LGA submission to MHCLG’s consultation on future social housing rent policy

• Council Housing Revenue Accounts (HRAs) are under severe financial strain. Owing to significant expenditure pressures councils’ have not been able to reduce their operating spend in line with the fall in their income. As a consequence, debt servicing costs now account for a growing share of HRA ‘surpluses’ where they still exist. An increasing number of councils have had to address end of year deficits by drawing on their dwindling reserves. At the same time, councils’ ability to supplement their HRA capital programmes from their revenue resources has been severely curtailed. 
• We support the principle of a multi-year rent policy to give registered providers, lenders and investors more confidence to commit the investment needed for both existing and new social homes.
• To really strengthen and provide stability to Housing Revenue Accounts (HRAs), a minimum 10-year rent settlement is needed, alongside restoration of the lost revenue due to the rent cap in 2023/24, new burdens funding for new responsibilities and a review of the self-financing settlement of 2012. 
• Council Housing Revenue Account’s need CPI+1 per cent for 10 years as an absolute minimum, but this will still result in a national Housing Revenue Account deficit and is highly unlikely to support an uptick in new build. 
• The LGA therefore strongly advocates for the reintroduction of convergence of rents to formula rents. This should be in addition to CPI+1 per cent for a minimum of 10 years.
• Rent convergence at either an additional £2 or £3 week delivers cumulative surpluses of up to £1.0 billion by 2036/37, potentially enabling all existing stock pressures to be addressed with some capacity for additional development. 
• However, the projected move to surplus only takes effect from 2034, meaning that for deficits to be addressed, there will need to be additional funding resources other than additional rent in the medium-term, to cover all necessary expenditure requirements.
• The Government’s new burdens doctrine should also be extended to Housing Revenue Accounts so that local authorities know that any new policies will be fully funded and they do not have to ‘cost-in’ the risk to their business plans.
• To provide additional certainty and build confidence the finalised rent policy should be put on the face of primary legislation. The Government should also commit in legislation to reimbursing councils in full for any cumulative shortfall in local authority income should the Government deviate from the agreed rent policy during the settlement period.

The LGA’s response to this consultation draws on analysis work that has been undertaken by Savills Affordable Housing for the Chartered Institute of Housing (CIH) working in association with trade body partners: the National Housing Federation (NHF), the Local Government Association (LGA), the Association of Retained Council Housing (ARCH), the National Federation of ALMOs (NFA) and the Councils with ALMOs Group (CWAG). 

The analysis exemplifies the additional income and therefore additional investment capacity arising from the application of a stabilised rent policy and increases at CPI+1 per cent as opposed to CPI-only.

It also evidences the case for the reintroduction of convergence of rents to formula rents for social housing tenants as a means of addressing the shortfalls in income arising from the seven per cent rent cap applied to general needs rents in 2023/24.

Yes. We support the principle of a multi-year rent policy to give registered providers, lenders and investors more confidence to commit the investment needed for both existing and new social homes. This rent policy should be a minimum of five years. 

However, we do not consider that five years is a sufficient length of time to provide the level of confidence and certainty needed.

To really strengthen and provide stability to Housing Revenue Accounts (HRAs), a minimum 10-year rent settlement is needed, alongside restoration of the lost revenue due to the rent cap in 2023/24 and a review of the self-financing settlement of 2012. 

A 10-year settlement would provide councils greater certainty on rental income and support long-term business planning to ensure they can deliver high quality homes and associated support for their tenants.

It is also vital that there is further government investment to help respond to priorities- from retrofit to building new council homes- to avoid all the pressure falling on HRAs and the residents whose rents and services charges fund them. 

The Government’s new burdens doctrine should be extended to Housing Revenue Accounts so that local authorities know that any new policies will be fully funded and they do not have to ‘cost-in’ the risk to their business plans.

This would better support long-term business planning to ensure councils can deliver high quality homes and associated support for their tenants. Longer-term predictability in rent policy also delivers a greater financial and investment premium in relation to equity investment. Our response to Question 2 provides more detail. 

The LGA advocates for a minimum 10-year rent settlement which would provide greater confidence and certainty to councils to support long-term business planning for existing and new stock. 

