EXECUTIVE SUMMARY
Introduction
This report analyses the patterns of council and housing association rents in Scotland in 2005/06, and sets these in the context of the broader housing and labour markets in Scotland. The rent policies of a number of case study landlords are examined in more detail. The report then sets out, with exemplifications, a number of options for consideration as a basis for the future of social sector rents policy in Scotland.
Chapter 2 Social sector rents and service charges
There are a number of inconsistencies between the rent data that local authorities submit to the Scottish Government and the rent data they submit to the Chartered Institute of Public Finance and Accountancy ( CIPFA). The research project sought reconciliation from authorities where there was a difference of more than £1 per week between these figures.
The inconsistencies in past rent data suggests that measures need to be taken to try to ensure in future that rent data collected from local authorities is derived on a more uniform basis. In some cases however, current local authority financial and IT systems mean there is inevitably a measure of estimation involved in generating average rent figures.
Average local authority rents in Scotland at April 2005 were £45.02 per week. But there were large differences between individual councils, with average rents ranging from £35.58 per week in Moray up to £55.70 per week in Inverclyde.
Nationally, average council rents ranged from an average of £35.83 per week for bedsits up to an average of £53.01 for four(+)-bedroom dwellings. There were, however, six councils where there were very limited differences between the rents of smaller and larger dwellings.
Average housing association secure rents in 2005/06 were £50.27 per week, with average levels ranging from £45.16 per week in Falkirk up to £54.94 per week in South Ayrshire.
Nationally, housing association rents ranged from an average of £39.73 per week for one-apartment dwellings up to an average of £64.31 for five(+)-apartment dwellings. While there was some diversity in the size differentials of housing association rents in different areas, in no area were those differences as limited as in the case of the six 'flat rent' councils.
The average rents for large scale stock transfer ( LSVT) landlords differed significantly from the local rents of other housing associations. Glasgow Housing Association ( GHA) rents were well above the average for other associations in Glasgow. Conversely, the average rents for the LSVT landlords in Dumfries and Galloway and Scottish Borders were well below the average for other associations in those areas.
LSVT landlords apart, there were only limited differences between the average rents of individual housing associations within each area. There were, however, a few marked 'outlier' rents in a number of areas. But in all cases these related to a very small number of dwellings.
There is limited data available in respect of service charges. Service charges were highest for sheltered housing and small dwellings, and were more frequently levied by housing associations. Local authorities rarely levied service charges other than for sheltered dwellings, but accounting practices, in terms of rent and service charges, varied substantially between individual landlords both within the local authority and housing association sectors.
Six councils changed their rent-setting policies between 2001 and 2006, either to replace outdated 'Gross Annual Value' ( GAV) systems or the separate rent-setting policies inherited from predecessor councils or development agencies. In five cases, the councils moved to a points-based rent setting system; in the other, to a simple comparability scheme.
Rents, house prices and earnings
House prices are highest in Edinburgh for all sizes of dwellings, and lowest in Angus, Eilean Siar and Shetland Islands for different sizes of dwellings. Variations in house prices are very wide; average prices in the most expensive local authority area are some 3 times higher than those in the least expensive areas. There are also wide differentials between the prices of different sized dwellings.
Earnings are far less varied across Scotland. While average earnings are some 50% higher in the highest-paid local authority area than the lowest-paid area, this reflects wider variations among high earners. At the lower end of the earnings scale, local variations are much narrower, with earnings in the highest area (Aberdeen City) less than 25% above those in the lowest area (Western Isles).
There is very little correspondence between the spatial variations in council and housing association rents across Scotland. Nor is there any significant correspondence between either of those rent profiles, on the one hand, or house prices or earnings on the other. The only exception is Edinburgh, which ranks top or very highly on all measures.
In several cases, councils and housing associations have high rents in areas of relatively low earnings and/or house prices; in others, the reverse is the case. There are a few areas where there are significant differences in the relative levels of house prices and earnings at the lower ends of their respective markets.
The disparities between earnings and the profiles of council and housing association rents across Scotland result in a number of areas where the affordability of rents is more of an issue.
Taking the case of a couple with two children and one full-time earner at the level of the minimum wage, average council rents exceed 30% of their net incomes in Edinbugh and Inverclyde councils. Average housing association sector rents also exceed 30% of net incomes of this level in Aberdeen City, Dundee City, East Ayrshire, East Lothian, East Renfrewshire, Edinburgh, Inverclyde, Renfrewshire and Shetland Islands, and for Glasgow Housing Association.
Taking the same case, there are also a number of areas where the working household would remain dependent on housing benefit. This applies for Edinburgh council and GHA, and for average housing association sector rents in East Lothian, Edinburgh City, Inverclyde, Shetland Islands and South Ayrshire.
Housing benefit dependency is most likely to occur for working families with children. This is because the structure of the housing benefit scheme (and its relationship with tax credits) fails to take account of the requirement for larger households to meet the higher housing costs of the larger dwellings they require.
