Housing associations and their tenants have been warned that unaffordable rents could hurt their tenants and damage their own finances, as two thirds of social landlords plan to raise rents ahead of inflation,

Housing associations and their tenants have been warned that unaffordable rents could hurt their tenants and damage their own finances, as two thirds of social landlords plan to raise rents ahead of inflation,

A new report from the Scottish Housing Regulator (SHR) has been described as the most comprehensive risk assessment ever carried out on the sector.

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It finds average rents rose last year by approximately 5.9%, well ahead of inflation. This is a dramatic change after previous years saw rent rises broadly in line with or below inflation.

Ian Brennan, SHRs Director of Regulation said most Residential social landlords (RSLs) were coping with the current environment, but there could be problems ahead, especially for those planning rent increases well above inflation. "We are asking RSLs with business plans which rely upon above inflation rent increases to consider whether this is sustainable given the financial challenges tenants are facing," he said.

The sector finance report says that over the five years to the end of 2012/13, the increase in average rent charged was broadly in line with inflation as measured by the Retail Price Index (RPI). However the last two years have seen above inflation price increases, and in the year to March 31, 2013 average rents increased by almost 6% over a period where inflation rose 3.2%.

Against this background 64% of Residential Social Landlords (RSLs) are planning rent rises of at least one 1% above inflation every year for the next five years, the regulator says.

Despite efforts by many housing associations to prioritise affordability, the SHRs finance report also claims just 20% of RSLs expect only inflation level rent rises over the next five years.

The Regulator's role includes the wellbeing of both landlords and social housing tenants, and is concerned about the risks to both from rapidly rising rents.

Increasing housing arrears serve no-one, SHR insiders warn.

Figures in the report show 42.7% of tenants on full housing benefit while another 16.9% receive housing benefit payments for at least part of their rent.

But welfare reforms including the benefits cap agreed this week, the bedroom tax and the imminent new benefit Universal Credit could make it increasingly hard for these tenants to cope with finding more money to pay for their housing. Meanwhile the 40% of tenants who pay all of their rent from their own resources are likely to be little better off, given the prevalence of pay freezes and poor wage inflation.

If rents do not remain affordable for tenants, RSLs could struggle themselves, especially if repaying loans for new development is dependent on higher than inflation rent increases. The SHR believes even those which have budgeted not to increase rents ahead of inflation are sometimes working from unrealistically high estimates of inflation in the years to come.

The report says; "Hitherto the risk to both RSLs and tenants has been mitigated by the provision of housing benefit - either full or partial - for those who were unable to pay their rent.

"It is less certain in the future that the welfare budget will provide the same level of support both for tenants and RSLs.

"It is important therefore that RSLs do everything possible to ensure that rents remain affordable for tenants."

The SHR's Chief Executive Michael Cameron has previously warned that some landlords have scope for above inflation rises due to historically lower rents, but says the rest is basic maths: "There is simple arithmetic in play here: no matter the starting point, and assuming tenants incomes don't increase above inflation, rents that go up in this way will become less affordable."

The report also shows that the amount spent on buying and building by RSLs has fallen as grant funding on offer for new housing has been slashed, and borrowing by landlords peaked in 2012.

Now a landmark has been reached in that for the first time since records have been kept the number of houses owned and managed by RSLs has fallen, albeit marginally. While new houses are still being built, they are not enough to compensate for sold or demolished stock.

For tenants, high rent increases are plainly a problem. Unlike a mortgage, anyone taking on a social tenancy is almost guaranteed that their housing costs will be going up. RSLs have confirmed that arrears are going up because of welfare reform and that trend is expected to continue.

Maureen Watson, Head of Policy at the Scottish Federation of Housing Associations, said: "Scotland's housing associations and co-operatives are committed to ensuring that rents remain affordable to low income households. However, welfare reforms such as the 'bedroom tax' and benefit sanctions are making the operating environment for tenants and housing associations increasingly challenging."