Rent Reform and the Too difficult Box
by Ken Gibb
Over the last 20 years, I have worked on at least five discrete projects about rents and rent-setting. This has included studies funded by governments and by individual providers in Scotland and Northern Ireland. A feature of this experience has been on the one hand that precious little reform of how rents are set followed on from this work (score zero for ‘impact’), but at the same time, it has been a learning curve. In this post, I want to reflect on these lessons.
First, we are primarily interested in the pricing of social housing. By that we mean the level of the average rent, the way that rents are distributed around that average reflecting variations in, or differentiating the, quality of the stock, and, how we uprate rents each year. A fourth theme is whether these principles can be established not just for one provider but across a housing system (e.g. all social landlords), be that a local authority, a region or even a country. A fifth theme is whether rents should be consistent across the entire stock or whether pooling would not extend to separate well-defined schemes and new developments? Most of the following discussion assumes complete pooling (e.g. with a premium applied to new build should it be required).
Second, this desire to look at rents may arise because of policy seeking to remove anomalies and put rents on a more coherent basis than current perception or evidence would suggest. It may also arise because of the actions of a single landlord (e.g. taking over another landlord’s stock), it may be due to external policy challenge such as welfare reform or the sense that competitive threat makes its necessary to review the rents. It may also reflect asset management strategies and the use to which rental income is put. There could conceivably also be internal pressures from board members or tenant groups, or indeed staff groups, to address perceived shortcomings. However, we should not underestimate the ability of these groups alongside other stakeholders like lenders or the regulator – to resist or dilute rent reform proposals.
Third, what are the key principles involved? One would be consistency – that rents are differentiated on a rational and credible basis e.g. bigger properties, more space and more amenity command higher rents and do so in a coherent way. A second would be affordability (a thorny issue in its own right) but typically about securing low cost housing for low income households, especially those just above HB ceilings, often in low wage work. A third point would concern viability – does the rent allow development to take place and does it support the ongoing operational delivery of housing services thereafter?
Many readers will recognise longstanding problems of archaic rent structures lost in the mists of time, of anomalies in rent levels comparing similar properties from different landlords and inconsistencies within a given landlord’s portfolio when looking at different areas, vintages of stock and other similar problems. There is also often the sense that rent systems may be past their prime and are slipping into entropic disorder accelerating over time. These discrepancies can be brought to light particularly during periods of new development, when stock transfers or mergers take place and when the external policy environment sheds perhaps too much light on the way rents are done.
So how to reform? I worked with one landlord who initially wanted to bring the full weight of evidence and analysis through a sophisticated formula rent. The stakeholders I mentioned earlier thought not and subsequently a much simpler model based really only on size and property type became the favoured option. Others lose their zeal for reform when they see that, as in England in the 2000s. shifting to a national formula rent (complete with local average rent convergence across landlords) requires long term adjustment over 10-15 years and also implementing protection measures for those losing out in the form of damping to lessen year-on-year effects. While the English model was relatively complex – such a process of transition and convergence could be devised for much simpler internally consistent models. But a big lesson from the English experience for me has been the unwillingness of Governments to see these sorts of policies through. The simplicity of a national formula rent, for all its problems (e.g. the financial pressure it put on landlords who had to slow down planned rent increase), fell apart after a change of Government and their desire to set off on different paths for non-market housing and required rents for new models. This was then followed up by statutory rent cuts to save on housing benefit – massively expensive for social landlords who in good faith planned reinvestment (as well as just trying to retain the resource levels of their landlord operations).
Geography is interesting concerning policy trajectories over rents. Alongside the English experience since 2000, Northern Ireland’s social sector appears to have had quite a lot of discretion though in fact almost all social landlords base their rents on some version of sorts of the dominant (Housing Executive) landlord’s rent points policy from the 1980s. Again, this has gradually become less recognizable over time (and average rents remain lower for Housing Executive properties). In Scotland, on the other hand, despite earlier research studies examining the merits of a more national system of rent-setting, there has been absolutely no interest from those who would champion rent reform. And as a result, Scotland probably has the least coherent and comparable rents in the social sector across the UK. Yet no-one gets that excited about it, other than in terms of the starting rents required for new build, and the impact of LHA caps on rents and rental income received.
So, does viable, affordable and consistent pricing of rents matter? At one level, of course it does. But more broadly, surely it still makes sense for tenants to be able to make rational, informed judgements about price and quality both within a landlord’s stock and between different landlords? Arguably the growth and encroachment of private renting into the non-market housing sphere is another reason for more not less transparency. But if the regulator is tolerably happy with the situation, if tenants are not too despondent about annual rent increase (outside of England), and if providers are up to their necks in operations and crises, unless the policy environment forces it on them – rent reform is not going to be coming anytime soon. Like so many public policy reform questions, the rationality and benefits of rent restructuring are outweighed by their time, resource and political costs (and it is of course a nontrivial process) – but like council tax reform, not making the necessary change will only in due course make things worse.