In October 2024, work undertaken by Savills Affordable Housing on behalf of the LGA, ARCH and NFA explored the cumulative impact of historic and proposed government policies and wider economic factors on the viability of council Housing Revenue Accounts (HRAs). The analysis showed that the future of council housing finances is at risk with rising costs and increasing pressures pushing budgets towards an unsustainable footing. 

The analysis found that HRAs were under extreme pressures as a result of: 

• The impact of rent cuts from 2016 to 2020 and the rent cap in 2023 resulting in much lower levels of anticipated income than had been promised by the then Government.
• The increase in the amount of capital investment needed for existing council housing. This includes for maintaining and repairing existing homes to bring them into line with current and proposed future requirements, for instance building and fire safety requirements, a new Decent Homes Standard, as well as minimum energy efficiency and net zero carbon requirements. In 2012 this was estimated as £64.2 billion over 30 years; it’s now up to £96.1 billion – a difference of £31.9 billion that local authorities need to find.
• Day to day repairs costs that are spiralling well above the rate of CPI inflation, as demand increases in the light of Awaab’s Law and the need to address problems with damp and mould, and cost increases due to labour and supply chain shortages.
• Pressures arising from enhanced regulation and proposed requirements for professional qualifications for housing staff.

In order to enable councils to meet these ongoing expenditure pressures, not only does there need to be sufficient funding in the system to address them, for example, through rents, government grant, borrowing, equity investment, but there needs to be certainty of funding over as long a time period as possible. Specifically in relation to rent policy, this should be a minimum of 10 years. 

The LGA’s spending review submission also highlighted how the impacts of rent reductions alongside the recent spike in inflation is now apparent in councils’ HRAs. For example:

• Budgeted HRA income has fallen in real terms by £1.2 billion (10.3 per cent) in this period.
• Budgeted HRA operating costs have fallen by only £410 million (4.7 per cent) in real terms over the same period.
• This has squeezed the ‘surplus’ available to councils which is used to service debt, build reserves, or contribute to HRA capital programmes.
  • Budgeted reserves have fallen from a real terms peak of £3.8 billion in 2019/20 to £2.8 billion – a 28.1 per cent reduction.
  • Annual budgeted revenue contributions to capital have fallen in real terms by £859 million (58.6 per cent) from 2015/16 to 2024/25.

Overall, councils’ have not been able to reduce their operating spend in line with the fall in their income. As a consequence, debt servicing costs now account for a growing share of HRA ‘surpluses’ where they still exist. An increasing number of councils have had to address end of year deficits by drawing on their dwindling reserves. At the same time, councils’ ability to supplement their HRA capital programmes from their revenue resources has been severely curtailed. These are worrying signs in terms of the financial sustainability of councils’ HRAs.

In terms of what future social housing rent policy should look like, Savills analysis (December 2024) shows that for local authorities, the cumulative annual in-year impact of CPI+1 per cent increases over 10 years (compared to CPI only) is £1.1 billion per year by 2035/26 – the impact of which would continue for all years beyond 2036. This would provide cumulative additional income in 10 years of £5.6 billion or an estimated cumulative £31 billion over a 30-year business planning period. 

Conversely, if CPI+1 per cent is allowed for five years only (then reverts to CPI only), the impact is much reduced to £0.48 billion per year by 2030/31, cumulatively £16 billion over a 30-year business planning period.

Longer-term predictability in rent policy also delivers a greater financial and investment premium in relation to equity investment into affordable housing.. Investor views of risk in relation to various future changes to the investments they make are reflected in the requirement for investment returns; the greater the risk, the higher the return needed.  If rent policy is stabilised for five or 10 years or longer, the view of risk reduces, investment value increases, return requirements reduce and the capacity for investment and delivery increases. Most investors underwrite their investment on the basis that rents will increase over the long-term by at least CPI.

The Savills (December 2024) analysis estimates that the additional value derived from CPI+1 per cent for five years would be 0.24 per cent off returns. That is, if ‘CPI only’ required four per cent yields, CPI+1 per cent would reduce the required yield to 3.76 per cent and an increase in potential investment capacity of six per cent. This would also apply to a five-year rolling stabilisation policy as investment decisions are made on the basis of the rent position each year. 

