Only a £3 rent convergence premium can restore housing associations’ financial capacity quickly enough

From the outside looking in, it would be easy to think there is little rhyme or reason to housing association rents. In part that’s down to the plethora of rental products on offer – a legacy of various national and regional affordable homes programmes. But it’s also down to inconsistencies in our core rental product, social rent.

Under the current system, it is entirely possible for residents living in identical neighbouring properties to be charged markedly different social rents. Same street, same number of bedrooms, but very different social rents – perhaps a difference of tens of pounds per week.

The reason for this lack of consistency is the absence of rent convergence. This was introduced by the Labour Government in 2002 as a means of aligning social rents. A ‘formula’ rent was calculated for each home based on relative property values, relative local income levels, and the size of the property.

Registered providers were able to charge a small premium (£2) per week on top of the standard annual increase for homes below their respective formula rent so that they would eventually catch up. The aim was that residents would pay similar rents for similar homes. But the policy was scrapped by the coalition government in 2015 before hundreds of thousands of homes could hit their formula rent. The result is curious anomalies which in aggregate mean registered providers’ rental income is many millions of pounds lower than it should be.

With almost two decades having passed since the end of rent convergence, hopes were fading that it would ever be reintroduced. Indeed, as recently as October last year MHCLG had seemingly opted against incorporating convergence into the post-2026 rent settlement. So it came as a welcome surprise that the resumption of rent convergence was announced as part of June’s spending review. The Chancellor announced a consultation (which closed last week), not on the principle of rent convergence, but how it should be implemented.

You would intuitively expect residents to pay similar rents for similar homes. But very often this isn’t the case

The seemingly imminent return of rent convergence is unquestionably a good thing for social landlords.

Rent convergence is a technical concept, but at its heart is fairness. You would intuitively expect residents to pay similar rents for similar homes. But very often this isn’t the case. Differences in rent for identical neighbouring properties can arise because, whereas one home has recently been re-let, a neighbouring home has been occupied for many years. The household living in the former pays a formula rent (as rents can revert to formula on being re-let), whereas the occupants of the latter pay a lower rent because the absence of rent convergence means it hasn’t been able to ‘catch up’ with its respective formula rent. The situation is fundamentally unfair and made worse by the fact new tenants are often on lower incomes than many longer standing tenants.

For housing associations, rent convergence is vital to ensure our income covers costs. G15 members currently have almost a quarter of a million homes where residents pay below formula rent, which means our annual rental income is almost £168m lower than it should be. In many cases, the rent is not only below formula rent, but it also fails to cover management, maintenance and interest costs. The situation is mirrored at an organisational level where most G15 members’ EBITDA-MRI interest cover remains well below 100%.

This clearly isn’t sustainable. The resumption of rent convergence is therefore vital to restore our financial resilience. Unless rents increase to target level, we’ll struggle to fund the costs of increased regulation and maintain ageing homes. Residents of landlords with weaker EBITDA-MRI cash interest cover would lose out as investment and services would inevitably be squeezed.

MHCLG’s recently closed consultation took these arguments on board and asked not whether rent convergence should be implemented but how. Specifically, it asked whether rent convergence should be achieved via a £1 or £2 weekly premium over and above CPI plus one percent. But, in common with much of the rest of the sector including the G15 and NHF, we have called for a £3 weekly premium.

For the last decade, the absence of rent convergence has created a two-tier system of rent setting and weakened housing associations’ financial resilience

Having crunched the numbers, it’s clear only a £3 per week premium restores our financial capacity at the pace required to meet new regulatory requirements including the potentially very costly revised Decent Homes Standard. And it enables the delivery of new affordable homes when and where there is capacity. Crucially, it also ensures the vast majority of homes – around 95% – will reach formula rent within a decade, finally addressing long-standing inequities in rent levels.

Alongside the £3 per week premium, we’re also calling for the continuation of what’s known as the rent flexibility level. This allows us to set rents for individual properties at up to five percent above formula rent (ten percent for supported housing) in certain circumstances in consultation with tenants. It’s a useful element of discretion that – used in a targeted way – could help us bring homes with the biggest rental shortfalls up to formula rent more quickly.

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We feel these measures are fair, particularly given that the original convergence mechanism introduced in the early 2000s was set at £2 per week, and inflation and cost pressures have increased substantially since then. Target rents remain good value for money with the gap between social and market rents have grown in a way that would have been unthinkable in 2002.

For the last decade, the absence of rent convergence has created a two-tier system of rent setting and weakened housing associations’ financial resilience. Labour has recognised this has to stop. However, a £1 or £2 premium would be too low to have a meaningful effect. Only a £3 premium would restore our financial capacity at the pace required to meet both immediate and long-term challenges, while reintroducing much needed fairness into housing association rents.

Paul Hackett is chief executive of Southern housing and an honorary professor at the UCL Bartlett School of Sustainable Construction