Merging rented sectors 'feels timely and would reduce social stigma'

Published by 24publishing for 24dash.com in Housing and also in Central Government, Communities, Local Government

Merging the two rented sectors would reduce the ‘stigma’ of social housing, give social landlords greater ability to cross subsidise and could drive up rental standards in hard-to-let areas, according to housing experts.

However, the move is likely to increase the housing benefit bill at a time of caps and cuts, with fears the move could exclude those most in need.

These are the opinions of housing leaders, lenders and thinkers who have responded to beliefs the Government may look at merging the two rented sectors in a bid to rein in capital expenditure for house building and allow need to be met through market forces.

Some 66% of 24dash readers believe, however, that the Government should not merge the two sectors, which would see housing associations compete on a level playing field with private landlords – meaning no capital grant and gradual deregulation – fearing the future for those most in need. Especially, as the Government shows no sign of U-turning on the £500-a-week household benefit cap due to come in next April.

Of the senior housing professionals I spoke to, most said such a move feels “timely”, that they could see some benefits “worth exploring”, but feared a market forces approach wouldn’t cater for those most in need.

‘Tenure neutrality’

The case for ‘tenure neutrality’ was put forward nearly 10 years ago in an influential paper by the Social Market Foundation (SMF). Author Tom Startup believed successive Government policy had been to privilege both homeownership and social housing over private renting. The result? Creating excessive demand for both, insulating them from competition and forcing low-income families into the private rented sector because of the necessary rationing of social housing.

He wanted to improve provision for low-income families by introducing an annual property tax on homeowners and deregulating and phasing out capital subsidies for RSLs.

This, he argued, would create a more neutral framework for all providers to compete with each other on a broadly level playing field. He said it was the “best means for generating an overall increase in standards, to ensure that failing providers go out of business and that good providers can expand”.

You could argue that the current Government’s erosion of social housing through the Affordable Rent programme + fixed-term tenancies is a major step towards tenure neutrality, but where Startup’s paper and the Government’s thinking differs is on housing benefit which has been capped in the private rented sector and which falls into the £500 a week household benefit cap from next April.

Startup wanted a generous income subsidy, related to household size and local costs which could eventually be absorbed into general income support.  

He believed this was much more efficient than subsidised rents which he said had generated a demand for rental accommodation that could never be met, typically characterised by the huge waiting lists we’ve got today. The impact he argued was that it drove out private landlords and saw those that couldn’t be catered for fall foul of unscrupulous private landlords charging excessive rents.

Startup’s call for a generous housing benefit system was twofold: it would allow providers to expand to meet demand and the recipients would still have an incentive to economise on their housing choices because competition would keep rents down.

A number in the social housing sector agree that income subsidy at the point of need is more efficient that subsidised rents, but not necessarily when the benefit will be unringfenced like it will be under Universal Credit.

Tim Pinder, chief executive of Macclesfield-based Peaks and Plains Housing Trust, is of the view that one sector would help reduce the stigma associated with social housing which rapidly manifested itself following the 1977 Housing Homeless Persons Act.

He said: “When putting planning permissions in for new developments the concept of affordable or social housing gets heckles up in local communities in a way that private sector housing doesn’t.”

Peaks and Plains has just opened a new development of over 30 apartments in Macclesfield where market rented homes will be cross-subsidising a dozen affordable ones. He says there could be some “distance” and “aspiration” in exploring a rental market with no distinction between social and private so you have ‘affordable housing applicants’ subsidised in open market homes.

Housing for those most in need

The idea behind tenure neutrality would be to create fair competition that drives prices down and standards up, benefiting low-income households. But if the Government were looking at this, it would still need to raise housing benefit levels for households that lack sufficient funds to afford a home.

Even at Affordable Rent levels – up to 80% of the market rent – housing associations in London smell trouble.

Stephen Howlett, chief executive of one of London’s oldest housing associations, Peabody, said he feared a merger of the two sectors would undoubtedly lead to people being forced out of the capital.

He says major retailers in the capital are already expressing concern over the availability of low-cost housing in central London for workers. “The merger of the two sectors seems like a big experiment really when a lot of things are already up in the air,” he says.

“The Affordable Rent programme has its faults, but it’s allowing us to move forward. To move further away would bring some issues to vulnerable people in London.”

Indeed, it’s only the moral compass of housing associations that is giving hope to low-income families in the capital as they find ways of producing three and four-bed homes not far off the old social rent levels. If they charged higher rents, they could price families out of London.

If the sectors were merged and the market dictated where would those families be?

To some extent it is possible to see because many housing associations like North West-based Halton Housing Trust are running their own commercial for-profit subsidiaries and letting market rented homes to cross-subsidise the building of social ones.

Chief executive Nick Atkin says Halton’s is much more “hard line”. “It’s very commercial in outlook and operation and is very targeted about who we will and won’t take on.”

As such, two areas Atkin believes a merged rented sector could have an immediate effect on is allocations and investment. “If you merge the two sectors what happens to those most in need,” he asks. “If you are running a commercial model why would you take those people on because per tenancy they will cost you more.”

If housing associations also lost their charitable status by charging open market rents they’d lose their ability to claim VAT on all capital investment works. “That would go,” he warns. “So if we were taking a more commercial approach, where is the incentive to carry out investment when it would cost 20% more?”