The additional value derived from CPI+1 per cent for 10 years would be 0.45 per cent off returns. That is if ‘CPI only’ required four per cent yields, this would reduce to 3.55 per cent and an increase in potential investment capacity of 11 per cent. A 10-year settlement would therefore deliver nearly double the additional value.

A rolling settlement of five years would provide additional stability or certainty compared to a five-year settlement. 

However, the LGA advocates for a minimum 10-year rent settlement as outlined in our response to Question 2.

A longer-term rent settlement, for example 10 years, would in principle increase councils’ willingness and ability to invest in new and existing homes, but this needs to be supported by a quantum of funding from a range of sources, including rents, that is sufficient to make this a reality, as outlined in our response to Question 7. 

Question 5: Are there rent policy measures that would provide confidence in the stability of our policy in the event of an inflationary spike?

Question 6: Are there other steps that the government should take to build confidence in the stability of its rent policy?

Councils’ confidence in the rent policy has been undermined by a number of unanticipated changes over the last few years including rent cuts and rent caps, as the consultation document rightly points out. 

To provide additional certainty and build confidence the finalised rent policy should be put on the face of primary legislation. Whilst we recognise that the government could still choose to enact primary legislation subsequently to make changes, it is considered this would allow for additional parliamentary scrutiny on any future proposed changes, particularly those introduced mid-settlement.

The Government should also commit in legislation to reimbursing councils in full for any cumulative shortfall in local authority income should the Government deviate from the agreed rent policy during the settlement period.

For a rent policy that is 10 years long, it should be renewed with a minimum of five years remaining so that councils continue to have certainty over their rental income, and avoids ‘cliff-edges’ at the end of a rent settlement period.  

It is recognised that a balance needs to be struck between the need for increased investment in new and existing homes, the affordability for tenants and the impact on national welfare spending. 

CPI+1 per cent is the absolute minimum required by councils, but the Savills analysis shows that whilst this will improve the national Housing Revenue Account projections, there will still be a deficit. 

• CPI+1 per cent rent increases for five years improves the position to a cumulative deficit just below £8 billion.
• CPI+1 per cent for 10 years stabilises net rent income by 2036/37 (i.e. the national HRA position is no longer in annual deficit), though cumulative deficits to that point are over £5 billion.
• If local authorities relet voids at formula rent, on top of CPI+1 per cent increases, this shows deficits reducing by 2032/33 but cumulatively HRAs remain in deficit to circa £3 billion.

The LGA therefore strongly advocates for the reintroduction of convergence of rents to formula rents for social housing tenants as a means of addressing the shortfalls in income arising from the seven per cent rent cap applied to general needs rents in 2023/24. This should be in addition to the CPI+1 per cent for a minimum of 10 years. The Savills analysis shows that rent convergence at either £2 or £3 week delivers cumulative surpluses of up to £1.0 billion by 2036/37, potentially enabling all existing stock pressures to be addressed with some capacity for additional development. 

However, the projected move to surplus only takes effect from 2034, meaning that for deficits to be addressed, there will need to be additional funding resources other than additional rent in the medium-term, to cover all necessary expenditure requirements.

It is also vital that there is further government investment to help respond to priorities- from retrofit to building new council homes- to avoid all the pressure falling on Housing Revenue Accounts and the residents whose rents and services charges fund them. 

Affordability for rent payers

In relation to affordability for rent payers, analysis undertaken by Savills earlier in 2024 assessed how the relative affordability of social rents could change as a result of the introduction of CPI+1 per cent rent increases from 2026 to 2036. This showed that a rent increase policy of CPI+1 per cent will not change the relative affordability of social rents compared to the private rented sector. 

The analysis showed that:

• Social rents stay well below market rents in the vast majority of the country
• In London and the South East, CPI+1 per cent rent increases for social rents maintain them below 50 per cent of market rents for most local authority areas
• There are only a small number of authorities where social rents would rise above 80 per cent of market rents (those with a less developed private rented sector). 

