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Social housing gets into bed with the private market
Contract Journal; 23 April 2008

It's a long time since anyone in the industry thought about Norman Lamont's housing market package but with chill economic winds blowing through housebuilding, memories have stirred of the emergency measures 15 years ago. By Mark Smulian

It's a long time since anyone in the industry thought about Norman Lamont's housing market package - indeed it is probably a long time since anyone thought about Norman Lamont - but with chill economic winds blowing through housebuilding, memories have stirred of the emergency measures taken by the chancellor 15 years ago to stimulate a recession-hit sector.

Back then there was a relatively safe haven for housebuilders - those that were contractors for housing associations enjoyed steady work and a near-certainty of being paid from public money.

That still happens, but 15 years of building boom have seen the affordable housing market become intimately linked with the private market because of the increased use of planning gain. In effect, the government has viewed housebuilders' profits as a bottomless pit of money from which social housing can be financed in return for grants of planning permission or access to public land that can be redeveloped.

Some 40% of all new social housing is due to come from private builders through these deals.

Simple mathematics dictates that if fewer private homes are built then there will also be fewer affordable ones, since in these deals provision of the latter is a fixed proportion of the former.

Government funding

The Housing Corporation has said its 8.4bn National Affordable Housing Programme will provide 155,000 new homes over the 2008/11 period, almost double the rate achieved in the previous two years.

Private builders are now eligible to bid against housing associations for this money to build social housing, and those that gained these funds will be able to use them for the affordable homes components of their projects.

But this source of money has never really taken off. It is now in its third year, yet housebuilders collectively received less than 200m out of the 3.3bn allocated this year.

The government has made much of its commitment to provide new affordable homes, and will be embarrassed if the 155,000 total is missed. That might just mean that Whitehall will act to help the industry.

Indeed, even though the private housing downturn has only recently begun to bite, the Home Builders Federation (HBF) has already started to lobby ministers. It would like to see money that the corporation has earmarked for new affordable homes construction made available to buy unsold homes originally built for the private market.

There are fears that without such help the housebuilding industry would shed capacity and so be in a poor position to take advantage of the market when it eventually recovers.

Lamont's package gave housing associations a mere 100 days to spend almost 600m on buying up 180,000 empty private homes - it was welcome but had a whiff of panic to it, and the industry would like things planned better now.

John Slaughter, the HBF's director of external affairs, says: "We have raised the feasibility of housing associations purchasing affordable homes from the private sector with government in the context of the credit crunch.

"The Housing Corporation is looking to see what can be done. If it could act in this challenging market to support industry capacity that would clearly be helpful.

"In the last recession we saw capacity go and when the market came back it took some time for the industry to gear up again, and we could avoid that if the corporation and housing associations can use their resources to help."

One problem with this approach is that the government has tended to use the influence its funding gives it over social housing to make it a test bed for sustainability with, for example, a requirement that new social housing must meet Level 3 of Code for Sustainable Homes. English Partnerships has decided to require larger than normal space standards in homes on its land, whether these are social housing or not.

The HBF hopes the corporation will allow some flexibility to relax these standards so that homes that do not meet them could be bought by housing associations from builders.

Affordable Housing Group

Terry Fuller, who chairs the HBF's Affordable Housing Group, hopes "they will accept homes that may not be built to housing association standards because stock will have been built, and that will have cost money".

Associations may also find it difficult to insist that builders continue to 'pepper pot' affordable homes among those for sale.

This concept has its origin in the government's belief that old-style council estates have generated social problems and that people on lower incomes who need social rented housing should live in homes mixed up among, and visually indistinguishable from, their owner-occupier neighbours.

But as Fuller points out, it would be impossible for any builder to develop odd clumps of affordable homes while waiting for the market to recover enough to make it profitable to build the adjacent private ones. "Housebuilders do not want money locked up in sites that are full of empty units," he says. "What developer will build out affordable homes in small groups when they would have to put in all the infrastructure for a site, the rest of which cannot be developed?

"The health and safety problems would be appalling if you had a large site with affordable housing scattered around it and you later had a building site at work round those people's homes."

Mr Fuller also hopes that long-term solutions will be devised, rather than the crash measures of the early 1990s.

He suggests that local authorities could resume their practice of offering mortgages to first time buyers to stimulate a market in which lenders are pulling out.

"Its been a problem because it would count against the public sector borrowing requirement, but possibly local government could take equity stakes in the homes concerned," he says.

Colin Dixon, managing director of United House, says: "The credit crunch puts a different dynamic into the market structure, and it becomes not a question of the value you hope to make, so much as the value you can sell at.

"We are certainly making sure that we are operating with some comfort in our developments."

He urges the government to use direct grants for housing association building to stimulate the market and avoid the excessive use of planning gain where that serves to slow both strands down at once.

"Housing associations offered deals in the early 1990s and used their money to stimulate the market and buy up straight from developers," Mr Dixon notes. He thinks things are worsening outside his company's core market in the capital.

"We focus on central London where there has been a little protection and not such a great problem," Mr Dixon says.

"Our three large developments in London have sold quite well and one in Woking has been half pre-sold to an investor.

"I think the problem will come with 40- to 50-unit developments in the Home Counties and I would not like to be a shires developer at the moment."

Dave Palmer, national affordable housing partnership manager at Westbury Partnerships, hopes the corporation would be willing to finance the difference if it buys homes from builders, yet still insists on its sustainability standards.

He points out that even the relatively sound intermediate shared ownership market - in which buyers buy part of their home's value and a housing association holds the remainder until the buyer chooses to increase their share - has been hit by mortgage turbulence.

Shared ownership counts towards the government's social housing target, but "there are only about five lenders still seriously involved in it, even though it has the security of a housing association standing behind it," he says.

Mortgage availability

"There is a contraction of mortgage availability, the 125% loans have gone and there are not many 100% ones around," Mr Palmer says.

"It would be good if the Housing Corporation could increase grants to support building just to keep things ticking over so the supply chain can be kept going before sites need to be mothballed.

"Achieving the government's building targets will prove very challenging."

The Housing Corporation has remained somewhat tight-lipped about these issues, even though with planning gain accounting for 40% of its programme it is dependent on builders staying in business.

A spokeswoman said: "It's too early to tell how extensive the problem is. In fact, housebuilders may be more likely to build out the affordable units in this climate, as they are guaranteed to receive agreed funding for these. The Housing Corporation is always monitoring the housing market."

Merron Simpson, policy director at the Chartered Institute of Housing, also thinks it is too early for dramatic measures, and points out that in a downturn land prices ought to fall, making some projects more viable.

"A lot of things are going on that challenge received wisdom in the housing market and its certainly true that if the private market goes down the government's target for new social housing will go with it," she says.

"There is just not enough money to go round and you tweak something somewhere it causes problems elsewhere."

History never exactly repeats itself, but 15 years ago contracts backed by social housing grants contracts saved some builders.

If planning gain collapses as a source of finance of social housing the government might just be forced to come up with more grant money for housing associations.