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Landlords fears rent squeeze as UK enters deflation

United Kingdom for the first time in more than 50 years this week entered negative consumer price inflation, causing fears amongst landlords of a rent squeeze.

The Office for National Statistics announced yesterday that the UK has now entered deflation, with the Consumer Price Index (CPI) falling by 0.1% in the year to April.

The announcement follows a report by the Bank of England last week forecasting that CPI will remain close to zero ‘in the very near term… as the past falls in food, energy and other goods prices continue to drag on the annual rate’.  It forecasts however that CPI will rise towards the end of the year.

However, if negative or low inflation continues into September, it would hit housing associations’ rent settlements, which are based on the September rate of CPI plus 1%. At current rates, landlords would only be able to raise rents by 0.9%.

Tony Stacey, chief executive of Placeshapers, said the low rent would be a problem if building costs or staffing costs increased by much more than CPI.

He said ‘a fair number’ of Placeshapers members had increased staffing costs by between 1.5% and 2% this year to make up for previous rent freezes in the recession. He explained landlords would have to monitor the difference between rent rises and an increase in costing, and potentially reduce planned pay increases, or cut back on building work if this ‘differential inflation’ grew too big over time.

Alistair McIntosh, chief executive of consultancy Housing Quality Network, said many of his clients a year ago had been business planning on an assumption of a 2.5% increase in CPI. ‘Now it looks like the settlement will be 1% at best. That’s clearly a significant loss of cash. Factor in increases to wages, pension costs, building costs and compound it over a 35-year plan, and in some cases the plans will turn red.’

The most recent global accounts of English housing associations, published by the regulator the Homes and Communities Agency (HCA), showed landlords received £12.8bn of rent in 2013/14. A 1% lower than expected rent increase would therefore represent around £128m of rent.

A spokesperson for the HCA said: ‘Providers should be considering the impact of deflation and differential inflation when they are stress testing their business plans.’