Budget: Rent reductions ‘will hamper development’

A reduction in rents paid by tenants in social accommodation was one of several announcements around housing made in George Osborne’s second Budget of 2015, alongside tax changes for private landlords.

From 2016, the Government will reduce the rents paid by social housing tenants by 1% a year for four years.

The Chancellor also introduced Pay to Stay, where high-income social tenants will be charged a market or near-market rent, with the additional rental income raised by local authorities to be returned to the Exchequer.

The Government is also set to review the use of lifetime tenancies in social housing to “ensure that households are offered tenancies that match their needs and make best use of the social housing stock”.

In his Budget speech, Osborne said: “It’s not fair that families earning over £40,000 in London, or £30,000 elsewhere, should have their rents subsidised by other working people.”

The Chancellor also introduced changes in property taxation for private sector residential landlords, to rectify “a tax system which supports landlords over and above ordinary homeowners.”

Changes include:

  • Reducing Mortgage Interest Relief, where landlords can deduct costs they incur when calculating the tax they pay on their rental income, to the basic rate of income tax
  • Reform how landlords of residential property can account for the costs they incur in improving and maintaining rental property. Currently, landlords of furnished properties can deduct 10% of their rent from their profit to account for wear and tear, irrespective of whether they have improved the property or not. From April 2016, the allowance will be replaced so landlords can only deduct costs they actually incur
  • Rent a Room relief to be increased from £4,250 to £7,500 a year from April 2016, after being frozen since 1997. According to the Government, this increase will allow individuals who rent a room in their main residence to do so tax free on income up to £7,500

Industry reacts

Commenting on social housing rent reduction, Dr Anthony Lee, senior director at BNP Paribas Real Estate, said: “The government’s plans to reduce rents paid by tenants will have an adverse impact on both housing associations and developers.

“Social housing rents have – until now – increased annually by RPI plus 0.5% per annum, underpinning housing associations’ business plans and making social housing an attractive investment proposition.  This announcement is likely to undermine housing association finances and risks making bond issues less attractive.

“There is also likely to be an adverse impact on the viability of new developments.  The rent reduction will reduce the amount housing associations can pay developers for the affordable housing element in their schemes. This will put pressure on viability and ultimately reduce the overall percentage that schemes can provide.”

Richard Donnell, research director of Hometrack, said: “The biggest focus on housing was related to the social sector, which will impact new supply. For home owners and house prices, the outlook is for continued growth in house prices as continued economic growth stimulates demand. So far, there has been a one dimensional housing recovery focused on the south of England but 55% of homes are located in markets where house prices are still below 2007 levels.

“The changes to buy-to-let mortgages and mortgage tax relief for high rate tax payers will moderate housing demand, but this is unlikely to impact the growth in house prices as just one-in-ten housing sales is to a buy-to-let investor buying with a mortgage – 63% of rented homes are not encumbered by a buy to let mortgage. There are probably as many cash buyers investing as using a mortgage and this group will remain unaffected. The move to reflect the tax advantages of investors, and the risk this poses to the housing market if not addressed, is important. Expect the Bank of England to act further on buy-to-let.”

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