UK

Why we oppose ‘rent convergence’

HubMP2012

SEPTEMBER 4, 2O25

The government is consulting on “How to implement social rent convergence”. The Labour Campaign for Council Housing explains what convergence is and why we are opposed to it.

Rent convergence was a policy introduced by John Prescott in 2002. Council housing and housing association rents were to be brought into alignment over ten years. As the House of Commons Library explains, “A rent formula was established with actual rents moving towards a national formula rent which took account of property values and local earnings relative to national earnings.”

It’s a complicated formula (see Note below). It set annual rent increases at the level of the Retail Price Index + 0.5% + up to £2 a week, the latter being the ‘catch-up’ element. The policy was justified on the spurious grounds of overcoming ‘confusion’ over the difference between council and housing association rents and giving tenants greater choice.

In fact council rents were historically around 20% lower than housing association rents, for a reason well known. Councils could borrow money more cheaply from the government’s Public Works Loans Board, whereas housing associations had to borrow money at higher interest rates from commercial sources.

In practice, convergence meant driving council rents up to housing association levels. It was designed to facilitate ‘stock transfer’ of council housing to housing associations. The government set a target of transferring 200,000 homes a year. Chancellor Gordon Brown saw it as a means of removing council housing debt from the Public Sector Borrowing Requirement. He was even prepared to write off council housing debt if tenants voted ‘the right way’, for transfer.

Convergence was also designed to undermine the resistance of tenants to ‘stock transfer’. If council and housing association rents were the same, council tenants would have less reason to oppose transfer, it was thought. The Green Paper, Quality and Choice: A Decent Home for All, which proposed convergence, gave the game away when it said: “A coherent approach for rent setting in the two tenures would be more equitable and could make it easier for stock transfers.”

As a result of this policy, rent increases outpaced inflation. In England, the average council rent was £41.17 in 1997. As a result of this policy, by 2010 it had risen to £67.83, 64.7% higher, compared to inflation of 38.8% (ONS).

The Coalition government revised the convergence date to 2015/16. In 2013 they announced that they would change the rent formula to CPI+1%. They subsequently ended convergence and introduced a 1% rent cut, for four years, essentially to cut the housing benefit bill as part of their austerity programme. In 2020 they reintroduced CPI+1% for five years.

The current government consulted on continuing with the Tories CPI+1% for at least five years. (See our submission to the consultation opposing above-inflation rent increases. Government rent consultation: NO to above inflation rent increases – Labour Campaign for Council Housing). As a result of pressure from landlords, they have decided on CPI+1% for 10 years, and the reintroduction of rent convergence. The consultation is on “How to implement social rent convergence” not if to implement it. It poses two possibilities, £1 or £2 a week, and asks for preferences on how many years convergence should be applied.

Rent arrears have doubled

In the 23 years since convergence was first introduced,tenants have had above inflation rent increases in 19 of them. It’s no wonder that since 2015-16 rent arrears in England have nearly doubled from £203 million to £397 in 2023/4.

The English Housing Survey 2023/24 showed 59% of social housing households have at least one member in long-term ill-health or disabled. Some of these will lose money from the cut to the Universal Credit health element. The scale of poverty is reflected in their estimate of 73% households having no savings, making them especially vulnerable to the smallest change of circumstances. The phenomenon of tenants faced with the choice of ‘eating or heating’ increasingly impacts on more tenants. CPI+1% and rent convergence will surely drive up arrears and will increase the housing benefit bill for the government. Their impact assessment says that a £2 a week convergence increase will cost the exchequer £4 billion in increased social security spending.

The gap between actual rents and formula rent does not appear to be that great – an average of £5.74 in England (though £9.14 in London). Yet when tenants are struggling to get by financially, month by month, even relatively small increases can push them over the edge. Combined with CPI+1%, convergence will hit hard those people whose rent is not covered by housing benefit or the housing component of Universal Credit. Pensioners will be heavily impacted. The impact assessment estimates that pensioners who receive no housing support will see their rent increase to 26.6% of income nationally, and 36.9% in London.

How long would convergence take? Of 179 local authorities for which data is available, 167 of them have an average rent below the formula rent level. With the £2 a week option, just 14% of them would converge in the first year of the policy, while 17 would take five or more years.

Even when rents reach the formula, its connection to house values is likely to push them further upwards (similar to ‘affordable rent’ which is linked to 80% of market rent). Council housing is not part of the market and rent should not be linked to the market through house prices.

Housing Revenue Account funding crisis

These policies are a substitute – to the detriment of tenants – for adequately funding Housing Revenue Accounts. They will not resolve their funding crisis. The councils that signed Securing the Future of Council Housing warned that Housing Revenue Accounts are unsustainable without more support from central government. They have estimated that they need £12 billion extra over the next five years just to enable councils to improve all the stock to Energy Performance Certificate C. They estimated at least £23 billion would be needed to decarbonise existing homes. Without funding on this scale the condition of existing council homes is likely to deteriorate.

The impact assessment reports that: “In aggregate across all 162 council landlords with Housing Revenue Accounts, spending has exceeded turnover in four of the past five years, leading to a corresponding decrease in aggregate reserves as they are used to cover the shortfall in the ring-fenced account.”

