Housing and regeneration minister Rebecca Evans asked Housing Futures Cymru to look at rent affordability in relation to housing standards. Robert Panou outlines out some of the discussion points.
The requirement to meet the Welsh Housing Quality Standard (WHQS) was one of the key catalysts for the age of stock transfers. New organisations were established, stock was transferred, huge mortgages were taken out and investments made. Mortgages were secured against the value of future rents and based on financial models that were underpinned by above-inflation rent increases. Where wages and benefits continue to grow in line with rent increases, tenants are able to maintain a happy equilibrium. Unfortunately, with caps on benefits and real wage growth barely keeping pace with CPI this equilibrium no longer exists.
The group looked at some typical housing business models, which showed that capitalised revenues could reduce by 37 per cent over a 30-year period if rent increases were capped at CPI. Whilst capital expenditure to deliver WHQS could be maintained, revenue-funded tenant support services would be put at risk and operating margins (and financial viability) would be reduced.
RSLs facing rent reductions could take a commercial approach and look to reduce operating costs to improve operating margins – commercial organisations faced with reduced turnover driven by increased competition will naturally look to drive down costs whilst maintaining quality and service to meet both customer and shareholder expectations.
But there must be a balance. On the one hand, RSLs could and must be prepared to wean themselves off guaranteed rent increases, but on the other their shareholders (tenants and communities) must continue to receive services that meet their expectations. Therefore, in allowing (or restricting) rent increases to maintain business plans and operating margins, Welsh Government needs to assess to what extant rent increases are funding inefficient, unnecessary or ineffective services.
Moreover, at an individual property level, rent increases should also be justified. Why should rent increases be applied to properties that are WHQS fails – especially where a poor thermal performance means that the home is already unaffordable through high energy costs?
Removing WHQS altogether will be challenging. There is not enough competition, mobility or supply in the market place to allow tenants to vote with their feet and move to associations with better standards.
Moreover, a straw poll from tenants on the standard felt that it is sensible. It ensures they are able to live in a quality home that is more affordable to maintain. Therefore, perhaps there should be potential to review WHQS further and focus it even more towards affordability – making homes even cheaper to run through even more efficient heating and lighting systems. These investments could reduce the cost of running properties and make them, in the round, more affordable – above CPI increases or not.
For new stock, Development Quality Requirements (DQR) encourage the construction of larger-than-open-market properties to provide ‘lifetime’ homes that reduce costs of future adaptations and counter a lack of social mobility amongst social housing tenants. But like WHQS, how does this standard align with affordability? Funding the construction of larger properties is becoming difficult with build cost increases far out-stripping rent increases – ACGs have recently increased by 11 per cent-15 per cent, whilst rents are set to increase by only 4.5 per cent.
Similar modelling undertaken by the group shows, that with CPI rent caps, housing associations could struggle to continue to fund decent development programmes without some form of internal subsidy. This could come from operating margins, commercial activity (which introduces risk) or by cutting services elsewhere. Alternatively, it could drive behaviours and cultures – for example pressurising associations to focus more on achieving target rents rather than looking at the impact on affordability.
In terms of standards – as new builds can be improved more easily than renovation projects, we improve affordability by driving standards. By improving the thermal performance of properties to say Passiv standards, heating bills can be reduced by 75 per cent. This makes higher rents more affordable and puts more disposable income into tenant’s pockets.
Reviewing other DQR aspects could offset the impact of increased construct costs. Reducing the size of properties slightly (but still ensuring Welsh affordable housing delivers the highest standards in the UK), combined with economies of scale from delivering higher thermal performance standards en masse would generate savings – whilst still providing homes that are bigger than those of national housebuilders. Moreover, a straw poll of tenants suggests they would rather have a warmer, cheaper-to-heat home than one that was bigger.
In summary, the evidence we reviewed shows that reducing rent increases will put pressure on housing associations, but there are two potential solutions:
Rent increases need to be sensible and justified to ensure that they are being used to fund efficient, lean, effective and sector-leading services.
Standards need to be more transformational, focusing less on sizes and ancillary items and more on improving the overall affordability of homes for tenants.
Robert Panou is senior development manager at Bron Afon