Reclassification of properties the pros and cons

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1 Reclassification of properties the pros and cons Simon Smith Assistant Director CIH consultancy July 2013

2 Overview Why do it? The Legal Position Financial Implications Other Strategic Implications What are others doing? Government Intervention Summary of pros and cons 2

3 Why do It? Pros and the Cons! Pros: Tenant benefits from being excluded from underoccupancy (no 14 reduction for 1 bedroom) Organisation has lower arrears Government (partly) benefits (?) Cons: Reduction on rental income (?) Strategic issues (waiting lists) Government penalties (?) 3

4 The Legal Position (1) Housing Benefit and Council Tax Benefit Circular HB/CTB A ( deals with the housing benefit size criteria restrictions for working age claimants in the social rented sector. From 1 April 2013, those deemed to be under-occupying their properties by 1 bedroom will see a reduction of 14% of total eligible rent and those under-occupying by two or more bedrooms will see a reduction of 25% of the total eligible rent. The legislative backing for this is the Housing Benefit (Amendment) Regulations 2012 which were introduced under section 69 of the Welfare Reform Act

5 The Legal Position (2) In circular HB/CTB A4 2012, DWP is clear that they will not be defining what is meant by a bedroom in legislation and there is no definition of a minimum bedroom size set out in regulations. It will be up to the landlord to accurately describe the property in line with the actual rent charged. Therefore, in legal terms, it is up to the landlord to describe the property and hence some form of re-designation appears possible. This does prompt the question how does the landlord accurately describe the property in line with the actual rent charged? 5

6 The Legal Position (3) Rent-setting powers are set out in section 24 of the Housing Act 1985 as amended. This legislative framework is broad and contains only two requirements: 24 (1)A local housing authority may make such reasonable charges as they determine for the tenancy or occupation of their houses; and 24(2) The authority shall from time to time review rents and make such changes, either of rents generally or particular rents, as circumstances may require. The framework therefore gives considerable scope to set whatever rent the authority deems reasonable. However, the government has sought to exercise control over local authority rents through other mechanisms. The rental charged on a property has been influenced in the social sector by the rent restructuring regime and since April 2002, local authorities have been setting their rents based on rent restructuring principles. 6

7 Financial Implications (1) Rent Restructuring: In principle rents for the same property in the same area will be the same if Council or Housing Provider Each property has a formula or target rent based on a formula This formula rent increases by Inflation (RPI) plus 0.5% Actual rents are to converge by April 2015 (latest guidance though has varied from 2011 to 2023) Actual rent not to increase by more than RPI plus 0.5% plus 2 To cover Bricks and Mortar only 7

8 Financial Implications (2) So how is the formula rent calculated? Based on Capital Value 30% Regional Average Earnings and Bedsize 70% Example: 3 Bed House (Bedroom weighting 1.1) January 1999 Valuation is 75,000 Local (County) Earnings Index (per week) Average Rent across sector Average Value 49,750 Average Earnings

9 Financial Implications (3) The Calculation! Stage 1: ( x 70%) x ( ) x 1.1 Stage 2: ( x 30%) x ( 75,000 49,750) Stage 1 + Stage 2 = Formula (Target Rent) Formula Rent = (April 2000) When inflated by RPI(s) + 0.5% = (April 2013) 9

10 Financial Implications (4) So what happens if the 3 rd bedroom no longer exists? Bedroom weighting = 1.0 (instead of 1.1) January 1999 Valuation = 72,000 (instead of 75,000) New Formula rent : Inflated to April 2013: (reduction of 8.08) Without Jan 99 adjustment: (reduction of 6.53) Annual loss to organisation: (say 200 properties c 84,000) 10

11 Financial Implications (5) HOWEVER! The Government is going to consult on the future of rent convergence New Social Rent Policy Issue IF your ACTUAL rents are not at FORMULA rent (in our example the actual rent could be say 6 below formula) Therefore potentially whatever the rent is on April 2014 it will be inflated by CPI plus 1% in the future No longer the potential to increase rents above set limit (previously RPI plus 0.5% plus 2) 11

12 Other Strategic Implications The waiting list: Could impact available properties What are the drivers on your lists? Loss of Government initiatives? How do you decide which properties are affected (just those affected)? Implication to Housing Providers Business Plans covenants etc 12

13 Whose doing what? Knowsley Housing Trust 425 to 600 properties reclassified for those affected loss of 250k rent per year Leeds City Council 865 properties Welwyn Hatfield (tbc) 100 properties (>4.65sqm) Incommunities 50 properties Nottingham City Council 1,019 flats * From National and Housing Press 13

14 Justification for Reclassifying Cannot let the property Low demand & benefit reduction Tenant has made their own alterations Changing the layout The Box-room Welwyn Hatfield Case by Case basis CAUTION: lost potential post April

15 Government Intervention (1) Rent Rebate Subsidy Limitation: In 1996 it was introduced with a limit rent. If a Council s average rent is higher than the limit rent then a proportion of the amount above the limit rent is returned to the government. The limit rent will converge with formula rent in April 2015 RRSL does not apply in the Housing Provider sector 15

16 Government Intervention (2) In June Lord Frued wrote to Councils expecting the designation of a property to be consistent for both housing benefit and rent purposes Blanket redesignations without a clear and justifiable reason and without reductions in rent, are inappropriate and do not fall within the spirit of the policy. If it is shown properties are being redesignated inappropriately this will be viewed very seriously. 16

17 Government Intervention (3) DWP will commission independent audits to ensure correct and appropriate procedures have been followed The threat of restricting or not paying housing benefit subsidy DWP has no objections to redesignations where there are good reasons, such as where a property has been adapted to cater for a disabled persons needs. 17

18 The PROs Tenant is removed from full (or part) of underoccupancy liability Arrears performance to pre- April levels Less stress on staff Reduced rent may assist with full introduction of Universal Credit The Government partly benefits (though loses out on the full average 14/week reduction) 18

19 The CONs Political/Board Decision Loss of rental income Extra (initial) administration Potential for inconsistencies between HB and non-hb tenancies for the same properties Risk of Government Intervention Goes against the spirit of the policy national policy not local Impact on Waiting Lists 19

20 Questions????? 20

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