Let tenants choose

• provide closer links between rents (differentials) and the qualities which tenants value in properties
• give tenants the opportunity to take more responsibility for their choice of housing
• reduce unjustified differences bet- ween the rents set by local authority and registered social landlords (RSLs)
• encourage better management of the stock.

The DETR’s woes start with the proposals for achieving these aims. There are two front runners, the ‘running costs’ option and the ‘property values and affordability mix’ option.

The running costs option sets rents to cover landlords’ running costs, plus an element based on property values. This has logic from the landlord point of view, but produces higher rents for flats than houses. This hardly reflects tenant’s views. So the ‘what tenants value’ principle would have to be ditched before it could be implemented.

Most debate has revolved around the ‘property values and affordability’ mix option. The DETR initially put forward two variants. In one ‘affordability’ (based on earnings) determines 50 per cent of the rent, with local property values the other 50 per cent. In a second, 70 per cent of the rent figure comes from the ‘affordability’ factor.

The 50:50 variant excited most dismay. This would reduce average RSL rents in the north east by a quarter. RSL rents in London, already the highest, would rise by almost a quarter. Changes for some individual RSLs and tenants would be much greater. Local authorities in London and the South East, already the two most expensive regions in the country, would face higher rents. This would force up the rent for 10 per cent of three-bedroom homes in London to over £100 per week.

Affordability problems worsen unless the property values component is 20 per cent or less. For this reason the National Housing Federation and the Association of London Government have gone for a 80:20 variant and the Local Government Association has supported consideration of a higher than 70 per cent affordability element.

In practice, the DETR’s formula means that rent differentials between tenants of any one landlord are being set, not by managers or tenants, but through estate agents. Yet their mantra of ‘location, location, location’ reflects the demands of a different group of consumers who have to be concerned about movements in house prices. It is not clear why council and RSL tenants must accept owner-occupiers views on housing cost differentials when tenants’ views may be very different.

This conflicts with no less than three of the stated aims of the green paper which refer to tenants. In consumer research terms it is like setting an entire long-distance rail price structure according to what business travellers think of UK air fares.

In fact, there is good evidence that council and RSL tenants often have a different definition of quality. This is clear from DETR research quietly released some time after the green paper and unfortunately not on the DETR website. Tenants generally put much less weight on location.

But sharp differences in property prices over very short distances will mean, according to our analysis, that rents of the same sized council dwelling may vary by a factor of two within some boroughs (under the 50:50 variant). It seems that few council tenants would think that ‘fair’, irrespective of what estate agents’ window prices say.

It must be right in principle to ask tenants. Councils and RSLs from inner London to rural North Wiltshire have done so and the results have produced coherent rent structures.

A property value-based model also has practical problems in addition to dubious logic. The rents generated depend on which data source is used, as a comparison of the results from HACAS’s research for the DETR (based on Halifax price data) and the DETR’s in-house analysis (based on English House Condition Survey data) shows.

Also, the formula-based approach will not aid the DETR’s aim of ‘better local stock management’. Using the property value/affordability formula will eliminate local flexibility in rent levels.

If, for instance, the affordability share is increased to reduce sharp variations within an area, it will also reduce the differential between large and small properties. This will upset good stock management, reducing landlords’ ability to persuade older under-occupiers to move into smaller homes with the carrot of lower rent.

More generally the government wants RSLs and councils to behave in a more commercially responsive manner with the emphasis on business plans and the views of customers and tenants. How can this square with Whitehall determining the price structure of each of their products irrespective of local circumstances?

The DETR deserves credit for opening up this debate and providing the data needed to inform it. But tenants require more than lip service on affordability. Landlords need local flexibility to take the consumers’ views into account in the local rent structures. We need a two-stage approach rather than the beguilingly elegant simplicity of a single national property values/affordability formula.