The 2025 Budget lands in a housing sector already under strain. Housing associations across the UK are grappling with elevated borrowing costs, sustained inflationary pressure and tenants facing persistent pressures on real incomes. The OBR’s Economic and Fiscal Outlook confirms that this is not about to change quickly. Real GDP growth is forecast to average only 1.5 per cent a year over the medium term, with productivity growth revised down again and underlying inflation stickier than previously expected. CPI is expected to remain around 3.5 per cent in 2025, easing to 2.5 per cent in 2026, before finally returning to target in 2027. Meanwhile, interest rates are expected to stay higher for longer. The OBR pointed to market expectations for Bank Rate only falling to around 3.6 per cent by late 2026, then settling close to 4 per cent by the end of the decade, although at Arlingclose we believe there are downside risks to this outlook. The OBR notes that UK gilt yields are now the highest in the G7, reflecting both higher and more persistent inflation and the UK’s elevated public debt position – while a reduction in Bank Rate may alleviate some pressure on gilt yields, the fiscal credibility premia may remain for some time.
Higher interest rates affect new funding and refinancing, while the (somewhat) elevated inflationary environment keeps construction, maintenance and staffing costs elevated. Despite some softening in energy prices, the OBR forecasts that overall operating costs for landlords will remain well above pre-pandemic norms. Local authority housing services have already seen significant cost escalation over the last five years, with net housing service spending rising almost 90 per cent between 2019–20 and 2024–25 while rents grew only 8 per cent due to government-imposed rent restrictions. Associations have felt similar pressure. The Budget does not change this fundamental backdrop, but it does offer some certainty on rents, new investment channels for development and a clearer framework within which providers can plan.
The Government restated its ambition to deliver 1.5 million homes in England during this Parliament, although this depends heavily on planning reforms and local government capacity. The Budget confirms the policy direction already set out earlier in the year: a long-term £39 billion Affordable Homes Programme, described by ministers as the largest multi-year commitment to social and affordable housing in “a generation”, and the creation of a £16 billion National Housing Bank. This new institution, launched in June 2025, aims to unlock difficult sites using concessional loans, equity and guarantees, with a goal of mobilising up to £53 billion of private finance. For housing associations, this has the potential to provide a new route to low-cost capital for regeneration, supported housing and mixed-tenure schemes, particularly where commercial lenders are cautious. If the bank achieves its purpose, more associations could bring forward projects that have stalled due to viability challenges.
Planning reform is the other cornerstone of the Government’s housing narrative. The forthcoming Planning and Infrastructure Bill is described as a major overhaul aimed at tackling delays that slow development. The Budget reiterates plans for a “default yes” for development around train stations, faster judicial review processes and streamlined environmental assessments. Ministers confirmed £48 million in additional planning capacity funding for local authorities, designed to fund 350 new planning officers and additional casework support. The OBR highlights that planning changes already implemented could lift housebuilding by up to 30 per cent by 2030. Whether or not this optimistic forecast is realised, the likely direction of travel is faster approvals and earlier starts on site, both essential conditions for associations seeking certainty over delivery timetables. Faster planning will reduce holding costs, improve cashflow, and strengthen the viability of affordable schemes that are currently marginal.
The Government is also pushing forward with new towns and growth-focused regeneration. Three new towns are expected to be brought forward in this Parliament, and significant funding has been devolved to city-region mayors to support local housing strategies. The Budget allocates £1.3 billion from the National Housing Delivery Fund to Greater Manchester, the West Midlands, Greater London and several other combined authorities. In practice, housing associations will increasingly find that decisions on capital funding are made locally, not centrally; housing associations operating in devolved areas of England will need strong relationships with mayoral administrations and will have to shape projects to fit local investment frameworks. With a significant number of local authority clients, including Mayoral Combined Authorities, this is a key area in which Arlingclose will be able to assist.
Alongside these English-specific policies, the Budget confirmed new local growth funding for the devolved nations. A total of £783 million will be available for regeneration in Scotland, Wales and Northern Ireland. In addition, the Barnett formula allocations arising from Budget decisions will provide the devolved governments with an extra £820 million in Scotland, £505 million in Wales and £370 million in Northern Ireland. Although these funds are not ring-fenced for housing, they give the devolved administrations additional headroom for their own affordable housing and capital programmes. The scale of housing need in all three devolved nations remains significant, and these allocations may allow for expanded grant programmes or additional retrofit and regeneration funding. How far that goes will depend on each administration’s priorities, especially as Scotland and Wales continue to prioritise tenant affordability and have taken a more interventionist approach to rent policy than England.
On rents, English housing associations finally have a degree of long-term certainty. The Budget affirms a return to CPI + 1 per cent rent increases from April 2026 over 10 years first announced in the 2025 Spending Review. After years of ad-hoc rent interventions, this clarity is welcome and will support investment planning and treasury management. The Government has also consulted on rent convergence, allowing larger annual increases for properties significantly below target formula rent. A final decision will be announced in January 2026. If agreed, convergence would raise rental income on some older social rent homes, helping to fund backlog repairs, building safety and new development. The Government has been clear, however, that convergence will be designed with tenant affordability in mind.
Affordability is further influenced by the Budget’s welfare measures. The most significant is the abolition of the two-child limit in Universal Credit from April 2026. According to the OBR, this will increase the incomes of around 560,000 families, at an average gain of over £5,000 per household per year. This is one of the most consequential welfare reforms in a decade and will make a substantial difference to rent affordability for larger families, particularly in social housing. The Budget also introduces a reform to the Housing Benefit earnings disregard for people in supported housing or temporary accommodation. This means residents who work more hours will keep more of what they earn without losing housing support. The change encourages work while protecting providers’ rental income and will be particularly relevant to associations delivering supported accommodation or homelessness services.
The Budget also confirms inflation-linked uprating of working-age benefits and the National Living Wage in 2026. While this will help improve tenants’ ability to meet rent payments, associations will also need to factor the higher wage environment into their own staffing budgets, especially in care, support, repairs and estates services.
One area to watch will be the Government’s planned consultation on VAT reforms for land intended for social housing development. This is a technical but important issue, as the current treatment creates irrecoverable VAT costs for certain land and preparatory works. A favourable reform could improve scheme viability and widen the scope for regeneration-led development, particularly on brownfield sites.
Taken together, the macroeconomic environment and Budget measures present a mixed picture. Subdued economic growth and potentially relatively high government bond yields imply continued financial pressure, although falling inflation will provide some relief on operating costs. The Budget does not transform the sector’s financial landscape, but it, alongside recent policy, does offer useful tools: long-term rent certainty, potential relief on land VAT, a strengthened Affordable Homes Programme, a new National Housing Bank, planning reforms that should accelerate development and welfare changes that will materially improve tenants’ incomes.
Arlingclose can assist housing associations navigate the changing financial landscape and develop regional partnerships with local authorities. Please contact us at info@arlingclose.com.
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