New analysis for London Councils suggests social rent levels set by the government leaves London boroughs with a £700 million ‘black hole’ in their social housing finances over the period 2023/24-2027/28, despite the desperate need to improve housing conditions and build new homes in the capital.
The research assessed the impact of social rent policy on boroughs’ Housing Revenue Accounts (HRAs) – the ring-fenced budgets that councils use to manage social housing stock, including paying for repairs and maintenance. Since 2012, councils have been expected to balance HRA budgets according to rules set out by the government, including on rent setting. HRAs are not allowed to budget for a deficit and any projected deficit must be addressed through spending cuts or use of HRA reserves.
The analysis incorporates longer-term research commissioned by the London Housing Directors’ Group from Savills, which forecasts that London boroughs will have to make savings to their HRA budgets for the next 20 years. This is because of social rent constraints and the current impact of inflation.
In January the government confirmed a maximum permitted increase to social rents of 7.7% in 2024-25. Official government policy is to let social rents rise by a maximum of inflation (measured by the Consumer Price Index, CPI) plus an additional 1% (referred to as ‘CPI+1%’). However, in five of the past seven years the government has intervened to set rent levels well below inflation – leading to significant HRA deficits.
Inflation on core expenditure such as building materials and repairs contractors is expected to continue outpacing CPI in the coming years. As a result, increases in social housing costs are set to remain significantly above increases in borough income, despite a return to the CPI+1% rent policy. The cumulative impact of costs continuing to run higher than rental income will equate to nearly £900 million over 20 years, according to Savills.
This squeeze represents a substantial real-terms reduction in funding available for improving housing conditions and building new homes. Many of the savings that boroughs are required to make will come out of budgets for social housing development and undertaking repairs.
Key priorities for London boroughs
- Raising standards: Boroughs acknowledge that London has the lowest social housing standards of any region in the country. A disproportionately high number of Housing Ombudsman maladministration cases for damp and mould relate to social homes in the capital. London’s housing stock faces particular challenges, as it is generally older and less insulated than in other parts of the country. There is also a higher proportion of tall buildings and flats, which complicates maintenance, plus higher rates of overcrowding.
- Building safety: Significant funding is needed to ensure social housing meets the highest building safety standards. The Local Government Association estimates councils across England need £7.7 billion between 2023-2030 to achieve this, including through installing sprinklers and improving compartmentation to reduce fire risk.
- Decarbonisation: Boroughs are working together to reduce carbon emissions through retrofitting housing. However, London Councils estimates it will cost at least £49 billion to boost all London homes (not just social homes) to an average EPC rating of ‘B’ by 2030.
- Building new social homes: London faces the most severe homelessness crisis in the country and over 320,000 London households are on social housing waiting lists. London Councils estimates that one in 50 Londoners are homeless and living in temporary accommodation arranged by their local borough. Boroughs are determined to keep building new affordable homes, but high construction costs have led many projects to become unviable.
Our asks of London MPs
We appreciate anything London MPs can do to make the case for more flexibilities and sustainable funding arrangements for the social housing sector. These include:
Introduce a sustainable post-2025 social rent settlement to address the funding gap for borough Housing Revenue Accounts. The government is expected to launch a consultation on future social rent policy in the coming months. A catch-up period following the rent cap or short-term revenue support to cover the shortfall in borough HRAs would enable providers to recover some funding, while protecting tenants from significant short-term annual increases in rent. Future rent policy must ensure the sector is put on a sustainable financial footing.
Remove restrictions on right-to-buy sales receipts to support local housebuilding ambitions and improve the supply of new affordable homes. London Councils welcomed temporary flexibilities announced in March 2023 which allowed councils to retain 100% of the money raised through sales and froze the cap on the number of existing homes councils can purchase using receipts. We are extremely concerned that the government decided not to extend the 100% retention of sales receipts. We did however welcome the Spring Budget announcement to raise the cap on the percentage of the cost of a replacement home that can be funded by right-to-buy receipts from 40% to 50%. All these flexibilities should be made permanent to ensure every penny raised from the sale of a home goes towards building a new home.
Provide additional government grant funding for new affordable housing delivery. Research commissioned by the Greater London Authority shows an additional £4.9 billion annually is required to deliver the number of affordable homes that London needs – over six times the current settlement.
