Capping social rent increases at 5% a year would cost councils more than £3bn in five years, new analysis has warned.

Councils support moves to keep rents low but the Local Government Association (LGA) is warning that the loss of funding would slowdown or halt essential housebuilding projects, key maintenance and improvement works and retrofitting of existing stock in pursuit of Net Zero goals and more energy efficient homes.

In response to a government consultation on the social rent cap – which suggests a 5% cap with a 3% or 7% cap also considered – the LGA, alongside the Association of Retained Council Housing (ARCH) and National Federation of ALMOs (NFA) have estimated loss of income.

It found that a 5% cap would cost £1.16bn in the first two years, rising to more than £3bn within five years and potentially rising to £45bn over the next four decades as the rent cap changes the baseline for future rent increases.

The organisations say that because the majority of council tenants (60%) receive housing benefit, “any rent cap will not benefit those directly. Instead, it will be a saving for the Department of Work and Pensions’, while councils will have to cope with the additional financial burden as a result of the lost income.”

The LGA said decisions around social rent should remain with councils to ensure a balance between improvements and affordability, and that the Government will need to provide funding to cover the loss of income.

Cllr David Renard, housing spokesperson for the LGA, said: “Councils recognise the pressures on tenants, exacerbated by the rising cost of living and inflation, and had already been considering their approach to next year’s rents to ensure that a careful balance is made between affordability for tenants and investment in the homes that they live in.

“It is right that rents are kept as low as possible but our analysis shows that the proposed rent cap will have a significant medium to long term impact on councils’ ability to build the homes our communities desperately need, which is one of the best ways to boost growth.

“With more than one million people on council house waiting lists and the retrofitting of existing housing stock key to the country’s Net Zero goals, imposing a cap without compensating councils for lost income would have a hugely detrimental impact to those efforts.”

Mike Ainsley, Chair of the National Federation of ALMOs, said: “This is a difficult decision for all councils during exceptionally hard times and no council or ALMO wants to increase rents. We already have the lowest rents in any part of the rented sector and our operating costs have been going up with every rise in the cost of materials, energy or wages.

“NFA members, in partnership with their parent councils, are doing everything possible to help residents cope with the rapidly accelerating cost of living.

“Government has to come up with an answer to this question: if rents don’t rise with inflation but no additional support is given to local authorities or their ALMOs, where do we find the investment to pay for the services our residents need? How do we keep their homes in good condition? How do we do the fabric-first retrofit that is vital to keep their energy bills down and meet our climate change responsibilities?

“A rent cap makes a great headline – but unless government also helps plug the investment gap, residents will suffer in the long term.”

Cllr Aydin Dikerdem, Chair, ARCH, said: “The principle underlying public housing is that people on low incomes should not be forced to endure poor housing.  Council tenants should have the right to enjoy safe, decent and energy efficient homes at a rent they can afford. If such rents leave a funding shortfall, government must act to plug the gap.”