A recent survey by Southwark Council, responded to by 76 councils, found 9 in 10 council housing budgets under financial stress, taking or expecting to need to take substantial action or use emergency funds to balance their books by 2029. For example, 61% of councils have already cancelled, paused or delayed housebuilding projects and more than one third have cut back on repairs and maintenance of council homes.

The scale of the funding crisis of Housing Revenue Accounts is reflected in the proposal of the Chartered Institute of Housing, suggesting that a debt write-down of £17 billion would be necessary to make them sustainable. We have suggested going further, explaining why there is a good case for cancelling council housing debt.

We believe there needs to be a campaign for adequate funding for HRAs and an end to above-inflation rent increases rather than trying to increase funding by making rents increasingly unaffordable for those who don’t have it all covered by housing benefit. As the Chartered Institute of Housing has observed: “In theory, it would be possible to change rent policy to allow rents to increase faster and to a higher level – but there would be extra costs in terms of increased benefits payments and risks in terms of social rents beginning to approach or exceed market rents if this was pursued over an extended period.”

In fact rents are now high enough that it has become more common for tenants on the waiting lists to be turned down for a tenancy because they are judged to be unable to afford the rent. If they cannot afford a council or housing association rent, what can they afford?

The declared objective of the government in implementing ten years of above-inflation rent increases and rent convergence is “to provide private registered providers and local authority registered providers with the rental income and stability they need to be able to borrow and invest in both new and existing homes, while ensuring there are appropriate protections for both existing and future social housing tenants and taking account of the impact on the government’s fiscal rules.”

In reality this means that the fiscal rules preclude the government from investing beyond its current parsimonious level. “The scale of investment pales by comparison to the scale of housing need…” This is a political choice, of course. They are making tenants pay more for investment in their own and new homes, though at the cost to the Exchequer of up to £4 billion because rents will become increasingly unaffordable to more tenants.

Housing Revenue Accounts have little scope for more borrowing. They pay more than £1 billion a year on debt servicing. In addition, because of the government’s borrowing policy (determined by the Bank of England) interest rates for Public Works Loans Board loans are exorbitantly high at 5.95% for a thirty-year maturity loan (payment of the loan at the end of the loan period). Even with a 0.6% reduction for council housing, they are still well over 5%. In the case of housing associations they are already loaded up heavily with debt. Last year, for the first time since 2009, debt servicing cost more than their income.

Like most consultations, the government has already decided what it will do. The only open question is whether landlords will be able to increase rents above CPI+1% by £1 a week or £2. Most landlords are likely to call for the £2 option. It seems likely that the government will accede to them.

These policies need overturning. Funding councils and housing associations by further impoverishing already poor tenants is no solution to the crisis. The social consequences are unacceptable.

Tenants should not be forced to pay unaffordable rents to substitute for insufficient funding of Housing Revenue Accounts or to subsidise a commercialised housing association sector. Rather than support above inflation rent increases, councils should be seeking the support of tenants to press the government for the funding needed to improve the quality of existing homes, decarbonise them and build/acquire the new homes necessary to bring down the numbers on the waiting list and in temporary accommodation.

A Note on ‘formula rent’

Social rent is set by local councils in line with a formula set by central government. It is a complicated and frankly, bizarre system. The same formula applies to housing association properties.

The basis for the calculation of formula rent is:

• 30% of a property’s rent is based on relative property values
• 70% of a property’s rent is based on relative local earnings
• a bedroom factor is applied so that, other things being equal, smaller properties have lower rents

Weekly formula rent is equal to: 70% of the national average rent, multiplied by relative county earnings, multiplied by the bedroom weight, plus 30% of the national average rent, multiplied by relative property value. However, that is the national (England) average rent from way back in April 2000!

Relative county earnings means the average manual earnings for the county in which the property is located, divided by national average manual earnings, both at 1999 levels!

Relative property value means an individual property’s value divided by the national (England) average property value, at January 1999 prices. These figures are set out in Appendices produced by the Ministry.

Having set the formula rent for 2000-01 for a property it then has to be uprated, for each year thereafter, based on the annual inflation figure. The national average rent to be used in the calculation, is £54.60 for April 2000. The national average property value from January 1999, is £49,750. There is a table for county earnings from 1999 which has to be applied, the average being £316.40.

Example

The Ministry provided an example of a calculation using this formula based on a three-bed property in Leicestershire, for which the capital value for January 1999 was £55,000. The figures on which to apply the formula are:

• Average rent at April 2000 £54.62
• Average earnings in Leicestershire £303.10
• National average earnings £316.40
• Bedroom weight 1.10
• National average property value in January 1999 £49,750.

Putting these figures into the formula we have

70% of the average rent 70% x £54.62	£38.23
Multiplied by relative county earnings x £303.10 / £316.40	£36.62
Multiplied by bedroom weight x 1.10	Sub-total £40.29
Subtotal 30% of the average rent 30% x £54.62	£16.39
Multiplied by relative property value x £55,000 / £49,750	Sub-total £18.12
Adding together the sub-totals £40.29 + £18.12 £16.39 £18.12	Total £58.41

The Labour Campaign for Council Housing is calling for support for a statement on rent convergence, available here.