The Government recently announced a series of reforms to Shared Ownership rents, which apply from October 12th, 2023. In this feature we explain the new rent reforms, and who benefits. We also take a look at whether some shared owners fall outside the new reforms, or might even be disadvantaged by the changes.
What are the new reforms?
- The Government is scrapping RPI as a measure of inflation for annual Shared Ownership rent reviews, and replacing it with CPI
- The reforms make it clearer that housing providers have discretion to apply lower Shared Ownership rent increases in times of high inflation
- Under the new reforms, Shared Ownership rents cannot be increased if inflation (CPI) is minus 1% or lower
1. RPI and CPI
The Retail Prices Index (RPI) is a measure of inflation. Most Shared Ownership leases specify that rent is increased annually by RPI+0.5%, on an ‘upwards only’ basis. (Older leases may have different terms, such as RPI+2%).
In announcing the new rent reforms, the government says: “We recognise that RPI is now an outdated measure of inflation, that [we have] committed to phasing out of usage by the end of the decade”.
The new reforms bring Shared Ownership annual rent increases into line with the approach used in other social housing tenures. The Consumer Prices Index (CPI) is used as the measure of inflation, and rent is increased annually by CPI+1%.
How do RPI and CPI compare? The table below shows that - over the past ten years - RPI has consistently been higher than CPI.
Say, your monthly rent is £100, and your Housing Association’s policy is to use the inflation rate published the previous September to calculate your annual rent increase. Using RPI plus 0.5%, in 2024 your rent would increase from £100 to £109.40 (8.9% + 0.5% = 9.4%). But if your Housing Association calculates your annual rent increase using CPI plus 1%, your new monthly rent would be £107.70 (6.7% + 1% - 7.7%).
2. Discretion to apply lower rent increases
The new rent review schedule spells out that Housing Associations have discretion to apply rent increases which are lower than CPI+1%. In fact, the 7% rent cap applied by some (but not all) Housing Associations in 2023-24 illustrates that they had already had discretion. But the guidance has been tightened up to make this clearer. The government says: “This ensures that providers have greater flexibility to protect new shared owners from particularly high rent increases during periods of high inflation”.
However, the fact that not all Housing Associations applied the recommended 7% rent cap in 2023-24 illustrates that shared owners shouldn’t, perhaps, place too much reliance on rent caps being implemented during future cost of living crises.
3. Minimum rent increases
Shared Ownership rent increases are currently calculated on an ‘upwards only’ basis. Your rent never goes down, even if inflation does.
Under the third rent reform, the government has reduced the floor for Shared Ownership rent increases from 0.5% to 0%. What does this mean in practice? Although rent still won’t ever go down, it can’t be increased if CPI is minus 1% or lower.
Do the new rent reforms apply to all shared owners?
As we’ve already mentioned, the new reforms apply from October 12th, 2023. But they won’t apply to all shared owners.
The changes apply to grant funded Shared Ownership schemes. But not all Shared Ownership schemes are grant funded. So, if you are buying a new-build Shared Ownership you’ll need to check if your development is covered by the new rent reforms.
New Shared Ownership schemes will have been costed on the basis of the ‘old’ RPI annual rent review. So the government has also allowed transitional arrangements exempting schemes already in progress, even where they are grant funded. Again, check if your new home benefits from the new arrangements.
Existing shared owners
The reforms aren’t retrospective, so existing shared owners won’t necessarily benefit. This is what the government says:
“Providers are also able to amend the rent review in existing shared ownership leases from RPI-based to CPI-based where they think this appropriate or prudent. Where this is agreed then Homes England’s permission to do so is not required and it will be for the parties involved to determine the mechanism for achieving this.”
What this means is that, housing providers can amend the existing rent review arrangements for current shared owners, but they don’t have to!
Will the new rent reforms cause any problems?
Shared Ownership is complex and can be confusing. So, bringing the annual rent review in line with social rented homes eliminates one potential cause of confusion (whether rent increases are based on CPI or RPI).
On the other hand, some new-builds delivered under the new model for Shared Ownership will have one basis for annual rent review, whilst others could now be calculated on a more beneficial basis. Homebuyers will need to check with their sales team and solicitor, to see if they’re getting the best deal possible.
For anyone purchasing a Shared Ownership home as a ‘starter home’ with the intention of selling on in the short to medium term, it might not make that much difference whether rent is calculated on the old or the new basis. But those purchasing a ‘forever’ home might be more concerned about whether or not their home comes with the benefits of the new arrangements.
And, assuming at least some Housing Associations don’t update annual rent review terms in existing leases, current shared owners may have concerns about the emergence of a two-tier market (where ‘new model’ Shared Ownership properties see increases in value while ‘old model’ Shared Ownership properties fall in value). Some may already have concerns about the impact of the new model lease, with better – i.e. longer – leases. Could the new rent reforms make their own homes even less attractive in the market place when they come to sell?
Do your research!
If you’re in the process of buying a new-build, make sure to ask the sales team and your solicitor whether it benefits from the new rent reforms.
If you’ve already purchased a Shared Ownership home, you could ask your Housing Provider if they intend to amend the rent review arrangements in place for their existing shared owners, including you.