Willingness and ability of registered providers to invest in new and existing homes over the next five years

Our response to question 8 highlights that whilst a CPI+1 per cent rent increase will improve the national Housing Revenue Account projections, there will still be a deficit which will inevitably impact the willingness and ability of registered providers to invest in new and existing homes. 

The LGA therefore strongly advocates for the reintroduction of convergence of rents to formula rents for social housing tenants as a means of addressing the shortfalls in income arising from the  seven per cent rent cap applied to general needs rents in 2023/24. Rent convergence at either £2 or £3 week would deliver cumulative surpluses of up to £1.0 billion by 2036/37, potentially enabling all existing stock pressures to be addressed with some capacity for additional new development. 

The Savills analysis also suggests that if all of the additional rent income from convergence were committed to borrowing for development/acquisition, this might suggest c£7.5 billion of additional borrowing capacity.  Based on £250, 000 delivery cost and 50 per cent average grant for HRA social rent, this could deliver capacity for up to 60,000 additional homes. 

In practice, it is more likely that councils will commit additional rent income to existing stock pressures in order to return to HRA surplus. Beyond 2034, capacity for investment rises rapidly and could allow the delivery of an additional 30,000 homes from that date. This estimate is based on an assessment that authorities may commit a proportion of surpluses (half) towards new supply. Individual councils will of course need to make local decisions regarding their investment priorities based on their specific financial situation. 

The financial picture is complex. It is important that as well as looking at additional income projections that this is not looked at in isolation. There is also a need to understand expenditure pressures in order to assess the overall implications for councils’ capacity and delivery. Savills (October 2024) analysis as outlined in our response to Question 2 illustrated major additional expenditure pressures falling on Housing Revenue Accounts, which will inevitably need to be paid for by a proportion of any additional rent income from a future rent settlement. 

The most recent Savills analysis also highlights the additional expenditure implications for councils of recent changes in National Insurance costs which are estimate at £50 to 60 million per annum for councils. Lower September 2024 inflation at 1.7 per cent compared to the expected 2.5 per cent has also reduced 2025/25 rent by around £65 million for councils. Without funding to cover these changes, either through increased rents, grant funding, borrowing or other funding sources, difficult trade-offs will need to be made in terms of investment in new and existing homes. 

There are a number of measures that could help to rebuild capacity to invest in new and existing homes:

• New burdens funding to cover additional requirements falling on councils – including the decarbonisation of homes, building safety, professionalisation, enhanced regulation and minimum energy efficiency standards. This will avoid all the pressure falling on struggling HRAs and the residents whose rents and service charges fund them.

To support delivery of the Government’s Green Mission objectives councils also want to:

• Help design and deliver the Warm Homes Plan, leading place-based efforts to reduce emissions from social homes
• See a new approach to radically reform the existing national retrofit schemes, including the Social Housing Decarbonisation Fund, Home Upgrade Scheme and Energy Company Obligation. By pooling funds, a new approach could bring the scale needed to shift towards a place-based allocations model of funding retrofit outcomes towards a place-based allocations model of funding retrofit outcomes to build certainty and long-term plans for local government and supply chains, and away from the challenges of dealing with fragmented competition pots.
• Recent reforms to Right to Buy have been welcomed by the sector. Government now needs to bring forward further reforms to Right to Buy, some of which are currently being consulted on including flexibility to combine receipts with other government grants and exemptions for new build. Councils should also be able to set Right to Buy discounts locally. 
• Continued local government access to preferential borrowing rates through the Public Works Loan Board for housing until March 2026 – this should be extended permanently. Each additional £5 million provided through this scheme is estimated to provide up to £150 million in savings and additional investment into social housing.
• Government support to set up a new local government led Housing Advisory Service to provide additional capacity and improvement support tools for councils as direct deliverers of housing and development partners, as well as registered providers of social housing.
• Increased Affordable Homes Programme (AHP) grant levels per unit.
• Roll out of five-year local housing deals to all areas of the country that want them – combining funding from multiple national housing programmes into a single pot. This will provide certainty and efficiencies and could support delivery of an additional 200,000 social homes in a 30-year period, thereby improving public finances and reducing the housing benefit bill.

No further comment.