Rachel Reeves works on plan for 10-year formula to give councils and housing associations certainty

Social housing rents will rise by more than inflation over the next decade as part of UK government plans to boost affordable housebuilding and shore up the finances of struggling landlords.

The chancellor, Rachel Reeves, is working on plans to introduce a 10-year formula to calculate social rent on homes that will result in rents increasing every year by the rate of the consumer prices index – which is now 2.2% – plus 1%, removing an existing cap on rises.

Reeves is expected to announce the plan at her first budget, on 30 October, alongside measures to raise taxes and cut spending.

The plan for social rent homes – those rented usually at 50% of market rate – will be welcomed by the councils and housing associations who are now facing a squeeze on their finances, which has put the brakes on housebuilding.

Bodies such as the National Housing Federation, which represents England’s housing associations, and the Local Government Association, the national membership body for local authorities in England and Wales, have lobbied for a 10-year rent settlement to give landlords more certainty over cashflows, and the confidence to invest in new stock.

The changes were designed to provide long-term certainty to landlords, a government source told the Financial Times, which first reported Reeves’s rent plan.

The deputy prime minister, Angela Rayner, has promised to achieve the biggest boost to affordable and social housing in a generation as part of a target of building 1.5m homes during this parliament.

Last month she outlined a series of housing policies to support this, including promises to soon provide “rent stability” and details of government investment.

In recent decades, councils have largely stopped large-scale housebuilding, with local authorities providing less than 2% of the new homes in the country for more than 40 years.

Housing associations, which now build the majority of social homes, have also put the brakes on development spending, instead investing in existing buildings after the Grenfell Tower fire and various scandals exposed the poor standards across their stock.

Last month, the Guardian revealed that housing associations started only 30,631 affordable homes in the 12 months to March 2014, down 22% on the year before.

The rent rise will mean consistently higher rates for some of the 3.8 million social rent households in England, who have been shielded from huge inflationary increases in recent years by government caps on rent rises.

However, this is also likely to add to the government’s housing benefit bill across the period as many social renters receive housing support.

Social landlords have seen policy repeatedly change under the previous government.

The Conservative-led coalition government initially set a 10-year rent settlement in 2012 that would lead to rents increasing by the rate of the retail prices index plus 0.5%. This was reversed in 2015 by the then chancellor, George Osborne, when he introduced an annual rent cut of 1% for four years in an attempt to reduce the housing benefit bill.

In 2020, the sector was given a five-year settlement of CPI plus 1%. However, the government later capped any increases at 7%, after the headline rate of inflation hit more than 11% in 2022.

According to the NHF, rents are now 15% lower in real terms than they were in 2015, while the cumulative rent cuts and caps have contributed to councils facing a £2.2bn black hole in housing budgets by 2028.

Andy Hulme, the chief executive of the housing association Hyde, said a long-term deal would play a critical role in attracting additional private sector investment to build more.

He added that the sector would need assurances that the government would stick to the plan, as it had been promised long-term settlements before and been let down.

A spokesperson from the Ministry of Housing, Communities and Local Government said: “Work is ongoing to fix the foundations of our housing and planning system and we will set out our plans at the next fiscal event.”