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Waverley Borough Council Committee System - Committee Document

Meeting of the Environment Overview and Scrutiny Committee held on 23/09/2002
Rent Restructuring and HRA Subsidy



APPENDIX I

WAVERLEY BOROUGH COUNCIL

COMMUNITY OVERVIEW AND SCRUTINY COMMITTEE – 12TH November 2001

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Title:

RENT RESTRUCTURING AND HRA SUBSIDY
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Summary and Purpose

This report is to inform Members about the Government’s proposals to introduce a new rent regime from 1st April 2002 and associated proposed changes to the Housing Subsidy system as published in a recent consultation paper.

The proposals potentially have significant financial implications. There are no significant Human Rights, Crime and Disorder, ‘Opportunities for All’ or asset management implications.
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Introduction

1. The Government’s objectives for social rent setting were originally set out in the Housing Green Paper published in April 2000. These objectives were reiterated in the policy statement Quality and Choice: A Decent Home for All – The Way Forward for Housing, published in December 2000. Amongst other things, the policy statement proposed that rent setting in the social housing sector should be brought on to a common system based on relative property values and local earnings levels.

2. In March 2001, the Government published a Guide to Social Rent Reforms that set out the detail underpinning the policy statement and provided background information on the implications of the proposals for tenants and landlords. A formula rent for each property is to be calculated using information on the capital value, bedroom size and local earnings. This rent will be up-rated each year by an inflation factor and real-terms increase as prescribed by the Government to achieve a ‘target’ rent that the Authority should aim to reach over the ten-year restructuring period.

3. More recently the Department for Transport, Local Government and the Regions (DTLR) has published A New Financial Framework for Local Authority Housing: Resource Accounting in the Housing Revenue Account – HRA Subsidy and Rent Restructuring. This outlines proposed adjustments to the HRA subsidy system which Ministers intend should:

Support rent restructuring and at the very least remove the financial disincentives that would otherwise discourage local authorities from moving their rents to the formula rent.


Rent Reform Proposals

4. Rent restructuring is to be applied to all social housing, including hostels and shared-ownership properties. The Government has identified the following objectives to be achieved by rent reform:-

“ that social rents should remain affordable in the long term that social rents should be fairer and less confusing for tenants that there should be a closer link between rents and the qualities which tenants value in their properties that unjustifiable differences between the rents set by local authorities and by registered social landlords (RSLs) should be removed “.

5. In seeking to achieve these objectives, the Government has concluded that in future rents should be set on a basis that takes account of relative property values, local earnings levels and the size of individual properties. This should be achieved over a ten-year period. In order to achieve convergence with the rents of RSLs, guideline rent increases will be set at a lower level for RSLs than for local authorities. In order to achieve this, the recently published paper on potential changes to the HRA subsidy system referred to above suggests that average local authority rents will need to increase by 1.5% per annum over and above inflation.

6. A prescribed formula is to be used for setting target (or formula) rents for individual properties as detailed below:-

7. It is recommended that the property values in the restructuring formula should reflect Existing Use Value (EUV) (open market value assuming vacant possession and continued residential use). For ‘Resource Accounting’ purposes, local authorities are required to make downward adjustments to these EUVs to reflect the lower value of properties when used for social housing.

8. Although the beacon values for resource accounting are based on April 2000 valuations, the recommended date as the property valuation base for calculating restructured rents is January 1999. The District Valuer is currently carrying out a valuation exercise for Waverley to meet these requirements.

9. Restructuring is expected to take place over a ten-year period beginning in 2002/03 and to be broadly complete by March 2012. Phasing over several years is expected to limit changes in rent levels in any one year and indeed Ministers expect a cap of inflation plus 2 to be applied to each year’s rent increase. The DTLR have indicated that a three-year progress review will be carried out at which time they will consult on whether property values and earnings should be updated.

10. Once formula rents have been calculated a discretionary factor of up to +/- 5% may be applied taking account of local factors and concerns and agreed in consultation with tenants. Local Authorities are not expected to use this factor to uniformly raise or reduce formula rents.

11. Local Authorities will be expected to produce an annual rent restructuring plan and progress report as part of their HRA business planning process.

12. Landlords are not expected to apply the restructuring proposals to the service charges element of rents. Service charges should reflect what is being provided to individual tenants and landlords are encouraged to levy such charges on consistent and transparent principles.

Housing Revenue Account Subsidy

13. The amount of subsidy to which an authority is entitled is calculated through a notional HRA based, not on the actual levels of income and expenditure but, on assumed or notional levels determined by the DTLR.

14. A key part of the housing subsidy calculation is the assumption made about income from rents. This is based on an assumed average rent, the ‘guideline’ rent. Current guideline rents bear little resemblance to real rent levels. Nationally, on average, local authority rents are some 16% above guideline rents. The guideline rent for Waverley in 2001/02 is 49.81 compared with an actual average rent of 61.04 that is then reduced to 54.77 in the subsidy calculation by the removal of a notional amount for service charges.

15. The Government reimburses the cost of rent rebates through the notional HRA but only up to a ‘limit’ rent. This is to ensure that the authority meets any rent rebate expenditure incurred as a result of rent increases above the Government’s annual guideline increase. Waverley has been in subsidy limitation for some years and in 2001/02 the cost to the HRA is estimated at 260,000.

