Rent affordability in the affordable housing sector: literature review

7. Social rent setting mechanisms

This chapter looks at literature assessing how social rents have changed over time in order to provide an overview of social rents in Scotland, and discusses the mechanisms that RSLs use to set, raise and control their rents. Finally the chapter focuses on the impact of housing standards on rent increases. The data in this chapter confirm the overall increase in social rents discussed in the previous chapter.

7.1 An overview of changes in social rents

Figure 7.1 presents data on council rent changes across time and different landlord types. Over the last decade (since 2007/08) the average weekly council rent for social housing has increased by £8 per week or 13% in real terms which is over and above general inflation (Housing Revenue Account Statistics: Scottish Local Authority Housing Income and Expenditure). The average council rent per dwelling (including let and un-let properties) was £69 per week in 2017-18, an increase of under £1.50 since 2016-17.

Figure 7.1 – Average council rent per Housing Revenue Account (HRA) property per week, Scotland 1997-98 to 2017-18

Source: Scottish Government, Communities Analysis Division – based on Housing Revenue Account return provided by Local Authorities. Consumer Price Index (source – ONS) CPI all Items Index. (2015 = 100)

Notes: Six councils transferred their housing stock to the housing association sector, therefore HRA information is not available for them. Dotted lines indicate breaks in comparability following large scale stock transfer. Current (or nominal) prices are in the value of currency for that particular year. Current prices are affected by inflation. Constant (or real) prices adjust for the effects of inflation and used to measure the true growth of a time series. Constant prices have been deflated using the Consumer Price Index (by ONS). This calculation includes both let and un-let properties and therefore the amount of rent actually paid by is likely to be slightly higher.

The above data is concerned with the changes over time to council rents. Figure 7.2 shows that landlords’ average planned rent increases have decreased from 3.6% in 2013/14 to 1.9% in 2015/16, but then rose again to 3.2% in 2017/18 (Scottish Housing Regulator data^[37]). According to the chief executive of the Scottish Housing Regulator in 2017, “many landlords use the September or October inflation figure as the starting point for their proposed rent increase for the following year” and “we are seeing signs of inflationary pressure starting to build in rents”.

Figure 7.2 – Landlords’ average planned rent increases across time

Source: Scottish Housing Regulator 2017/18, National Report on the Scottish Social Housing Charter (p. 4)

7.2 Rent setting mechanisms and tools

In Scotland, there is no national rent policy or rent regulations. The Housing (Scotland) Act 2001 allows social landlords to increase rent (giving tenants at least four weeks’ notice), but requires them to consult with tenants about rent increases. In addition, when suggesting a rent increase landlords should keep in mind what is affordable for their tenants.

In 2016, the Scottish Housing Regulator conducted a survey with tenants via their National Panel and drew evidence from a discussion with 11 social landlords, as well as from a review of their websites, and from a discussion with members of the Regional Tenant Organisation Liaison Group (RTO Liaison Group) on ways to monitor how RSLs consult tenants about rent increases (Scottish Housing Regulator 2016). The results from the survey found that landlords either consult tenants annually or on a rent setting for a fixed period of time. The Scottish Housing Regulator report (2016) concluded that only half of the interviewed tenants were informed by their landlords about annual rent increases, and the majority were not presented with alternative options to these increases^[38]. In this case, the consultation process appears to be limited to informing tenants, instead of consulting with them.

There is no official guidance for landlords on how to define rent affordability. Landlords should determine the balance between affordability for the tenants and costs of delivering services and property management (Scottish Housing Regulator 2016). In a 2017 report, the Scottish Social Housing Charter defined standards and outcomes that all social landlords should aim to achieve:

• “Social landlords manage all aspects of their businesses so that: tenants, owners and other customers receive services that provide continually improving value for the rent and other charges they pay” (Standard 13);
• “Social landlords set rents and service charges in consultation with their tenants and other customers so that: a balance is struck between the level of services provided, the cost of the services, and how far current and prospective tenants and service users can afford them” (Outcome 14)
• and “tenants get clear information on how rent and other money is spent, including details of any individual items of expenditure above thresholds agreed between landlords and tenants” (Outcome 15).

