Looking for a way of reining in rents

But what is missing from all these options and their variants is a cut off point beyond which social housing rents would not go. An "affordability cap", applicable at local authority or regional level, may be the answer - protecting work incentives and limiting the proportion of working council tenants reliant on housing benefit.

Were such a cap to exist, it should be:

• reasonable in terms of its links to tenants' economic circumstances;
  
• realistic in terms of the rent differentials it is able to yield; and
  
• relatively simple to operate.

At the London Housing Unit we have developed a model that should be viewed as a step along the way to create an affordability cap that can be equitably and sensibly applied in restructuring social housing rents. It shows that such a cap, or a similar mechanism, would be possible and relatively straightforward to operate for social landlords and for central government.

The model is intended to represent an upper rent limit by area and by household type, not a target. In fact, within limits given by government, local authorities could set cap levels.

But how can an affordability cap reasonably reflect tenant's economic circumstances? An affordability cap would operate over areas covered by earnings data. This data would need to represent entry level wages, and the cap would need to take into account differences in the earnings capacity of different household types.

To be reasonable, an affordability cap must address household expectations of additional earnings capacity in the near future. This ensures that social housing rents are set at levels that are not unrealistically low, while still affordable.

Take a council tenant household of two adults and two children under 16 living in London not to be reliant on HB, with a gross income of £207 per week (entry level earnings), the rent would need to be set at £55 per week or less.

But the affordability cap could be higher than this if it was acceptable for such a household to be "within reach" of getting clear of housing benefit.

If it can be assumed that a tenant coming off benefit and taking up paid work at entry level earnings has a reasonable expectation of an increase in earnings capacity in the short-term, then the affordability cap could be set at a reasonable level above entry level earnings.

This additional earnings capacity of, say, £40 per week, would bring the rent affordability cap for a two-adult-two-child household type up to about £69 per week.

The key question here is what additional earnings capacity could reasonably be assumed in setting an affordability cap?

Chart 1sets out the upper rent limits indicated by different levels of additional earning capacity for a London council tenant household with two adults and two children and gross actual earnings of £207pw. It can be seen that an assumption of £20 per week additional earnings capacity increases the upper rent limit, or affordability cap, by just over £10pw from £55pw to £65.30pw. After this, each additional £20 assumed as additional earnings capacity produces an increase in the affordability cap of about £4 per week. The step from no additional capacity to £20 per week additional capacity has the biggest impact in terms of increasing the rent level at which the affordability cap would be set. But, in London, upper rent limits for two-bed rents set at much below £70 per week might not be considered realistic. An assumption of £40 additional earnings capacity, which would yield an affordability cap at £69 per week might be more appropriate.

Would an affordability cap be realistic in terms of permitting differentials between regions and different types of property? Table 1 (which assumes an additional earnings capacity of £40 for all household types) indicates that affordability cap differentials between regions are likely to be fairly flat for all bedroom sizes. The widest variation between regions ranges from £7pw to £9pw. This reflects the relatively low level of variation between regions in earnings at the lower end of the income scale. It also shows that operating an affordability cap permits reasonable differentials between property sizes.

How might the operation of an affordability cap impact on London council rents restructured under the 80:20 variant of the Green Paper option? We looked at a sample of 16 boroughs. One-bedroom properties would be affected by an affordability cap across the whole price range. This is because the significantly lower earnings capacity of one-bedroom households is not taken into account in the 80:20 formula as it stands.

Without the safeguard of an affordability cap, in all the London boroughs in our sample, many one-bed households with rents set by an 80:20 formula would probably be discouraged from taking up work at entry level earnings, even assuming an additional earnings capacity of £40 per week. This would apply to some extent even to the least expensive 10 per cent of one-bed rents and would apply across the sample for the most expensive 10 per cent.

The model that LHU has developed is intended to demonstrate that it is possible to ensure affordability through developing upper rent limits, or affordability caps, in a way that is not only reasonable and realistic but also transparent and relatively simple to operate .

It is worth remembering that there is no "right" level to set the affordability cap. It is a matter of finding a reasonable balance between assumptions about tenants' additional earnings capacity and sensible upper rent levels. But, wherever possible, it must be right to pursue a policy which takes proper account of tenants' circumstances and which safeguards work incentives.