The Impact Of Higher Inflation On Social Renters' Housing Costs

22nd December 2021

Times are tough for many at present, as prices rise and Omicron puts the UK's tentative economic recovery in jeopardy. In this quarter's spotlight we assess the living standards prospects of social renters, and in particular consider what soaring inflation means for their housing costs as they head into the spring.

Social rents can currently be increased by up to CPI plus 1 percentage point each year, and as a result, those living in local authority or housing association homes could see their housing costs rise sharply in April 2022. The 4.1 per cent rent hike they may face (based on September 2021's inflation figure) will be the largest rise for a decade - inflating the average social renter family’s rent by £202 per year. This increase comes on the back of a decade-long period in which social renters’ housing costs have outpaced incomes, and support from the benefit system has declined.

Housing providers will no doubt want to increase social rents in full in April 2022, not least because of the unexpected rent reductions they were required to make between 2016 and 2020. But an above-inflation rent rise would be especially bad news for the 44 per cent of social renter families not in receipt of housing benefit, who will have to absorb the entire increase themselves. Social landlords may be caught between a rock (business need) and a hard place (tenant wellbeing) right now, but raising rents to the maximum in April 2022 can only worsen the acute living standards crunch that social renters face next year, risking rising housing stress and rent arrears as a result.

The price of goods and services has soared in recent months as the UK has cycled in and out of pandemic-related restrictions and suffered supply constraints and shortages (particularly in the oil and gas sectors). Rising inflation clearly erodes the purchasing power of all families, but a higher rate of inflation has an additional implication for the housing costs of social renters.

Since 2001, social rents in England have been based on a ‘formula rent’ set by the central government and based on a property’s size and value as well as local income levels. In addition, there is a cap on year-to-year changes to protect tenants from large annual rent increases. From April 2002 until March 2015, annual social rent increases were capped at the Retail Price Index (RPI) plus 0.5 percentage points. In 2015-16, the system changed so that social rents could rise by up to the Consumer Prices Index (CPI) plus 1 percentage point each year. That settlement was abandoned just one year later, when the Government announced that social rents would fall by 1 percentage point for the subsequent four years. In April 2020, however, social rents returned to being uprated by a
maximum of CPI plus 1 percentage points - an arrangement due to last until April 2025.2

CPI inflation was 3.1 per cent in the year to September 2021 (the month used as the peg), so social rents will rise by as much as 4.1 per cent from April 2022 (equivalent to an additional £202 per year for the average social renter family).3 Although this is a ceiling on rent increases, and not a requirement, it seems very likely that the majority of housing providers will apply the full amount given the unexpected four years of falling rents - and thus falling rental income – that the sector faced from 2016. As Figure 1 shows, this 4.1 per cent increase will be the largest nominal rise in social rents for a decade. This comes at precisely the same point that other pressures on family budgets will come to a head: average gas and electricity bills are predicted to rise by as much as 50 per cent when the energy price cap is raised in April 2022; the Bank of England anticipates that consumer price inflation will peak at 6 per cent the same month; and National Insurance contributions will rise in the new financial year. Rising social rents on top of these increases will be very damaging for living standards indeed.

Read the full article at The Resolution Foundation HERE