The road to housing hell is paved with government good intentions. The latest example is the thoroughly laudable aim of sheltering social housing tenants from double-digit rental inflation. The problem is that might stop development of affordable housing in its tracks. 

Alastair Stewart

Alastair Stewart

The Department for Levelling Up, Housing and Communities is to consult on a cap on rent rises next year, with 5% its preferred level. . In Scotland, there’s an even more radical plan to freeze all rents, social or private. Cue relief for tenants: under current rules, housing associations can raise rents in a year by a maximum of consumer price inflation (CPI, set at the previous September rate) plus 1%. The figure for July was 10.1% and most economists expect this to rise further by the time September’s rate is announced next month – potentially pushing the percentage rise to low-to-mid teens, impacting many of the poorest in society.

But there is anything but relief from housing associations (HAs), the main developers of greatly needed new affordable housing for rent. This could kill housing association development volumes “stone dead”, says consultant Greg Campbell, a view echoed in more diplomatic language by various heads of the largest HAs.

While saving money for tenants outside the housing benefit net, it will also conveniently reduce the government’s payments of those by £4.6bn – £1.8bn more than the £2.8bn households will save in lower rents between 2023 to 2028.

The government has form in this regard. Former chancellor George Osborne replaced the CPI plus 1% rule with four annual absolute 1% falls between 2016 and 2020, at a time when inflation was much lower than today. This put many associations’ finances under strain. Several of the largest HAs – many formed through ‘mega-mergers’ – are highly indebted, because the cost of that debt had been exceptionally low, as it was underwritten by government. But Osborne’s cuts affected some of the ratings on their debt or tempted them into riskier private-led ventures such as build to rent or shared ownership, some of which have backfired.

The result was some pulled back on development plans, most visibly London & Quadrant’s bold aim to build 100,000 homes over 10 years.

Now the backdrop is much worse. A report by the National Housing Federation showed that costs of building new homes, and repairs and maintenance on existing ones, are all rising above inflation.

In addition, many HAs have sizeable commitments for recladding and ambitious programmes to cut energy bills across their stock. It’s not only new affordable housing starts that are under pressure – but potentially HAs’ financial survival.

Unintended consequences

And it’s not just social housing where government actions can have unintended consequences. Conservative chancellors have a habit of triggering short-lived mini-booms; witness Nigel Lawson’s 1988 Budget, when he signalled an end to double mortgage tax relief, but gave buyers six months to complete purchases, causing a spike in prices followed by a slump that lasted for much of the next decade.

More recently, Rishi Sunak possibly overcooked his use of the housing market to stimulate the wider economy post-Covid via his stamp duty holiday announced in July 2020. At least Sunak ‘tapered’ the tail-off over six months beyond the original March 2021 deadline, as opposed to Lawson’s ‘cliff-edge’ moratorium. But prices still rose 14% over the period and a further 6% since, pushing the prospect of home ownership further out of reach for many.

While Osborne was pulling back social housing rents, he also unleashed a series of tax hikes and regulatory burdens on private sector landlords – largely blamed for causing a sell-off of over 300,000 homes in England into the owner-occupier market and exacerbating private rent increases.

Conservative MPs, now under Liz Truss’s leadership, would do well to heed their hero Margaret Thatcher’s maxim: “You can’t buck the market.” Few markets are more at risk from ministerial meddling than housing – private or social.

Advice to the new housing secretary Simon Clarke when deciding what to do about the ‘broken housing market’? History suggests as little as possible.

Alastair Stewart is an equities analyst and consultant