Soft landing or a crash?

After a few lockdowns and a prolonged period of economic and political uncertainty, it seems that we have already stepped into a different era where Brexit and COVID are no longer making front page news. The increase of consumer goods, and inflationary effects in general, has hit hard without showing any mercy to the real estate sector. The rise in property prices which was initially perhaps a result of low demand due to COVID-19 or the stamp duty holiday now goes hand in hand with the increase in build costs and rental prices.

The fall of 2022 has brought an increasing concern about the inflated building costs which causes issues in cash flows and the estimated delivery time for development projects. Another consideration and probably the main area of discussion within the social housing sector is how inflation affects social housing tenants and housing associations. Already in the 1970s, there was a substantial movement towards decontrol of social rent in the UK, due to housing shortages. From 2015-16, the benchmark for social rent increases have been given by the Consumer Price Index (CPI) plus 1%. With inflation touching around 10%, how can this increase be justified – especially when applied to people that are already deprived?

The Department for Levelling Up, Housing, and Communities appears to be well aware of the issue and has already started consultations about setting a cap. The most likely scenario for the government at the moment is a 5% ceiling. Newton said that every action has a reaction and the social housing sector is no exception to this rule. The rent cap will not come without consequences and will be a real stress test for the Housing Associations. It is estimated that the implementation of a 5% cap will generate losses of approximately £1.3 billion in rental income for the social housing providers next year.

Several Landlords have publicly raised their concerns. They warned that rent caps will not only jeopardize their development plans and their capacity to deliver much-needed affordable homes but also affect their ability to maintain the existing stock. A few housing associations, including some of the G10, have already announced that they will cut their development plans significantly in the sight of the government’s proposals. In addition, the rent income reductions will force the Housing Associations to look for a way to compensate for the losses. The most direct saving will be the cuts in repairs and maintenance costs which are already 14% up this year. Furthermore, most of the negative impacts will affect housing on a long-term basis, implying even more risk to an already volatile market.

In conclusion, the rent caps from the government will test the Social Housing industry as a whole. It’s not only housing associations as the primary providers of affordable housing these days that should be concerned about their cash flows and their finances. The consequences of the forthcoming rent caps are something that should concern tenants as well, as they will be receiving lower quality services from their landlord. Finally, the government itself has to carefully consider the impact of these measures on the capacity to accommodate the need for social housing, both in a short- and a long-term perspective. One thing is for sure. Winter is coming and will bring a new tough reality the housing sector. Is it going to be a soft landing or a crash? And for whom? Could a stiff upper lip remain the most sensible of solutions for a more stable long-term outcome? It remains to be seen.

Blog by Thanos Mesochoritis