Role model?

If we have a Living Wage, why not a Living Rent? Well, now we do.

With due respect to the Scottish campaign of the same name, the report launched this week by Savills, the Joseph Rowntree Foundation and National Housing Federation addresses directly what I’ve long thought to be perhaps the most important question in housing policy: how to make homes genuinely affordable to people on low incomes.

Current policy gets nowhere near that. Employment may be at a record high but millions of people are trapped in low paid work, in part-time jobs and zero hours contracts, and average earnings have only just begun to rise again after years of decline.

Yet private sector rents are too high, leaving families reliant on housing benefit whether they are in or out of work and vulnerable to cuts to come: projections by Savills suggest that one in four of us will be private renters by 2019. ‘Affordable’ rents are only affordable in relation to a market artificially inflated by speculative investment and the aftermath of the financial crisis. Even social rents rise by an inflation-plus formula regardless of what’s happening to earnings.

Wednesday’s report by Capital Economics for SHOUT and the National Federation of ALMOs argued for a comprehensive programme of investment in 100,000 social rented homes a year and clearly demonstrated that it would more than pay for itself over the long term.

Today’s report has a more modest aim of 80,000 sub-market homes a year, of which 40,000 would be for Living Rent. However, it is also more ambitious in setting out to re-establish the links between housing and the labour market and between rents and the ability of people on low incomes to pay for them. That, combined with security, is to me what social housing should be all about.

Even Conservative ministers now see the Living Wage as a good thing (perhaps because it relies on persuasion rather than compulsion). However, it is calculated on the assumption that social housing at a low rent is available when in current circumstances it is less and less likely to be. If the Living Wage is to mean anything it needs a Living Rent to go with it.

Ministers also speak endlessly of  ‘making work pay’ and of work as the route out of poverty. The truth is that high rents and steep benefit withdrawal rates reduce incentives to work and lead to increased poverty rates, especially for private renters. Low rents increase incentives to move into employment and help tackle poverty. Yet under current policy social housing will shrink to a tenure reserved for the old, the disabled and the sick: an A&E department with the rest of the hospital left entirely to the market.

So how would the Living Rent change things and reconnect the housing and labour markets? Any rent model depends on a whole range of assumptions about earnings and affordability and Inside Housing has already covered some of the basics of this one. Where the current social rent model is based 70 per cent on earnings and 30 per cent on property values adjusted for size, the Living Rent removes the link to values and uses a different method to reflect size. It then uses localised data on lower quartile individual earnings adjusted for family size with a starting rent set at 28 per cent of net earnings.

As you might expect, the results are in general significantly lower than private and ‘affordable’ rents. Living Rents can be higher than affordable rents (and even some lower quartile private rents) for larger properties in some lower-rent areas. However, they are much lower than either in higher-rent areas. A larger gap between rents for different property sizes means that Living Rents would often be lower than social rents on one- and two-bed homes but higher on three-bed homes. In Newham, the Living Rent on a two-bed home would be £84 a week compared to a £114 social, £165 affordable and £230 lower quartile PRS. Next door in Tower Hamlets, the Living Rent on a three-bed home would be £155 compared to £138 social, £191 affordable and £400 lower quartile PRS.

However, even the best formula could be counter-productive if it ends up undermining landlords’ finances and the supply of new homes. No rent formula can be perfect and it’s easy to see how local anomalies could creep in.

The report tests the impact on landlords’ business plans of all these variations and finds winners and losers depending on local markets, current rent levels and the extent to which they are introducing affordable rents. To avoid problems, it proposes allowing landlords, especially in high-rent areas, to mix relets between Living Rents and intermediate rents, based on local affordability, and allowing them to average out the Living Rent across the stock, varying individual rents within that envelope. After consultation with lenders, rent increases would be in line with CPI inflation for the first five years and then be rebased in line with earnings.

On supply, the report calls for a programme of 80,000 sub-market rented homes a year backed by £3.1 billion a year of government investment. Of these, 40,000 would be for Living Rent (£2.3 billion with a grant rate of 30-35 per cent) and 40,000 for intermediate rent and shared ownership (£800 million). The benefits in terms of construction jobs and economic activity and reduced long-term spending on housing benefit should be obvious but there are wider benefits too including increasing purchasing power for tenants on low incomes, cutting households debt, improving work incentives and increasing labour mobility.

That’s the theory. In practice, devising an affordability formula is fiendishly difficult enough even without having to make adjustments for landlords’ finances. The larger differentials between different property sizes could also cause particular problems. These issues will need to be tested in detail at local level.

On a larger scale, this report runs up against the same problem as Wednesday’s: George Osborne seems intent on moving in the opposite direction. And both face the ticking timebomb of the benefit cap: the effects of a £23,000 cap are already toxic enough but Newsnight reported on Monday that it could be reduced still further to below £20,000.

Despite those obstacles, the Living Rent offers a chance to move beyond ‘affordable’ rents that nobody thinks are affordable and of allowing housing benefit to ‘take the strain’ when everyone knows it won’t. It offers the prospect of a new foundation for genuinely affordable social housing in the longer term.

The immediate questions are for landlords who have only just got used to the new CPI-based rent formula and who are either complying with the affordable rent regime or doggedly pursuing their own path without grant. Do they have the will to become Living Rent landlords (or for that matter Living Wage employers)?

Originally posted on June 18 on my blog for Inside Housing