5 years is £1.94 billion per year so it cannot be higher than that at £2.5 billion in today’s prices and must be lower than £1.94 billion.

Of course both analyses involve accepting the inflation assumptions of the OBR as used in the budget at 0.1% today rising up to 1.9% CPI in 2019/20 which GREXIT may alter and BREXIT undoubtedly will whichever way the EU Referendum goes as the financial turmoil of the referendum itself will inevitably hit UK inflation.

On a more detailed social housing level IF English social landlords evict the 3 – 4% of benefit tenants caught by reducing benefit cap and replace with working self-payers

OR decide that it is better financially to under occupy properties as the bedroom tax is a lower cost risk than the benefit cap if fully occupied (Yes just one perverse incentive from the budget)

OR if the perverse pay MORE to stay can be made to work that would see a couple both earning £7.38 per hour or just 18p per hour above the new “living wage” and working 39 hours each would mean that they go over the £30k household (benefit unit) income and so have to pay circa £70 more per week in rent (yes another perverse incentive of the budget)

Or ..any of dozens of other perverse incentives in this panoply of porcine faeces…..

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11 thoughts on “1% rent cut for English social landlords – £9.7bn cut and 500,000 fewer new builds

  1. I don’t of course – being a social housing tenant – want social housing to become obsolete Joe, but my provider put rents up not only by what you have quoted, but also due to a policy of ‘convergence’, which has meant that rent has risen to an unacceptable level here.

    I telephoned a few years back to challenge the managers about this, and they told me that traditionally, older houses like mine – that were built in the early 50s – had much lower rents than newer properties; obviously due to the fact that the cost of building this house had been paid many times over in rent. Some years ago, the social housing provider decided on a policy of ‘convergence’, so that all similar types of housing attracted the same rents, which meant that my rent would rise much faster than someone in a newer house.

    I was really angry about this, especially as the ‘not for profit’ social housing provider weren’t the ones that financed the building of my house in the first place, rather they paid peanuts for taking over all of the stock.

    I was under the impression that the social housing provider was not under any compunction to implement this policy. It’s obviously had a negative affect on anyone earning minimum wage; even 6 years ago, the consequences were that you couldn’t possibly afford to live here just on a single person’s wage.

    I may be wrong though, that my housing provider had a choice in this or not. Nevertheless, our area has gone from one of the cheapest areas to rent social housing to one that gobbles up nearly half of minimum wage earnings. I won’t be sad then that rent will reduce by 1% per year, because over 5 years when your rent kept going up way above inflation, that’s quite a big chunk of money to low income families, especially since tax credits will reduce so drastically.

    1. You raise an interesting point, and one that Giddiot and IDS will no doubt have to scramble to fix, and that is what happens where a HA has a policy of rent convergence? Will the rent go down by 1% full stop, or will the rent be reduced by 1% then pushed up by the convergence policy not only negating the 1% cut but by increasing the convergence policy force it to have no impact at all with rents rising by the same amount as previously.

      If convergence is a policy that an HA can use, as and when they feel like it, then what is to stop them all deciding to adopt some form of convergence policy that means that even with the rents “going down” all the rents will just continue to go up as before when they all realise the loophole exists and jump on it as a method of ignoring the 1% cut.

      1. The convergence issue is off the table for next 5 years is the most correct way of looking at this. Many tenants fundamentally misunderstand it as the convergence of social rent with private rent which it is not or ever been. Current net rent figures will fall 1% each year tho I suspect landlords will seek to change service charge levels and increase to mitigate.

    2. Rent convergence ended in 2015. 2014/15 was the last year this would have applied, I believe. The Gov’t amended the rent formula from [RPI + 0.5% +/-£2] to [CPI + 1%]. Rent convergence was intended to eventually make different landlords’ rents for similar properties in similar areas pretty much the same. There was a formula for setting the target rent, and the +/-£2 applied until the property had got to said target and would then have increased by RPI + 0.5%.

      The move from RPI (retail price index)to CPI (consumer price index) would have had the tendency to mean lower rent rises, as CPI is generally lower.

      In answer to Jonathan Wilson, my understanding was that rent convergence was government policy rather than HA / Council option, though I could be wrong. The policy has ended, therefore landlords will not be able to increase rents.

      Joe, do you know whether it is planned for the 1% cut to apply to service charges as well as rents please? This could have quite an effect on services delivered, especially in sheltered housing, which doesn’t count as Supported Housing and will therefore not be exempt from the cuts.

      1. I don’t know re service charges as detail not yet published (assuming the policy has been decided!) I suspect the 1% can only apply to net rent as service charges if variable are dependent on cost not on govt dictat and so the 1% will not apply to service charges

  2. A point of clarification: the 1% reduction in rents will NOT apply to service charges.

    Separately, Sarah Baker; you state that sheltered housing “doesn’t count as Supported Housing”. What’s the rationale behind that view? There’s always a difficulty with terminology in these issues (and the exclusion of service charges from the 1% rent reduction will leave sheltered housing service charges intact); however, I’m interested to know where your view on this comes from.

    Thanks, Michael Patterson.

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