Balancing the Housing Revenue Account in turbulent times

Posted: 19th April 2023 Jim Lashmar, Director, Financial Strategy and Consulting

The current economic environment is one of the most challenging seen in a lifetime. Inflation reached a 41-year high at 11.1% in October 2022 and remained at 10.4% in February 2023. The Bank of England base rate is currently at 4.25%, the highest since the Great Financial Crisis of 2008.

This is putting increasing financial pressure on social housing tenants, as one of the lowest income groups, but also on social housing providers including local authorities who face cost increases which are outstripping the levels of rent increases allowed by the Government and regulated by the Regulator of Social Housing (RSH). For local authorities, this means that it has become increasingly difficult to balance their Housing Revenue Account (HRA) budgets.

HRA Pressures

With the introduction of a 7% Government cap on social rent increases for 2023, following on from the 1% per annum rent reduction imposed by the Welfare Reform and Work Act for the 4 years from 2016, Councils are finding it increasingly difficult to prevent HRAs going into the red.

Whilst the rent cap partly protects tenants it also puts increasing pressure on the HRA in the light of:

  • General CPI inflation of 10.4% over the last year applying to management costs;
  • Maintenance and component replacement costs increasing by up 5% over CPI;
  • Increased building safety requirements;
  • Increasing upward pressure on salary costs to align with CPI in order to retain staff;
  • The requirement to comply with EPC C by 2035 and Carbon Net Zero by 2050;
  • Development cost increases of around 8.5%; and
  • Recent increases in Public Works Loan Board (PWLB) borrowing rates, although these may soon be reversed for some types of borrowing.

Current forecasts are that inflation is likely to fall to 5% by Q4 2024 and hence September 2024 CPI +1% is likely to produce a figure below the current year 7% rent cap, though the possibility of a lower Government cap and further differential between income and cost inflation cannot be ruled out. We are therefore in a time when Councils must impose effective cost control, review procurement processes, and make difficult decisions about non-core services provided to tenants.

It will also be essential to ensure the viability of HRAs by having an accurate HRA budgeting process supported by a fit-for-purpose 30-year HRA model demonstrating the ability to finance the maintenance of existing stock and any future development programme. This model should be thoroughly stress-tested so that Councils understand the potential impact of adverse scenarios and are able to identify mitigating actions if such scenarios materialise.

The 2023 Rent Standard

In the revised ‘Policy statement on rents for social housing’ issued in December 2022 the Government set out its direction to the RSH that increases in social housing rents for those rents covered by the RSH Rent Standard should be capped at 7% for increases from April 2023. This was in the context of the fact that application of the existing formula of CPI + 1% based on the September 2022 CPI of 10.1% would have seen Social and Affordable Rents being subject to a huge 11.1% increase, creating further affordability issues for tenants and a dramatic increase in the housing benefit budget for the Government.

Importance of accurately calculating and recording formula rent levels

In light of the pressures on the HRA it is essential to continue to maximise rents as far as possible and this will require Councils to keep an accurate record of Formula Rents for Social Rented Properties. The Rent Standard requires that rents must be based on the published rent formula included within the Rent Standard and Policy Statement. Under the current rent regime, a Formula Rent must be held for all properties and this rent will be used as the basis for rent setting. For historic reasons, local authorities may have actual rents that are at Formula, below Formula or above Formula for individual units. Where rents are above Formula, these may be increased by CPI only until Formula is reached, whilst rents below Formula can only be increased to Formula level on relet.

In the same way that actual rents may normally be increased by CPI +1% each year under the Rent Standard, so may Formula Rents. Formula Rents however, are not limited to the 7% rent cap for 2023 and may be increased by 11.1%, with the result that rents that were at Formula in 2021/22 will now be below Formula levels by 4.1%. Unfortunately, actual rents cannot be increased to Formula levels until the property is relet, and the shortfall will continue and compound each year. It is therefore vital that councils keep an accurate record of formula rents for all properties in addition to the actual rent being charged to ensure that relets can be increased to the Formula level. Keeping an accurate record of the Formula Rent using a tried and tested model is therefore not just a requirement to meet the RSH Rent Standard but will provide a real financial benefit over the coming years.

The Formula Rent calculation also allows for the application of a 5% additional flexibility for general needs housing and a 10% tolerance for supported and sheltered housing. If applying this flexibility, councils “should ensure that there is a clear rationale for doing so which takes into account local circumstances and affordability”. In the light of current inflationary pressures, councils that have not applied the flexibility may wish to revisit this decision and determine if there is a rationale for doing so, potentially allowing a further 5% or 10% increase on relet.

PWLB rates

There is some light at the end of the tunnel for council housebuilding however. In the Spring Budget, the Chancellor announced a new 40 basis point discounted rate will be introduced by the PWLB for borrowing through the HRA which will come in from June 2023 for a year. The rate will be available for capital projects and is designed to stimulate councils to develop social housing and potentially reopen closed HRAs.

Whilst this demonstrates a commitment by the Government to the Social Housing building programme it will only go some way to mitigate the impact of the rent cap and cost increases described above. With PWLB rates already much higher than when many schemes were originally appraised, the interest rate cut is likely to have a limited impact on restarting stalled schemes or increasing the size of development programmes.

Altair supports its local authority clients with:

  • Provision of a RSH approved rent model and support
  • HRA business plans models, training, stress testing and mitigations
  • HRA strategic planning
  • Procurement support and commercial advice

For an informal chat please contact:

Jim Lashmar, Director – Financial Strategy and Consulting
jim.lashmar@altairltd.co.uk

Graham Hishmurgh, Director – Local Authorities
graham.hishmurgh@altairltd.co.uk

Spencer Hill, Director – Commercial Services
spencer.hill@altairltd.co.uk

 

 

 

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