Social landlords usually set their rents after having compared the suggested rent change to other landlords and/or national averages (Scottish Housing Regulator 2016, p. 15). A positive practice identified by the Scottish Housing Regulator’s 2016 report concerns the East Lothian Housing Association, which determined rent increases on a percentage of tenants’ incomes (East Lothian Housing Association census gathers information on tenants’ income, employment status and benefits). Another positive practice concerns the Stirling Council, which moved from an “inflation plus” to a “cost of service” approach to setting rents in 2013. Stirling Council in 2014/15 offered tenants five cost saving options for changes to its service and consulted with tenants on their preferred option. The Council estimated that the tenants’ cost saving choice would save around £100,000 each year (Scottish Housing Regulator 2016, p. 16).

Social rents should satisfy the national ‘social rent benchmark assumption’ (More Homes Division – Scottish Government). As we can see from Table 7.1, which displays the relevant social rent benchmark assumptions over the years 2017-18 to 2020-21, annual increases of 2% have been applied. RSLs are required to justify why a proposed rent is considered affordable if the benchmark assumption is exceeded by more than 5%. Approval of rents exceeding the suggested benchmark by more than 10% is given only in exceptional circumstances.

Table 7.1 – Projected annual social rent benchmark assumptions, Scotland

Source: Affordable Housing Supply Programme: RSL Social Rent Benchmark Assumptions 2017 /publications/affordable-housing-supply-programme-rsl-social-rent-benchmark-assumptions/

Note: The table shows the social rent benchmark assumptions over the years 2017-18 to 2020-21 inclusive – annual year-on-year increases of 2% have been applied.

New Rent Affordability Tool

In September 2018, SFHA and HouseMark Scotland launched a rent setting tool for housing associations. The new rent affordability tool calculates five measures of rent affordability (percentage of income, percentage of market rent comparison, percentage of LHA rate, income after rent and income after rent above MIS) and provides comparisons to other local social landlords (SFHA Autumn 2018). In that way, social housing providers know whether their suggested rent is considered to be affordable and whether it is in line with the rest of the rents in the same area for similar types of properties.

7.3 Housing standards and rent changes

The Scottish Housing Quality Standard (SHQS), introduced by the Scottish Government in 2004, aims at ensuring that high quality accommodation is offered across Scotland. Social housing should be energy efficient, safe and secure, not seriously damaged and needs to have kitchens and bathrooms that are in good condition. Standard requirements include the Energy Efficiency Standard for Social Housing post-2010 (EESSH), fire and smoke alarm regulations, etc. “The critical determinant of rents is always going to be costs” (Scottish Housing Regulator 2016, p. 6 – from an SFHA report on Rent Setting Guidance for its members in 2010). According to the chief executive of the Scottish Housing Regulator, in 2017 landlords were investing in their properties in order to meet the energy efficiency standards. Therefore in order for the landlords to keep their rents financially viable, we would expect that higher standard requirements for RSLs might lead to rent increases. However there is no firm evidence of this in the literature at the time of writing. According to the SFHA, these standard requirements might lead to rent increases if social housing providers have to make investments to meet the requirements and ensure a continuing improvement of homes and services (SFHA Autumn 2018). Social housing standards are determined centrally by the Scottish Government, while rents are set (locally) by housing providers (housing associations and councils).

7.4 Summary

During the last decade, there has been an increase in the average social rent across Scotland. In Scotland, there is no rent policy or official guidance on rent setting for landlords. However, social landlords are required to consult with their tenants about rent increases. Based on recent research evidence, this consultation process often appears to be limited to informing tenants about rent changes rather than suggesting alternative solutions. Finally, social rents should satisfy national social rent benchmarks and social landlords are required to justify why a proposed rent is considered affordable if the benchmark is exceeded by more than 5%.