On Rent Incentives

by Ken Gibb

After a week on holiday and offline I have been trawling back over what has been going on. DCLG have floated the idea of penalizing non-developing housing associations in England by putting a cap on their rents that would not apply to developing associations.

This incentive mechanism (a nudge or a shove?) is a fairly crude attempt to access the borrowing capacity that many associations have but choose presently not to develop. This is of course also an issue in the rest of the UK but is essentially a function of both the current business environment and the ambiguous status of housing associations as either private or public  bodies (supposedly autonomous and risk-bearing but also grant-funded and regulated and therefore ‘legitimate’ instruments of policy intervention more broadly by the State).

Clearly, associations face a context of little public funding, difficult private borrowing conditions, unequal access to capital markets and their own historical debt and reserves profile. Demand also varies regionally as do rents (see below). Prudential risk management will for many providers indicate that not developing is the best, sustainable thing to do in such circumstances, least of all for their current tenants and their stakeholders. Government is not willing or able to sufficiently alter that environment to enable this risk profile to improve; instead, it proposes top-down controls on the rents of non-developing associations.

What about the unintended consequences? When the previous Government’s national rent policy was introduced it was recognised that this would impact on some housing associations business plans because they would not be able to increase rents by as much as they had budgeted for. Exactly the same outcome is being generated by this proposal (for non-developing associations) – and it will affect the improvement programmes and other services that current tenants might expect to receive.

I think this proposal also raises wider questions about rent setting. To repeat the phrase used above, the English (New Labour) national rent policy was a long term ‘top-down’ national policy that linked rent differentials to a national formula and locally, average rents across the non-market sectors. This policy was phased–in with damped adjustments over more than 10 years. Despite the fact that housing by its nature needs long term policy consistency, perhaps this is the great hubris of New Labour – that there would be electoral time, sufficiently robust long term conditions, and good enough long term planning, to warrant such decadal planning consistency. In any case, what we have now is the incremental erosion of that policy and the uneven drift from national consistency to more of a patchwork of confused signals that will in time baffle consumers.

Not only will the proposal to limit rents for non-developing associations affect rent setting but so also has the affordable homes programme with its higher rents and multiple higher rents on re-lets of existing properties. At the same time there is now also a much larger and growing private rented sector sending out its own price signals and one presumes, in many places those market rents are influenced by larger non-market sectors. All in all, this is a bit of a mess (and one that will with entropy only worsen over time).

The problem with rent setting policies and with subsequent tinkering is that there are too many policy objectives and not enough scope for intervention – one objective changes the way rents operate and it creates a problem elsewhere in the set of objectives. Rent setting is about rental affordability, provider viability (including to both develop and manage stock) and fairness in the sense of comparable consistency (i.e. quality differences are reflected in the same way for the rents of different providers). We all know that affordability comes at the expense of rents that will support development currently but also that higher rents have HB impacts. But in the long term how can we expect to build a viable social rented sector if we treat tenants with the contempt of state-induced rent variations that on the ground will make no sense at all?

Throughout this period Scotland has eschewed national rent setting and has historically been able to do this because of lower rents and higher grant. They may not be able to sustain this. At the same time, in Northern Ireland, there is evident government enthusiasm for a national approach to rent setting.

There is a stock-flow problem in all this. The requirement to expand supply in the current environment pushes the State to be more creative with rents including the proposed ‘nudge’ and the higher rents on relets to fund affordable homes. The pricing of the existing social housing stock is de-emphasized but it is where tenants have entered into long run contracts with landlords, where those landlords have long term business plans and it is where tenants should have fulfilled expectations that higher rents for a property should imply higher quality relative to a benchmark. The drift of current policy thinking is against this set of prerequisites for stable social housing. In time, it may only serve to further undermine the sector.