What is social housing ‘rent convergence’ and why does London need it?

Last week, a government press release announced that “thousands more families” will be getting “warm, secure social homes” thanks to “new funding and financial flexibilities” designed to “accelerate social and affordable housebuilding” by councils and housing associations, and to help them deal with damp, mould and poor insulation in existing ones.

Specific measures included a forthcoming, updated Decent Homes Standard, confirmation of the provision of £2.5 billion in low-cost loans to housing associations – of which 60 per cent will be for London – extending a discounted borrowing rate for homebuilding by councils, and reviving a thing called “rent convergence”.

This has long been desired by both London Councils, the body representing all 33 of the capital’s local authorities, and the G15 group of the largest housing associations operating in London. However, despite politely welcoming the government’s measures as a whole, they had hoped rent convergence would go further. So, what is social housing rent convergence and why is it important for London? Let’s begin by going back a bit.

HOW ARE SOCIAL HOUSING RENTS SET?

Since 2002, social housing rents have been determined according to a national formula devised by the Labour government of that time. “Formula rent” levels are based on a combination of local earnings relative to national averages, the value of the properties concerned, the number of bedrooms they contain and housing association rents in England.

The Institute for Fiscal Studies has described the formula’s aim of bringing to an end disparities between rent levels in different places and to gradually “achieve convergence” between housing association rents and council rents. The latter tended to be lower, though there could also be striking inconsistencies between council rents in different London boroughs. For example, a report from 2000 found one London council charging £15 a week more than a next-door neighbour for a very similar dwelling.

The goal was to bring all social rents into alignment over a ten-year period. Landlords were initially allowed to increase formula rents by the Retail Price Index (RPI) measure of inflation plus 0.5 per cent. Then, as a House of Commons research briefing explains, the Conservative-Liberal Democrat coalition government allowed social landlords to add, in addition to the formula hike, up to £2 a week year-on-year to rents that were lower than the national formula allowed.

In 2013, following some very sharp social rent increases, the coalition announced it would be changing the measure of inflation from RPI to the alternative and lower Consumer Price Index (CPI) plus one per cent, and decided to cut short the convergence policy. The financial implications of this worried social landlords  – but not as much as what followed.

In 2015, soon after the general election of that year which saw the Conservatives win a majority, the then-chancellor George Osborne announced that, from 2016, social housing rents would, for four years, be reduced by one per cent instead of raised.

This was prompted by politically unwelcome rises in the level of housing benefit being awarded to tenants who could not afford to pay their rents without its help. For other tenants, therefore, it was good news. But for social housing providers, it was seriously bad news for their revenues.

Conservative policy changed again from April 2020, with CPI plus one per cent returning for five years, but no accompanying freedom for landlords to increase rents on top of that in order to resume bringing them up to the relevant full “formula” amount and further hasten convergence towards the target of full alignment – an outcome that would also help housing associations and councils afford the costs of maintaining their existing social rented properties and building more new ones, something London urgently requires.

CONVERGENCE COMEBACK – UP TO A POINT

With a new, Labour, government elected in 2024 and the previous one’s social rent policy expiring, London’s councils and housing associations set about making their cases for a settlement that alleviated the financial pressures they are under and addressed one of the most damaging aspects of London’s deepening housing emergency, in particular the condition of some of the city’s existing social housing and the urgent need to build more of it.

Consultations were opened about the future of social housing rent policy in general and then, in July of last year, about how to implement convergence. Last June, chancellor Rachel Reeves said in her spending review that social housing rents would continue to be permitted to rise yearly by CPI plus one per cent from April 2026. The convergence consultation asked if weekly rents should also be allowed to go up by £1 or £2 a week on top of that “until they converge with formula rent” and what the implications would be for tenants and for landlords.

Both the G15 and London Councils asked for more: in each case, they wanted to be able to put rents up by an additional £3 a week, effective from this April. For the latter, which wanted “at least” £3 per week, failure to allow this “could mean at least 7,000 fewer council-led homes over a decade” than would otherwise be the case, and less capacity for reducing homelessness rates and associated ballooning costs.

But they were out of luck. The government has decided to limit it to £1 from April 2027 and to £2 from April 2028. G15 chair Ian McDermott, the chief executive of Peabody, welcomed “the move towards greater rent fairness” along with the other measures. On behalf of London Councils, Grace Williams, executive member for housing and regeneration and leader of Waltham Forest, was fairly frank.

The rent convergence rates “will not end the tough times for London’s social housing finances,” she said. They could bring in about £183 million extra for London’s boroughs, but that would not be enough to cancel out a forecast  estimated £269 million of cuts that will need to be made to housing revenue budgets to make them balance.

Williams concluded: “We are as committed as ever to working with the government and other partners to tackle the crisis. But to achieve this, boroughs urgently need more funding firepower if they are to overcome the challenges stalling development.”

NOW WHAT?

There are approximately 800,000 social rent dwellings across Greater London, a figure that hasn’t changed very much in recent years. A little more than half of them are housing association properties, the rest are council-owned.

At present, there are at least 336,000 households on council waiting lists in the capital for such homes. Some of those will already be living in social housing – a term that became prevalent in the 1980s – and want to move to a different one, frequently because they need more space. But many of them are living in temporary accommodation arranged by their local council – an estimated 210,000 Londoners altogether.

Very broad estimates put average council social rents in London at about £130 a week and those for housing associations at about £148 a week. So there’s still a bit of converging to be done between the two types. Meanwhile, within those two categories, there will be rents for individual tenancies that, for various reasons, have fallen behind the maximum the formula allows, perhaps because social landlords had felt in the past that they couldn’t put them up by the full amount if inflation had been particularly high. It was notable that the Conservatives capped rent increases at seven percent in response to the inflation surge that followed Russia’s invasion of Ukraine. Without it, rents could have soared by a punishing 11 per cent.

When a new tenancy begins, a landlord might re-set the rent level up to the full formula amount, which is one way to contribute towards the continuing convergence objective. But it’s the freedom to raise the rents of households in ongoing tenancies by more than CPI plus one per cent a year, and therefore to take them up towards the overall rent formula ceiling, that can make the biggest contribution to convergence – and to helping social landlords into better financial shape. In that respect, London’s housing associations and councils have got a bit of what they asked for, but quite a lot less than all of it.

There are lots of ways of looking at this issue. An extra £1, £2 or £3 a week in rent on top of your formula rent hike might not seem like a fortune, but every pound counts when you don’t have many to spare. Another way involves maintaining that relatively well-off social tenants whose rents are lower than the full formula amounts are getting an unjustified better deal than those whose aren’t. This is what social landlords mean when they talk about convergence creating greater “fairness”.

Stepping back, the rent convergence question forms just one part of a larger debate about social and other “affordable” rent setting and the basis of the national formula, which is still based on metrics from 1999 and 2000. London Councils argues that it is drastically out of date and no longer reflects the high costs of maintaining social homes in the capital. They would like the property value element rebased to 2024 levels. There is also the matter of the extent to which the finances of councils and housing associations should depend on rental income compared with loans of various kinds and government grant funding.

We can come return to all that another day. In the meantime, London’s housing emergency continues.

Follow Dave Hill on Bluesky, Facebook, Instagram, LinkedIn, YouTube and Apple podcasts.

OnLondon.co.uk is funded by sales of publisher and editor Dave Hill’s twice-weekly newsletter On London Extra. If you don’t already receive it, become a paying subscriber to Dave’s personal Substack or follow any Support link on this website.