It’s worth noting, as an insight into Government thinking, that the only thing preventing it from charging higher earning social households the market rent in its ‘pay to stay’ proposals was “the charitable status and objectives of providers".

The role of a housing association

The SMF paper called for associations to retain their charitable status but scrap allocations ‘based on need’ entirely, which it and many argue, led to widespread stigmatisation of the sector.

It also called for a “housing benefit premium” payable to providers of housing for those households in receipt of housing benefit.

This, it said, would “even-up” any tendency of landlords to favour better off low-risk households over low-income high-risk households.

Stephen Howlett points to the obvious point of a system of open allocations and rent setting freedom: “If you got into a situation where we charged the market rent and our tenants got subsidy, there isn’t a role there for us in a way,” he said.

But despite creating a level playing field, the SMF saw a lead role for housing associations within the new framework as a “disciplining force” able to offer longer tenancies and determining the costs and standards providers must follow. In effect, it saw the for-profit providers being leaders in quality, and the not-for-profits leaders in inexpensive accommodation.

David Ireland, chief executive of charity Empty Homes, believes housing associations competing with their private counterparts could see the worst landlords forced to pull their socks up.

“The bottom end of the private rented sector is a captive market that can lead to unscrupulous landlords exploiting tenants,” he says. “If the two sectors were merged in some way to the extent where people had a choice between the two, that could create competition which isn’t there at the moment in some areas.”

Nick Atkin believes that this could be true in hard-to-let areas but that overall, the impact on standards would not be a good one. In fact, he believes it could create a “race to the bottom”.

He fears that if the benefit cap isn’t removed standards could end up being reduced to enable rent levels to remain low and affordable.

He also fears rents would only move one way – and that’s to meet those in the private rented sector.

The reality

One reason why housing and welfare has been targeted so vociferously by Government reform is because it feels public money has been wasted.

Both cuts in capital grant and welfare aim to readdress the situation that has seen the state foot the bill not only on rental subsidies but income subsidies to support social and private tenants. In short, it appears they’re ready for a new approach, letting the market satisfy need.

“From the meetings I have had they seem to be only interested in supply,” says one expert. “They’re kind of tenure neutral in a lot of ways, just interested in supply.”

And if reports around the Montague review are to be believed, tenure neutrality is about to become a reality within section 106s – which have previously required and been a significant deliverer of social housing.

However, Vidhya Alakeson, director of research and strategy at the Resolution Foundation, believes the reports around Montague have been over-stated. She says the “spirit” of the review is not a blanket replacement of social housing but about local authorities taking a more “strategic review” of what they need locally – this might be social housing, private rented or home ownership options.

Lurking not too far behind Grant Shapps’ praise of housing associations for helping him exceed his target of affordable homes under the new investment framework is his beady eye on social landlords’ efficiency costs - as evident from his attacks over chief executive pay and the publication of £500 expenditure.

What is not always so evident though is how much more commercial housing associations are already becoming while still looking after those most in need.

Many have set up commercial for-profit subsidiaries, which are entering the PRS to cross subsidise the building of affordable homes and developing housing associations in London are keeping rent levels in London down on new family homes despite balance sheet concerns pushed onto them by the Affordable Rent programme.

They’re also streamlining their social businesses with efficiencies they’ve identified in their commercial operations – from reducing costs when turning around voids to admin costs.

“Everybody in the organisation from myself down hot desks,” says Nick Atkin about Halton. “Most can operate from home in the car with an iPad etc. We’ve saved £125,000 just from having less office space.”

“We are guardians of our own futures within the new regime,” says Rob Young, chief executive at Helena Partnerships. “We are already attempting and adopting private sector disciplines because it makes good business sense to do. It’s happening now but for a social purpose.”

A 'blunt instrument'

The distinction between social and private is already considerably blurred with housing associations offering private rents, private landlords moving into social housing and private landlords housing social tenants through private leasing schemes.

Housing associations are also providing homes for those on varying income scales – from those most in need to those on the cusp of home-ownership. To this effect, they’re already setting rents in order to ration demand fairly while keeping them at affordable levels.

Do we need to go the whole hog – and would it even be possible to do when housing benefit is being reduced?

“I think people should pay a fair price for their homes and people’s circumstances do change but it seems a blunt instrument really,” says Peabody’s Howlett. “Housing benefit isn’t a popular subsidy for Government therefore it’s likely we would not have the freedom to exercise this as much as it may want.”

Although open market freedoms could help cross subsidise affordable homes, Tom Titherington, director of business development and marketing at South East-based Catalyst, warns that a significant private rented presence would impact on housing associations’ levels of debt and “expose them to a degree of demand risk not faced before”.

He said: “This is a form of risk associations in the South East are not used to and, though the current data suggests finding tenants will never be a problem, our experience is that void levels vary significantly between area. An effective way of building a portfolio quickly could be to enter into forms of joint ventures with others including institutional investors.”

What the Government has done – which successive governments hadn’t managed to do – is begin to reappraise the purpose of social housing: who it's for and for how long?

Huge waiting lists and huge expense being pumped into both supply and personal subsidy isn't a system working well.

Perhaps a better balance between the tenures of homeownership, private and social rent - allowing them to operate competitively on a level playing field - could bring about a healthy change that substantial state intervention has yet to achieve.

But recognising and utilising the change already taking place at housing associations  - without sending them into the market rented sector - could be a significant weapon the Government has in tackling the housing crisis.

Ross Macmillan is the deputy editor of 24housing magazine