Some four in five retired households in the social rented sector in Scotland are in receipt of housing benefit. Retired households also occupy a range of different sized dwellings; nearly three in five occupy dwellings with two or more bedrooms.
There are two areas where the different profiles of house prices and council and housing association rents across Scotland mean that average rents are higher than the mortgage costs for house purchase at the lower end of the market. There are also a number of other areas where there is very little difference between rent levels and mortgage costs for house purchase at the lower end of the market.
The proximity and overlap between social sector rents and the costs of house purchase at the lower end of the market raise issues about equity to tenants, and about social inclusion as a result of the incentives this gives to working tenants in those areas to buy rather than rent.
Chapter 3 Case studies
The profile of social sector rents was further examined through seven detailed case studies, comprising three local authorities, two stock transfer landlords, and two 'traditional' housing associations - one medium sized and one a small neighbourhood association.
In particular, the case studies permitted an analysis of the dispersion of rents around average levels. There was limited rent dispersion in all three local authority cases, and the degree of dispersion was particularly narrow in two of those cases. None of the local authorities operated rent setting systems that took account of location.
There was a greater degree of dispersion in the rents for one of the stock transfer landlords, partly as a result of operating a rent policy including location as one factor. However, it also had relatively high differentials in terms of different types of dwelling.
There was also a greater degree of dispersion in the rents of the medium-sized housing association. This was partly the result of locational variations reflecting the wide geographical dispersion of their stock, and partly the result of a separate rent system still currently operating for stock inherited from another landlord.
While, as a whole, average rent levels for all case study landlords were below the costs of house purchase at the lower end of the housing market, this was not the case in all the localities where the landlords operated. The local overlaps between rents and housing market purchase costs occurred in some cases where landlords did not have any locational factor in their rent-setting systems. In other cases, where they did have such a factor, it had a limited impact on rents when compared to the extent of variation in house prices across the areas where they operated.
Rent policy options for social sector rents
The wide disparities in rent levels, both geographically across Scotland and between and within the local authority and housing association sectors, together with the absence of any coherent relationship with either local earnings or house prices, raises concerns about equity for tenants; affordability; and the efficient operation of the housing market.
In this context, the report sets out a number of options for developing a national rent policy for Scotland. One critical dimension of such a policy would be to strike a balance between the degree of consistency sought for compliance with the national rent policy and the degree of continued autonomy for individual landlords.
Current policy in Scotland is very close to the 'landlord autonomy' end of that range, while current policy in England is very close to the 'central national control' end. There are, however, many intermediate options available in constructing a rent policy that would provide a more balanced trade-off between consistency and autonomy objectives.
Alternative policy options
In substantive terms, the report sets out five alternative frameworks for setting a national rent policy in Scotland. These include basing rents on variations in local earnings (at the low end of the local labour market) and on local house prices (at the low end of the local housing market).
Three 'hybrid' policies are also set out. In these, rents are based on a mix of local earnings and local house prices. In one hybrid case, rents are based 75% on local earnings and 25% on local house prices, while in another they are based 90% on local earnings and 10% on local house prices. In the third hybrid case, rents are set in relation to earnings unless this would result in rents above the costs of house purchase at the lower end of the local housing market. In those circumstances, the rent is restricted by the level of a mortgage cost 'cut off '.
All five rent policy options have been exemplified by redistributing the average national rent figure for the overall social sector of £47.07 at 2005/06 levels. The exemplifications are therefore limited to looking at the redistributive impacts of the alternative rent policies. They do not imply or reflect any change to average rent levels across Scotland as a whole.
Rents based on housing market values would lead to a very substantial widening of rent differentials across Scotland. In contrast, rents based on earnings would narrow rent differentials across Scotland.
Rents based on housing market values would also increase the number of areas where average rents would result in minimum wage working households being dependent on housing benefit. In contrast, all other rent policy options would reduce housing benefit dependency relative to the current profile of social sector rents. Least dependency would occur under the option where rents are based on earnings, but with a mortgage cost cut off. This is largely because with this option there would be the narrowest range of rents across Scotland.
Conclusions
While the modelling of exemplifications, and related affordability analysis, can inform decisions about the appropriate principles from which a rent policy can be constructed, those decisions must ultimately be a matter of judgement, reflecting the relative priority given to different objectives.
There would also be many issues involved in moving from the principles on which a national rent policy might be based, to its implementation, including the central issue of the balance to be struck between policy compliance and local autonomy.
However, any national policy framework would require a review of the current regulatory and financial frameworks in Scotland within which local authorities and housing associations operate. Such a review would also need to consider the adequacy of the current powers available to the Scottish Government and Communities Scotland.
A national rent policy would also require a complementary policy in respect of the service charges levied by landlords. This would ensure consistency in the relationship between those charges and the rent policy.
Finally it was also noted that reforms to the structure of the housing benefit and tax credit schemes would be helpful in underpinning the development of a new rental policy. In particular there is a case for reforms that would enable larger households with children to pay the higher rents required for larger dwellings, without as a result becoming more likely to need to rely on housing benefit.