Michael Cameron – SFHA Development Conference - 15 March 2023
There has been extensive commentary both from us as regulator and others about the challenges which have emerged over the last few years. Given that, I’ll touch briefly on what has been, and then concentrate on the coming period.
I suspect that only a few years ago not many of our risk registers would have included a global pandemic, the UK out of the EU, war in Europe, political turmoil in the UK, soaring inflation, and rent controls. So, we’ve seen a period of huge disruption, volatility and upheaval. And it is a pretty safe bet to say that the context for the year ahead is likely to remain unpredictable, volatile and difficult.
That context can be summarised as one of continuing cost inflation – with inflation for social landlords running well above the headline rate of CPI – higher interest rates, increasing requirements on quality of homes – including on energy efficiency and zero-emissions heating – combined with huge demand for support from tenants who are facing genuine financial hardship. Alongside all of that, there will be continuing pressure to keep rents as low as possible.
On costs, a couple of week ago we reported that in 2021/22, RSLs’ operating costs increased by nearly 10%, and that was well above both inflation and average rent increases during that period. That increase was principally due to significant rises of around 20% in costs for planned and reactive maintenance. And, of course that predates the height of the current cost crisis.
Landlords are also having to work with a lot of uncertainty around the policy context: we’re still awaiting the outcome of the Scottish Government’s review of the Energy Efficiency Standard for Social Housing, and the conclusions from its work on a common understanding of affordability. There are housing bills in the pipeline, and the current political situation in Scotland may result in shifts in Scottish Government policy.
And we have seen higher levels of government intervention in social housing recently, both from Holyrood and from Westminster. Rent controls, legislation on damp and mould, and mandatory qualifications for housing managers, to name a few.
On rents, we will toady publish details of the rent increases which Scottish social landlords will apply in 2023/24. The average increases will be just over 5%, with the average for local authorities at 3.8% and for RSLs at just over 5.3%. Increases range from 0% to 8%.
Today CPI sits at 10.1%. The Bank of England expects inflation to fall to around 4% this time next year. However, and as you all know, the costs of materials and labour have risen massively and are unlikely to drop back in any significant way, at least for the foreseeable future. And as I’ve already mentioned, inflation in social landlords is generally running well above the headline rate.
We’re also likely to see further increases in interest rates, before this stabilises later in the year.
So, social landlords are facing a year of continued increases in costs that are likely to outpace the growth in the income they generate through rents.
Add in to the mix the range of new, and as yet not wholly quantified, costs for things like the investment in existing homes to achieve net zero, and for the proposed new Passivhaus equivalent standard for new homes in Scotland - and I know that’s something that you will be talking about today.
Last year we asked RSLs to tell us if they had considered de-carbonisation in their financial projections and what they estimated the cost of that to be if they had included that. Thirty five told us they have considered de-carbonisation as part of their business planning – around 25% of all RSLs – and 25 included an estimate for costs, with an average of £684 per house. These figures fall well short of those from studies which have tried to estimate the additional investment required to meet the net carbon zero target.
So, as a sector, we don’t yet have a good handle on what net zero will cost.
In recent conversations with a range of landlords, we are hearing real concerns about strains on organisations and people, and a call for a period of certainty and stability to help landlords to regroup and recover from everything that the last few years have thrown at them.
So, in addition to the challenges around costs, we also have to recognise the challenges around the sector’s capacity and confidence.
Do our organisations have the capacity, the “bandwidth”, to address all of the new and competing demands; do we all have the full range of knowledge and skills to operate in an increasingly complex policy and technical environment. And what about the capacity of others that social landlords depend on? Contractors, suppliers, partner organisations and other public services.
All of this, and an evident unease at the risk of further systemic shocks, is undoubtedly having an impact on landlords’ confidence levels. For example, we know that the number of landlords that are planning on building new homes next year is down, and that the number of new homes that are planned is also down.
And we’re starting to see different responses to this context and these challenges.
Some landlords are starting to think that now is not right time for growth, that it may be better to endure, hunker down and get through the coming period.
Others are determined to keep growing, building new homes. Indeed some might even be seeing opportunities to contribute more amongst all the challenges.
And others are unsure about the best strategy to adopt in the current climate.
We are also aware that conversations are happening amongst landlords about different ways to work together, and possibly to join together, to help them keep delivering for their communities in an increasingly difficult environment.
Now, having said all of that, and in spite of current context, we are seeing a continuing confidence in investment in social housing from lenders and other investors. The growing prominence of ESG in lending decisions suggests that social landlords will be seen as even more attractive to lenders and investors.
And of course, social landlords in Scotland have weathered many storms over the years, and have continued to adapt and evolve to keep building homes and sustaining communities, so that’s a track record we should take comfort from.
The last few years have taught us that it is incredibly difficult – almost impossible – to accurately predict the future, and to identify the specific risks that could materialise. So, that ability to adapt and evolve, to be resilient in the face of changes and challenges, has never been more important, not least to protect the legacy social landlords have created in the last fifty years or so.
There’s a quote that feels very relevant to our current context: we can do anything, but we can’t do everything. Recently I have been hearing more discussion, and a fair degree of consensus, about what the sector and government needs to do to get through the next couple of years, while tackling the most critical and immediate issues we face. I’d sum that up as keeping a long term focus on the wide ranging ambitions for housing in Scotland while recognising that the current context means we can’t do everything straight away, and that we coalesce around actions on a clear set of short to medium term priorities.
The Scottish Government is convening the first meeting of the Housing to 2040 Strategic Board next week. Perhaps that provides an opportunity for a more formal conversation to understand what achievable priorities at a sustainable pace look like for social housing for the next year.