Michael Cameron - TIS Rent Setting and Affordability Conference - 8 September 2022
Good morning, and good to see you all again.
They say that a week is a long time in politics, well it certainly is when writing speeches!
As you all will be very aware, the Scottish Government earlier this week announced that it will introduce emergency legislation to bring in a freeze on increases in rents until at least the end of March 2023 for homes provided by social and private landlords. This is part of a package of measures the Government is introducing in response to the cost of living crisis.
Now, as the measure stands it will have no immediate impact on almost all social landlords. This is because all bar one of Scotland’s social landlords apply rent increases from the start of April each year. However, it is a clear indication of how critical the Scottish Government views the role of rents in tackling the cost of living crisis, and importantly of its willingness to intervene on rents. It has also indicated that it wants to talk to the sector about rent caps beyond March next year.
So, I am sure that all social landlords will be considering carefully the implications of this development for their decision making on setting rent levels for 2023/24. It is worth noting that, from our engagement with landlords, it is clear that none was considering a rent increase for the coming year that would have been close to the current rate of inflation, and indeed most were talking about figures well below that rate.
In response to this development, and the wider cost crisis:
- we are calling on all social landlords to urgently review their business plans and stress test around a range of assumptions, including increasing level of arrears, sustained high inflation, and sub-inflation rent increases – I know that many of you will already be doing that;
- we are going to be asking landlords to notify us of their planned rent increase for 2023/24 as soon as they make that decision - normally we get that information in each landlord’s ARC at the end of May;
- we will be engaging with lenders to understand their reaction and potential steps they may take; and
- we will discuss with the Social Housing Resilience Group the possible reintroduction of a monthly collection from landlords of a limited number of financially focussed indicators, to help us all understand the impact of the current context as it develops over the coming months.
We’d encourage landlords to have an open dialogue with their lenders about the impact of this development, and the wider cost crisis, on their business plans.
And we would encourage any landlord that identifies potential financial viability concerns to talk to us as soon as possible.
As you may know, we have been doing a thematic review of rent increases by social landlords, and we are publishing the report on that today. Clearly, this publication is incredibly timely, even if that wasn’t by design. We had wanted to get this information out there as quickly as possible to help landlords and tenants in the discussions for the setting of next year’s rent levels.
It is worth saying first that the report sets out that every social landlord in Scotland applied an average rent increase in April 2022 that was below inflation: increases ranged from 0% to 6%, while the CPI rate was 9% at that time. The average rent increase was 2.98%; so that average was CPI minus 6!
Over the last six years, the average compound increase in rents has been 16.2%, equating to an annualised rate of about 2.5%. This illustrates that landlords have made significant efforts to minimise the level of rent increases, especially in the last couple of years, with many applying increases below those assumed in their business plans.
I can’t remember a more difficult time for tenants and social landlords. We have an economic context unlike anything we’ve seen before, with inflation in double digits and heading upwards, and a cost of living crisis that is placing huge stresses on household finances, which are only growing, most notably domestic energy costs and the price of food.
And the cost pressures on social landlords are also significant and growing, and our sense is that inflation for social landlords is well above the headline rate of CPI or RPI. We’re seeing increasing costs around:
- borrowing, with the Bank of England increasing interest rates by 0.5% to 1.75% in August 2022, the largest single increase in nearly 30 years;
- materials and labour for repairing, maintaining and improving tenants’ homes;
- pressure for pay increases for staff and other staff costs; and
- energy costs for offices, costs for other office supplies, and vehicle fleet costs.
Landlords are also facing significant and new costs for investing in existing homes to meet increasing standards for energy efficiency and to achieve the decarbonisation of heating. Alongside that, many landlords continue to invest in building new homes at a time of increasing costs for labour and materials.
So, all of this points to the forthcoming annual rent setting exercise, and potentially those for some years to come, being the most difficult that social landlords have faced. They will need to balance rising costs with the financial hardship that is a reality for many of their tenants. Add in to that mix the heightened potential for government intervention in rent setting, and this means that landlords – and tenants – will face some difficult choices and decisions.
We know that most landlords look closely at how they can manage their businesses efficiently before passing costs on to tenants. This is a hugely important discipline In the current contexts of tenants. It is now even more vital that landlords vigorously challenge every element of their expenditure to ensure that it is necessary; it is focused on delivery of outcomes for tenants and others who use their services, and that it represents value for money.
The Scottish Government’s recent announcement of a rent freeze is a clear demonstration of the importance it is placing on landlords keeping rents affordable, particularly to help it achieve its social justice objectives on child poverty and fuel poverty. At the same time it is also looking to social landlords to invest significantly in tenants’ homes, including to improve energy efficiency and to decarbonise heating. In the context of a cost of living crisis for tenants, and an emerging cost crisis for social landlords, the Scottish Government may need to consider what more it can do to help landlords to keep rents affordable and to continue to deliver for current and future tenants.
For their part, landlords will need to be able to demonstrate – principally to their tenants – that they are operating as efficiently as possible and that any planned increase in rents is value for money. And, of course, it is now even more important that landlords have meaningful and effective ongoing dialogue with tenants around what is important to them and what they want, and can afford, to pay for.