Headlines: February 3rd, 2011

The Localism Bill now being debated in Parliament will give councils greater freedom to manage their housing stock, but tenants will pay higher rents and in the longer term rent increases will also be higher.

The value of council’s housing businesses is more than £28 billion. Currently the Housing Revenue Account subsidy system requires councils to pay council rents to Whitehall and the funding is then redistributed on an agreed formula. The weaknessse of the system are that councils have no certainty about future income making long term planning difficult and there is little incentive to be more efficient.

The new self-financing approach puts councils in control with the tools and incentives they need to manage their housing stock over the long term rather than on a year by year basis. This will be achieved by a one-off adjustment to each council’s housing debt after which councils will retain all the rental income they collect. And they will be free to make decisions about their housing assets without first having to get permission from Ministers in Whitehall.

The effect of the proposed changes for tenants will be a rent increase of 8 per cent by 2015/16. This figure represents the gap between what tenants pay now and the ‘formula rent’ which is based on property values, property size and local earnings. Over time, all social landlords are expected to move their rents in line with this formula. At present most housing associations set rents at or close to the formula level.

There will be a double whammy for tenants because annual rent increases will be calculated on the Retail Price Index plus 0.5 per cent.