Setting rents

In announcing that there would be a green paper on housing to be published later this year, the March budget emphasised that the two key areas for reform were housing benefits policy, and proposals to bring a measure of coherence in rents in the social housing sector. That housing associations are to be well to the fore in the government's thinking can be seen by the fact that one of the first pieces of research commissioned by the Department of the Environment, Transport and the Regions was on options for restructuring association rents. Writing last month about a Chartered Institute of Housing publication Housing Associations - A Viable Financial Future? John Perry and I emphasised that future constraint on the rent stream is the biggest risk associations face (Housing Today, issue 138). It is therefore important to consider what the government's proposals may entail.

The current incoherent structure of rents in the sector has its roots in the previous government's policies of letting "rents take the strain" and encouraging significant housing association development at ever lower grant rates. This has left us with the situation where association rents are on average some 25 per cent higher than council rents; where rents vary widely between associations for similar properties in similar locations; and where, in some areas, association rents are at or above those of the private rented sector and indeed the cost of a mortgage. The Housing Corporation's current policy of holding down the level of rent increases only serves to freeze in many of these disparities.

It is therefore easy to see why a government seeking to address these issues is looking at the introduction of some kind of national rent setting policy for associations. But it is vital that the housing profession argues against this becoming a crude method of rent control which narrows choices for tenants and associations and constrains other aspects of government policy.

It is clear that the government is keen to see "market signals" of some kind incorporated in a new rent system. This means a link to house prices or to private rents. The early indications are that the government prefers the former.

The use of capital values has problems as it recreates the massive differentials within the owner-occupied sector. Rents in high-priced areas would rise significantly. This could well reinforce social exclusion as only those dependent on benefits could afford to live there. This could lead to problems of labour supply which we are already seeing in some parts of the south, evidenced by Swindon's national advertising campaign for workers or by London bus companies shipping in French drivers. Rents in parts of the north, on the other hand, would significantly reduce, constraining associations' ability to make a contribution to regeneration in those areas, and indeed possibly threatening some associations' overall viability.

Social housing received significant public subsidy to create housing which the market cannot provide. It would seem somewhat bizarre to link the costs of that housing directly to that very market. It is therefore vital that the government balances any market price aspect of its rent setting formula by taking account of what the consumers of social housing can afford. This could be done by using data related to local income levels. In the next few weeks research commissioned by the institute, National Housing Federation and the Local Government Association will be available to help inform this debate, by proposing a basis for assessing affordability. It is also important that any national formula is able to reflect consumer preferences and local conditions and permits variations in standards of property and service delivery between landlords. A clear option here is the use of 'bands' based on average rents in each local authority area, within which associations could decide the actual rent, but with higher rents having to be justified. These would need to be wide bands particularly at the outset, both to allow different policy choices by associations and their tenants, and to reflect differences within local authority areas.

Whatever formula the government uses it should not be written in stone. It needs to be capable of being refined, particularly to relate it to other policy changes, such as the valuation aspects of resource accounting for local authorities. This will be particularly relevant if as seems likely the government also pursues a common framework for local authority and association rents.

A national rent fixing system could have aspects which associations may welcome. Where rents are set to a government formula there would be no case for association rents being referred to the rent officer in relation to housing benefit, and the distinction between fair and assured rents could be abolished. It could also mean limiting the role of individual local authorities in developing local rent policies, as associations should not be caught between a national and a local rent setting system.

There are likely to be winners and losers from the sort of changes being considered. Tenants of associations are amongst the poorest people in this country, many already living on a stretched budget with a high relativity between income and debt. It is vital that the changes do not impact adversely on people for whom very small amounts of money can make a big difference to their ability to cope.

It is also vital that the changes do not undermine lenders' confidence, particularly at a time of low margins, and limit associations' ability to provide a good quality service to tenants. This is not just about ensuring that repairs and improvements can be undertaken. Associations need to be able to shape their services to meet changes in tenants' expectations and market conditions. The problems which local authorities have suffered in terms of underinvestment are a clear warning.

Moving towards a more coherent rent system implies some associations having to raise rents as well as others having to reduce them. Government will need to ask itself whether independent bodies can be persuaded to do this. How will change be introduced and enforced? Will it be 'voluntary' - policed by the Housing Corporation - or will we see it enshrined in legislation? Either way is likely to be controversial.

The government will need to take care in introducing housing benefit reforms which affect associations and their tenants at the same time as changing the rents structure. The biggest problems at present are caused by the complexities of the current system. We would urge the government to make simplifying the system and reducing administration the priority along with improving work incentives.

Whatever the government does is going to have significant effects. It is vital that government builds consensus around its reform proposals and allows them to be phased in - probably over a five to ten year period - so as not to adversely affect tenants on low incomes and associations who are very dependent on cash flows.