Council rent cut: suspend payment of ‘debt’

From April 2016 the government is instructing Councils and Housing Associations to cut their tenants’ rent by 1% a year for 4 years. This will make a pleasant change for tenants after years of above inflation increases. However, because of the way that our housing is funded the cut will have consequences. Swindon Council is consulting on various options to deal with the loss of income resulting from this cut. The only income which the Housing Revenue Account has (other than a small amount from rental of garages and shops that the Council owns) is the rent and service charges paid by tenants. Any cut in income means that the Council has fewer resources to maintain our homes and to renew components such as kitchens, bathrooms, roofs etc. There will be £22.8 million less rent income (than would have been available if the government had continued with the CPI + 1% formula) over the 4 years as a result of the cut in rents.

Swindon Council is proposing 4 possible options to counteract the loss of income: (Download a PDF here rentcutoptions or read on below)A) Use some of our ‘reserves’. This is money put aside in case of the need for spending on unforeseen events, e.g. very bad weather which damages roofs. There is currently £7 million held in ‘reserves’.

B) Repay less of our debt. We currently pay £5 million a year from the rent income to pay off the ‘loan’ which the government gave us in 2012 when a new housing finance system was introduced. The Council has to pay interest on the debt every year, but it has the ability to vary how much of the ‘loan’ it pays off in any year.¹

C) Reduce the amount we spend on improvements to our homes. For example cut back the number of kitchens, bathrooms or replacement windows that are renewed each year.

D) A combination of options A and B.

To make up our minds on what the best option would be it’s necessary to understand the way that our housing is financed.

Reopen the ‘debt settlement’

The government is not cutting our rent because they have taken pity on us after years of above inflation rent increases. For them it’s simply a means of stopping the housing benefit bill growing. However, if it wants to cut our rent then it should take account of the consequences of lost income for the Housing Revenue Account. It should reopen the ‘debt settlement’. When the new system was introduced in 2012 each Council was given a certain amount of ‘debt’ based on an estimate of how much rent would be taken in over 30 years. This was not real debt based on past borrowing. It was the result of ‘creative accountancy’ by the Treasury; a means of fleecing tenants whose rent has long since paid off the original borrowing which funded the building of our homes.

The Housing Revenue Account has no subsidy. Tenants’ rent and service charges cover the costs of maintenance and renewal. However, since the new system of ‘self-financing’ was set up the government has introduced policies which have cut the rent income that Councils take in. They have changed the rent formula (what they say Councils should increase their rent by each year) twice. The latest version, Consumer Prices Index + 1% was supposed to be in place for 10 years. Councils planned on the basis of the income that this would bring in over 10 years. However, the government has now moved the goalposts again. It abandoned the commitment to 10 years of CPI + 1%.

‘Right to buy’

Another of the factors in determining how much ‘debt’ each Council was given was an estimate of the number of homes sold under ‘right to buy’. Each one sold means the loss of rental income. An estimate of the amount of rent a Council would lose was built into the ‘debt settlement’. Since the government increased the discount for RTB sales numbers have risen considerably. So we are losing more rent than was estimated at the time of the ‘debt settlement’. For instance Swindon has sold 161 homes over the last three years compared to 34 in the three years before the debt settlement. For each 50 sold we lose nearly £250,000 rent each year.

Now the government is proposing to force Councils to sell ‘high value’ homes to pay for the extension of RTB to housing associations. This will mean even more rent lost.

All these policies, including the rent cut, mean in effect that Swindon’s ‘debt’ was based on a rent income which we do not in fact receive. That’s why Swindon Tenants Campaign Group, Swindon Tenants Voice and even the Council’s Housing Advisory Forum have all called for the ‘debt settlement’ to be reopened and Swindon’s ‘debt’ to be cut in order to take account of the much lower income we receive from rent as a result of changes in government policy.

The government has the power to reopen the ‘debt settlement’. Tenants are pressing the Council and the MP’s to demand that the government revisits this ‘settlement’ and write off some of this ‘debt’. Unless this is done then the shortage of money will lead to a decline in the quality of our housing stock. Obviously until such time as this happens the Council’s housing department has to plan to counteract the impact of the loss of income resulting from the rent cut.

Options

Which of the proposed options will best protect our housing stock?

The problem with Option A is that if we spend the reserves and an unforeseen problem occurs we would have nothing to cover the cost of the extra work required.

Option C is likely to lead to a backlog of necessary work which will cost more to carry out in future if it is delayed. For instance the Council is considering cutting the kitchens programme for 2016/17 by half in order to spend money on improving non-traditional (prefabricated) stock. If that was repeated over 4 years it would mean a backlog of 1,000 kitchens.

Option B would in our view be the most sensible option. If we suspend paying the £5 million a year then it will mean that we will pay more interest over the course of the 30 year business plan than originally intended. According to Council Finance officers it will mean an extra £166,000 a year in interest payments. With 26 years left of the business plan an extra £4.316 million would be paid. However, the advantage of this option is that when the cost of that extra interest is deducted (in each of these 4 years), we would have £4.834 million a year extra to spend.² This would mean that we could both maintain the level of spending on replacement of bathrooms and kitchens and other components, and we would still have more money available to invest in our non-traditional housing stock. This would mean that over the four years we would prevent a backlog of work building up. Delayed work will cost more to do in the future as inflation kicks in. And inflation for building work is usually higher than the general headline level of inflation.

A combination of A and B could mean, for instance, £3 million being taken from the reserves and paying £2 million less debt. However, you could only use the reserves as a one off. There is not enough to cover the 4 years. That’s why we suggest that the best option would be to suspend the £5 million payment and keep our reserves intact. This will help us prevent a backlog of work. The more work that can be done in that time-frame the better. As yet we have no idea what government rent policy will be after that. Using the extra £5 million for each of these four years would be the best means of preventing the deterioration in the condition of our housing.

Martin Wicks

Secretary, Swindon Tenants Campaign Group

Consultation response

To respond to the consultation you can download a form from here:

www.swindon.gov.uk/info/20056/council_tenants/599/housing_rent_decrease

It should be returned to:

FREEPOST SN178, Swindon, SN1 2BR

Or you can fill in a survey online.