- A rise in inflation
- Increase in interest rates
- Bills on the rise
- Cost of rent
- Impact on tenants
- Impact on social housing organisations
The cost of living crisis is impacting everybody in the UK, but there are obviously some demographics and sectors where this pinch is being felt more strongly. The ONS reported recently that households are facing the highest level of inflation in four decades, which is having a huge impact on residents. This will have a disproportionately negative impact on social housing residents and poorer members of society, who spend a large fraction of their monthly budget on energy and food.
Rising costs will also continue to place social housing organisations under growing financial pressure, as they try to balance an increase in costs against what their tenants can afford. This juggling act will have huge repercussions when it comes to setting rent increases for 2022/23.
This is a complex situation that requires careful planning and consideration, and understanding the possible impacts is the first step in reaching a solution. In this article, we take a look at the various impacts the UK cost of living crisis is having on social housing, both in terms of tenants and organisations.
A rise in inflation
According to the ONS, the inflation rate in the UK was 9.9% in August 2022, which represented an 8.6% change over the last 12 months. As mentioned previously, this is the fastest rate increase in 40 years, and unfortunately it is likely to increase further as we progress through 2022 and into 2023. This is partly down to increases in the energy price cap this winter, which will add even more strain to households in the form of a rise in energy bills.
This huge rise in energy bills is regarded as the largest contributor to current inflation rates, but other household costs can’t be overlooked either. In May 2022, the basket of goods for furniture, household equipment and maintenance rose by a whopping 11%, which the ONS reported as the biggest increase they’ve experienced since they started recording data for it.
In a recent report by the Chartered Institute of Housing, they found that the rise in inflation will have a bigger impact on social housing tenants, with the bottom three income groups (30% of all households on the lowest incomes) experiencing average inflation of about 10% – this was back in April!
It’s obvious to see how this rise in inflation impacts tenants, but social housing organisations will also feel the squeeze, as this increase will affect their costs significantly.
Increase in interest rates
Interest rates have also seen a huge rise as part of the UK cost of living crisis. The Bank of England base rate was 2.25% in September 2022, which has seen a considerable jump as inflation continues to soar.
According to 2021 Financial Forecast Return submissions, the sector expects to see a 34% increase in debt drawn down (to a total of £114bn) by 2025/26. A gradual rise in the base interest rate means that any additional debt will be a lot more expensive to service. As many housing associations hold variable debt, the impact is likely to be seen on the interest rates achievable on new or renewed fixed rate borrowing.
Bills on the rise
Heating homes, the weekly food shop, putting petrol in the car and other rising costs mean that affording life’s essentials is becoming increasingly more difficult. This astronomical rise in the cost of living will impact those affected by poverty the most, with social housing tenants feeling the worst of it.
While the government has started to intervene with several measures, it’s hard to see that it will be enough to help families living in social housing cope. Research from JRF, based on a survey of 4,000 people, has highlighted some worrying trends:
- Low-income families have fallen behind on payments by an average of £1,600.
- About seven million households have missed out on essentials like heating, toiletries or showers because they couldn’t afford them.
- One in five (21%) low-income households, the equivalent of 2.3 million families, were going without enough food and were unable to keep their homes warm.
Cost of rent
Affordable housing is already hard to come by for many, but as the above costs continue to soar, it’s likely that social housing tenants will find it increasingly hard to afford their rent – leaving thousands of families unable to pay. Equally, tenants may find that all they can afford each month is their rent, meaning that essentials like food and heating will have to be sidelined.
This creates a difficult situation for social housing organisations that will look to balance the cost increases felt by tenants against their own business requirements. The current Rent Standard allows most housing associations to increase social rent from April 2023 by a maximum of CPI for September 2022, plus 1%. So getting this balance right is going to be vital.
Impact on tenants
Unfortunately, tenants are yet to see income increase relative to the rising cost of living in the UK, which is likely to become hugely problematic over the coming months as bills continue to rise. The role of social housing organisations in tenant affordability is huge, as setting rents too high will potentially have life-threatening consequences for families across the country. The possible impacts on tenants have been discussed in great detail above, but here are the key points summarised:
- Huge increase in housing costs – food, toiletries, etc.
- A rise in energy costs – families having to decide between ‘heat or eat’
- The UK’s poorest citizens will be hit hardest by inflation
- Some families are going to be unable to pay bills, rent and afford household essentials
Impact on social housing organisations
Perhaps more than usual, UK social housing organisations will have to consider the impact an increase in rent will have on tenants. When it comes to budget and forecast planning, they will need to think about accommodating the cost of living crisis and increasing rates of inflation.
This will also impact day-to-day operations, such as maintaining homes and ensuring their staff continues to be paid. To accommodate for these rising costs, discretionary investment may well be an area of focus for managing budgets and we are likely to see housing associations reduce investment in new stock. Unfortunately, this may also mean that net-zero investment may have to be postponed for a while, at least until the economy recovers.
All stakeholders need to be considered when it comes to setting rents. While achieving a suitable balance that’s agreeable for all parties is incredibly difficult, there is no doubt that the squeeze felt by the current cost of living crisis is at a tipping point.
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