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To combat inflation and the rising cost of living, the government has proposed a rent cap to support low-income tenants. Here's what you need know...
Written by
Ben Luxon
PUBLISHED ON
Sep 14, 2022
To combat high inflation and the rapidly increasing cost of living, the UK government has put forward a rent cap proposal to support low-income housing tenants.
The consultation, which launched on the 31st of August will run for 6 weeks and will invite views from tenants and landlords. The rent cap would affect all social housing in England and Wales and be put in place for the coming financial year. The suggested options are a 3%, 5%, and 7% cap.
The move would force councils and housing associations to limit rent increases to predefined levels that are well below the UK’s current rate of inflation. The initiative is expected to save tenants an estimated average £300 per year and provide stability as inflation continues to rise.
This comes on top of an existing £37 billion support package, which includes a £150 council tax rebate, a £400 energy bill discount to support households over the coming months, and financial support of at least £1,200 to be given to the most vulnerable 8 million households.
There is already a rent cap in place on social housing, however, it is set to match the consumer price index (CPI) rate plus 1%. And with inflation at all-time highs (10.1% in July 2022), the Bank of England forecasts rents to rise by as much as 11.1%.
This announcement by the UK government has been somewhat overshadowed by a similar announcement in Scotland.
On 6 September 2022, the Scottish Government announced a rent freeze for public and private properties and an eviction ban (effective immediately) on winter evictions until March 2023.
The precise details as to how this rent freeze will be implemented are still unclear however the early indicators suggest the freeze will apply primarily to private residential lets. How or if this will also apply to purpose-built student housing or social housing remains to be seen.
Other commitments include:
Although there’s no indication that the UK government will do the same, pressures for more extreme action will continue to mount as many people continue to struggle to make ends meet.
The rent cap would be temporary and likely apply from 1 April 2023 to 31 March 2024, though a stretch deadline to 2025 has also been proposed. As part of a broader plan, it seeks to address the immediate impact of the current cost of living crisis as well as offer renters some security.
“We must protect the most vulnerable households in these exceptional circumstances during the year ahead. Putting a cap on rent increases for social tenants offers security and stability to families across England,” said Housing Secretary Greg Clark.
At this point, there is no talk about a rent cap for the private rental sector (PRS). This is good news for landlords, but not so much for tenants. This proposal will help a small proportion of renters while squeezing the already thin margins of social housing providers.
This proposal could have a more severe impact on the sector than prior measures due to the difference between current inflation and the suggested cap amount. If, for example, a 5% cap is set, then there’s a 6% (or more) differential. With the existing rent raise limits of CPI +1% still in place, social housing providers will end up wearing the cost of the cap over the long term.
Many social housing providers have built contingencies into their business plans, which already anticipate low levels of rent increases and have stress-tested additional rent increase caps. And there is some expectation in the sector that if rents are capped at 3%, there will be additional support from the government, including greater availability of funding (although there has been no formal word from the government on this point).
Lower revenue and rising costs will undoubtedly weaken the sector’s financial metrics. And with many material costs continuing to grow at rates above inflation, providers will face a difficult decision in the future to determine if their business models continue to make financial sense.
We may well see more providers dropping out of the market or converting property to alternative uses. This is a trend that is already underway with recent changes like Section 24 paired with high-interest rates and increased regulations, making margins tighter than ever for property investors.
Ironically, in the long run, if adequate support isn’t also offered to housing providers the rent cap may well negatively impact the very people it was designed to protect.
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