Reductions to social rents largely represent a transfer from councils and housing associations to the exchequer, not to social tenants, who will actually see little or no direct benefit from the cuts, the Institute for Fiscal Studies (IFS) has said.
The 1% annual reduction in social rents announced in the Summer Budget, effective from 2016, had already been criticised by local authorities – who claimed the move would both inflate service costs by £2.6bn as well as threaten plans for thousands of new homes.
But the IFS has now revealed that the cuts will also save Whitehall money while failing to serve the tenants it was designed to help. Entitlement to housing benefit will be reduced pound-for-pound as their rents drop.
And by reducing the annual rental income of councils and housing associations by £2.3bn, the housing supply will face a harsh blow. The Office for Budget Responsibility estimates that 14,000 fewer social sector homes will be built by the end of the decade.
Lower rents will also increase the financial incentive to seek and stay in social housing rather than looking into Right to Buy schemes that the government advocates.
But the slashed rents could also act as an incentive to move into work or increase earnings, since tenants will have less means-tested housing benefit to lose by doing so.
Robert Joyce, senior research economist at the IFS and co-author of the report, said the recent policy on social rents shows, in reality, “a worrying lack of consistency”.
“The government had committed to increasing social rents for ten years; but after just one of those ten years, it announced that rents will instead fall on the next four years. This instability could damage the ability of social landlords to plan and finance new housebuilding,” he added.
Pay to Stay
The report also analysed a similar policy introduced in the Summer Budget, ‘Pay to Stay’, which will force social landlords to charge market or ‘near market’ rents to tenants with pooled incomes above £30,000 from April 2017.
The IFS expects this policy to affect around 250,000 households per year (or 7% of social renting households), although four-fifths of those homes are in the top half of the income distribution.
But fundamental decisions around this scheme have yet to be made, such as how sharply rents will increase as tenants’ incomes move beyond the £30,000 cut-off. As a result, the effect on their incomes and work incentives and on revenue for councils and the government are still unknown.
Yet assuming that rents would jump to market levels once incomes hit the threshold, the IFS found that people earning just £1 more could be forced to pay up thousands of pounds extra. This would naturally lead to perverse incentives as any pay rise could trigger a sharp rent rise.
Instead, the institute said increasing rents gradually as incomes move past the threshold would be more sensible, although work incentives would still suffer a blow.
And contrary to cuts to social rents, the policy would increase the incentive for higher-earning tenants to leave the sector and exercise their Right to Buy – which could ultimately destabilise the economic diversity amongst social renters.
Andrew Hood, another research economist and co-author of the report, said: “There are trade-offs between the targeting of support and tenants’ incentives to increase their incomes.
“Pay to Stay will target the rent subsidy more closely on those in current need, but at the expense of weakening tenants’ work incentives.”