Rent cap proposals – how will they impact your authority?
We know we are living in extraordinary times, with the relatively calm economic environment experienced after the great financial crash in 2007/08 already seeming a distant memory. The impacts of the war in Ukraine, resulting in rising energy, raw material, and food costs, together with the impact of Brexit, have resulted in CPI inflation reaching 10.1% for the year to July 2022 and are forecast to reach 13% by the end of the year. In reaction to this, the Bank of England has increased the base rate to 1.75% against 0.1% this time last year. The expectation is for the Base Rate to exceed 4.25% by March 2023. This is accompanied by rising Gilt rates, the 30-year Gilt standing at a 10-year high of 3.76%, which will have a knock-on effect on PWLB rates, authorities now forecasting rates of 4% or higher.
The Government rent cap proposal
With rent increases for social housing tenants currently based on a formula allowing up to CPI +1%, Local Authority Registered Providers and Private Registered Providers could apply increases of up to 14% based on a 13% September CPI. To try to protect social housing tenants from very large rent increases the Government is proposing a 5% ceiling (with alternative consideration of 3% or 7%) on increases for both social rent and affordable rent homes for 2023/24 and 2024/25.
This will have a significant impact on rent rolls and HRA financial plans.
For a 5000-unit authority with an average rent of £85 per week, the 8% gap against CPI equates to £6.80 per tenant per week, a total of £1.76m per year. Whilst this is necessary to protect tenants, authorities will need to take measures to cope with the shortfall. Particularly in the face of maintenance cost increases forecast at around 17% and the upward pressure that inflation will put on staff costs if LA employees are to cope with their own rising living costs.
The impact is not just a one-off 2022/23. Assuming the current CPI +1% rent formula continues post-2022/23, it will not be possible to increase rents by a higher margin above inflation in the following years to “catch up” on the shortfall. So it may continue in HRA plans for many years to come.
There is some light at the end of the tunnel as the rent cap proposal does not affect the calculation of the maximum initial rent when properties are first let or subsequently re-let when lettings can be made at the formula rent. Any proposed developments should not, therefore, be adversely affected.
The proposed ceiling will not apply to the calculation of formula rent or the rent caps which continue to increase by CPI +1% and CPI +1.5 % respectively. Accordingly, the formula rent for a property may go up by 14% in April 2023, but the rent paid by a sitting tenant might increase by half that rate or less. This means there will be much more for an authority to gain by re-letting its dwellings at the formula rent, if it doesn’t already do so.
To keep track of the impact of the rent cap proposals, it will be vital for authorities to have an accurate, up-to-date formula rent model, which calculates formula rents and actual rents for all properties and keeps track of the difference between the two. Rents that are currently at formula will fall below formula in 2022/23 by the difference between the September CPI+1% and the 5% ceiling if the proposals take effect. LAs must therefore have a valid formula rent for each property in order to be able to keep track of this and to allow them to increase rents to formula level on re-lets in order to maximise revenue.
There will also be a significant impact on the HRA business plan. LAs will need to comprehensively stress test plans for the impact of the ceiling together with interest rate increases to determine the impact on overall borrowing. This is in the context of plans which will already be under pressure because of high inflation, additional fire safety and zero carbon costs.
How can Altair help?
Altair has been a leader in formula, rent modelling, validation and assurance for many years. We have worked with a wide range of Registered Providers on regulatory compliance matters, including Local Authority Registered Providers. Our comprehensive formula rent model developed over the last 20 years has been thoroughly audited and is recognised by the Regulator of Social Housing. We also have extensive experience of Affordable Rent calculations and Rent Standard Compliance for all tenures.
We work in partnership with Housing Finance Associates and offer HRA modelling and stress testing using the HFA model, which is in use by a range of LAs across the country. We also regularly work providing critical friend support to in-house modelling.
If you would like to explore how we might be able to assist you or would just like a chat about rents or HRA modelling, please contact Jim Lashmar.
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