The government’s policy of reducing social rents by 1% annually over the next four years will lead to 14,000 fewer homes being built.

That is the forecast from independent fiscal watchdog Office for Budget Responsibility (OBR)following the Budget announcements today. George Osborne announced that social rents will reduce by 1% annually over four years.

Accoridng to Inside Housing:

“The OBR said the measure, which comes into affect next April, will ‘directly reduce social landlords’ rental income, and therefore their financing for, and returns to, investing in new housebuilding’.

Because of this, the OBR has reduced its forecast for residential investment by 0.7%. It says housebuilding by housing associations will drop by around 4,000 homes in 2019/20 and 14,000 over five years.

The National Housing Federation (NHF) has calculated, using figures for rental income, that 27,000 homes will now not be built due to the changes. David Orr, chief executive of the NHF said: ‘A cut in rents over the next four years will be a real help for some tenants, but will massively constrain housing associations’ ability to meet the shared ambition of themselves and government to drive housing growth and new jobs.

‘At the very least 27,000 new homes will not now be built, though that figure could be much higher.’

After 2020, the rent formula will revert to the consumer price index plus 1%.”

Inside Housing also reported:

“Social landlords are preparing to reduce their development schemes after business plans were rocked by the surprise scrapping of the rent formula in the Budget.

The National Housing Federation predicted 27,000 fewer homes would be built as a result of the change, which it said will reduce associations’ earnings by £3.9bn over four years.

The government announced in 2013 that landlords would be able to increase rents by the consumer price index (CPI) of inflation plus 1% for 10 years – but they will now have to reduce them by a flat 1% with no regard for inflation from April until 2020. The changes, outlined as part of the government’s welfare spending cuts, will impact all social homes, including those let at affordable rents.

Landlords told Inside Housing that they expect development plans to take a hit as a result.

Sue Chalkley, chief executive of Hastoe, said: ‘I’m in a state of shock. We don’t yet know the details but the changes will inevitably reduce housing associations’ development programmes.

‘We now have no confidence in what’s happening from five years onwards. The government’s done a u-turn so we’re going to lose confidence and our credit agencies are going to lose confidence.’

Brendan Sarsfield, chief executive of Family Mosaic and chair of the G15 group of large Londonlandlords, said: ‘If we were a [for-profit] business we would stop developing. But we are not going to do that, we have got to work out how we get through this, we’ve got to keep going and keep building – it just means we may have to do a bit less.’

Paul Hackett, chief executive of Amicus Horizon, added: ‘It will take around 12% out of our income assumptions over the next four years. This is a big change and we weren’t expecting it. There will inevitably be an impact on our ability to develop.’ Paul Tennant, chief executive of Orbit, added that his organisation’s plan to build 12,000 homes by 2020 – one of the largest pipelines in the sector – is now ‘under question’.

English social housing regulator the Homes and Communities Agency (HCA) responded to the announcement by saying it will write to housing associations next week to ‘seek assurance’ that they are addressing the issue. A spokesperson for the HCA said: ‘Providers will need to look at their business plans in the light of the announcements at budget and decide what action they need to take.’

Housing consultancy Savills warned the change could reduce the value of social homes on balance sheets by up to 25% – presenting a big challenge for landlords with small surpluses. This change would not affect valuations for lending.

Robert Grundy, head of housing at Savills, said: ‘Inevitably there will be some associations who are unable to achieve the cost savings needed… Those who are delivering the smallest surpluses whose business plans are less robust have got to respond quickly.’

Rating agency Standard and Poor’s told Inside Housing it expected most landlords to respond by cutting spend on development and maintenance. It said ratings would likely be affected if landlords posted lower surpluses.

One major lender to the sector, who preferred not to be named, said: ‘We’re not closing our books. For most well run organisations, this will not be a challenge in terms of viability, but it will be a challenge in terms of how much they develop.’  He said the fact that the government had gone back on an arrangement could undermine confidence in the sector.”