16. Rent reform will lead to the introduction of a new pattern of social rents. Some authorities, with above average wage levels and high property values, will see their rents increase well ahead of the national average increase. For others, their rent increase will lag behind the national average increase or they will even see a reduction in rents for example where both average wage levels and property values are low. The retention of the current HRA subsidy system would fail to redistribute housing subsidy in response to the changed pattern of rents under rent restructuring proposals. It would also penalise those authorities obliged to raise rents above the rent rebate subsidy limitation threshold in order to achieve formula rent levels.

17. In order, therefore, to achieve the Government’s stated objective of removing any disincentives to local authorities carrying out rent restructuring, various changes within the subsidy system are being proposed.

18. The Government is proposing to move the guideline and limit rents toward the average formula rent in ten approximately equal steps from 2002/03. An increase in the guideline rent represents a reduction in subsidy entitlement as it assumes a higher level of income is being raised by the authority. This can be offset by increasing actual rents by the same amount as the guideline increase each year. An increase in the limit rent represents an increase in subsidy entitlement as it increases the threshold below which the cost of rebates is met through subsidy.

19. The limit rent, however, is currently based on an authority’s actual average rent and the Government is concerned that this will not provide any incentive to move rents toward formula rents. It therefore proposes to go a step further and introduce property specific limit rents with effect from 2004/05. This will mean a reduction in subsidy for authorities that have a significant number of properties with rents above the limit rent. There will be a transitional period during which the existing system of rent rebate subsidy will continue to apply with the limit rents moving in approximately equal steps to the average formula rent. The limit rent for individual properties will be set at 5% above the formula rent until 2012/13 in line with the discretion awarded to local authorities to adjust individual formula rents.

20. Service charges are to be identified separately and charged in addition to the formula rent. In the longer term, consideration will be given as to whether a different subsidy limitation arrangement will apply to service charges that are eligible for housing benefit.

Implications for Waverley

21. Detailed modelling of the likely effect on Waverley cannot be carried out until the District Valuer’s work is completed and a valuation provided as at 1st January 1999 for all HRA properties. It does seem possible, however, that applying the formula to the extensive range of properties across the Borough will produce a wide range of expensive rents, many of which will be above their limit rent and will therefore result in significant loss of subsidy during the restructuring period. Some village properties, in areas such as Waverley, will become highly expensive to rent. Officers will outline examples of how rent restructuring might apply and will table these examples at the meeting. Many tenants will of course be insulated from the impact of restructured rents through housing benefit but, if the Government carries out its stated intention of removing rebates from the HRA, the resultant increase in the benefit bill will fall, in the not too distant future, on the General Fund. Members will be aware that there are already other pressures on the General Fund.

22. The Government has indicated its intention to re-calculate guideline rents for 2002/03 in the light of re-basing the subsidy system for rent restructuring. If Waverley applies an average rent increase in 2002/03 in line with Government expectations and guideline rents are recalculated as indicated then the resultant subsidy loss for Waverley in 2002/03 could be in the region of 500,000. This would be a significant sum to lose from the HRA.

23. Waverley currently operates a rent pool that includes the costs of providing all aspects of the housing service. To recover these costs an average rent is then levied across all tenants. Rent restructuring is only to be applied to the ‘bricks and mortar’ charge for the property and therefore rent restructuring, as well as the Supporting People initiative, requires the disaggregation of support costs/service charges from the true rent for each property. Draft guidance on Supporting People for Local Authority Landlords issued earlier this year by the Government indicated that rent pooling landlords will not be expected to reduce their overall rent levels as a result of the exclusion of pooled costs of support services from the HRA. The implication of this is that Waverley’s current actual rent (see 10 above) will feed into the rent restructuring process and the subsidy calculation, potentially resulting in further loss of subsidy as the actual rent then becomes significantly above guideline. Any such loss may be mitigated to a certain extent by the freeing up of resources as a result of support costs due to be met by the new Supporting People Grant from April 2003. Until the Government has clarified its intentions with regard to Supporting People it is difficult to be more specific.

Conclusions

24. The Government’s programme for social rent reform is not, currently, to be contained in any legislation. The proposed changes to the HRA subsidy system, however, to support the rent restructuring regime ensures that local housing authorities will implement the new regime in order not to be even more seriously financially disadvantaged.

25. The potential reduction in Waverley’s HRA subsidy in 2002/03, combined with other budget factors, means that the Council could face some difficult decisions in relation to the level of rent increase to be applied for 2002/03. The impact of rent restructuring and changes to the HRA subsidy system will become clearer on receipt of the draft HRA Subsidy Determinations in early November.

Recommendation

That the Executive Committee be recommended that:

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Background Papers (DoH)

Quality and Choice: A Decent Home for All – The Way Forward for Housing, DETR December 2000

Guide to Social Rent Reforms, DETR December 2001

A New Financial Framework for Local Authority Housing: Resource Accounting in the Housing Revenue Account – HRA Subsidy and Rent Restructuring, DTLR July 2001

Supporting People - Guidance on Identifying Support Service Costs and the Amount of Pooled Rent Income Financing Support Services, DETR February 2001


CONTACT OFFICER

Name: Ms Glennis Pope Telephone No: 01483 523252

E-mail: gpope@waverley.gov.uk



comms/o&s2/2001-02/035 22764