Paradigm Housing’s Matthew Bailes weighs up the pros and cons of Labour’s proposal on affordable rent
News that the Labour Party plans to scrap the affordable rent regime has helped to heat up the debate on rent policy that has been bubbling away for some time.
There’s no one right answer on rents in social housing, just a series of complex trade-offs. Broadly speaking, lower rents are good news in terms of disposable income and work incentives for those allocated social housing.
However, as the gap between regulated and market rent grows, so does the level of subsidy required to build a new home. Low rents also exacerbate the risk of ‘windfall’ levels of subsidy being given to households that the welfare system would not otherwise support so generously, and make the system more attractive to gaming, like illegal subletting.
Assuming that levels of capital subsidy are fixed and limited, over time this leaves a choice about whether to offer a lot of households a little help, or fewer households a lot of help (or land somewhere in-between). This trade-off between affordability and supply is tricky. Taking a long-term view, would it be better in 10 years’ time to have delivered an extra million homes at affordable rent levels or 500,000 at social rent levels?
This choice also has housing benefit consequences, but they are not straightforward to model. Although the cost per household is reduced if rents are low, if as a result there are fewer affordable homes, more households will be left claiming expensive housing benefit in the private sector, including often exorbitant costs for temporary accommodation.
Just to spice things up, rent policy also has implications in terms of regulating providers. High and increasing rents may be good for supply, but there is a view in government that they can also feather-bed associations and leak into inefficiency. This view contributed to the four-year rent cut.
Affordable rent is the result of a particular view being taken on these trade-offs at a time, shortly after the coalition government took power in 2010, when the focus on deficit reduction crowded out most other policy considerations. This resulted in quite a simple task being posed for officials: find a way of building as many homes as possible with little or no grant, and make the homes rented because we want to reduce housing benefit costs in the private rented sector. It should be noted that shared ownership was barely in the picture, as the Treasury was in no mood to subsidise households that wouldn’t otherwise get state support.
There was also an imperative to launch a programme quickly. Because of the growing fiscal deficit, the previous government did not make the usual level of forward spending commitments, so as not to tie the hands of its successor. Among other things, this meant the previous affordable housing programme was coming to an end and had not been replaced.
It is easy to trace the logic of affordable rent from the questions it was designed to answer. Subsidy goes further with higher rents, and there was a precedent (in the form of intermediate rent) which provided comfort that a rent set at 80 per cent of market levels was state aid-friendly, and meant there was no need for a long debate about a new rent formula, which would have delayed the start of a new programme. Converting voids to the higher rent level created debt servicing capacity which would offset the need for grant, but avoided rent hikes for existing residents and didn’t hand over large rent increases to providers without conditions on supply. That was pretty much it.
Back in 2010 it was well understood that the absence of any labour market factors in the new formula would lead to very different outcomes in different regions. It seems to me perfectly reasonable for the Labour Party to revisit the model, and perfectly reasonable for it to take a different view, particularly around affordability and disposable income.
However, the trade-offs won’t go away, and even if a Labour government found substantially more grant it would still need to take a view on the balance between depth and breadth of subsidy: supply versus affordability.
Labour also needs to think carefully about what (if anything) it does with existing affordable rent properties. They were built (or converted) on the back of promises from the government on rent levels, which made new schemes stack up. If the government now intervened to reduce rents and break these promises, not only would it reduce cash flows and therefore development capacity, it would also damage future trust in government itself – which of course has already been damaged by this government’s rent cut. This in turn could spook lenders. Better to leave providers to make up their own minds, as Peabody has done.
Finally, it would be worth politicians reflecting on why a rent set at 80 per cent of market levels creates such affordability issues in some areas. It is true the crude formula that decoupled rents from wage levels hasn’t helped. But surely in a sensible functioning market rents set at 80 per cent of market levels ought to be affordable to people in paid full-time employment? That fact that they aren’t says at least as much about the need to reform the housing market as it does about the right way to set rents in the regulated sector.
Matthew Bailes is chief executive of Paradigm Housing