Back to articles • Back to home page

Affordable home hiatus
Housebuilder – March 2011

The government is confident that its overhaul of the social housing system - and cuts in funding - will offer providers the flexibility to supply 150,000 new homes to 2015. But Mark Smulian has identified four problems that could lead to a downturn in new build

Possibly the last thing housebuilders need is fresh market instability following the torrid past three years for the industry. But the government's reform of social housing construction finance is set to cause just such instability.

Although there is a hope that all will be well in the future as the system settles, for this year at least there is troubling uncertainty because housing associations are unlikely to build much until they are clear where the money will come from.

The government's spending cuts slashed grants for new social housing, and it wants most development to come through a new affordable rent. In effect this shifts the bulk of financing of new build from government grants to borrowing by housing associations.

Associations will be allowed to charge a new category of rent named, rather confusingly, affordable rent and pitched at 80% of market rents in each area, so well above the level of existing "social rents" in most places. These higher rents will then, so the theory goes, create a stream of money against which associations can borrow to build more homes.

Housing experts generally agree that across the whole country this could indeed deliver the 150,000 new homes by 2015 that the government has promised. On February 14 more information on how the new programme would work emerged when the Homes and Communities Agency issued a framework inviting its registered providers to put forward proposals by May 3 for 2.2 billion of funding (out of the overall 4.5 billion) for the entire 2011-15 Spending Review period. Of this money 1.8 billion is for new build, principally through affordable rent but also affordable home ownership.

Providers will be free to propose converting some of their social rented homes to the new 80% of market levels affordable rent and to use the money raised to build homes.

The framework states that proposals must meet local priorities, and the HCA will "act as a bridge between local authorities and providers to help deliver homes in line with local needs".

Housing minister Grant Shapps says that the flexibility offered by this new system is vital. "With some 4.5 million people on social housing waiting lists, it's clear that not only do we need more homes, but we also need a complete overhaul of the system to one that offers much more flexibility than the current 'one size fits all' approach."

But the question remains whether this overhaul will work and there seem to be four problems with the plan that could lead to a downturn in new build.

problem one

Problem number one is that the new system depends on housing associations borrowing against the 80% of market level affordable rents. But since the people who will be paying those rents are the same ones who would have been eligible for conventional social (i.e. lower) rents, few could meet the affordable rent from their own resources.

They will therefore have to rely on housing benefit and that gives lenders the jitters. Will banks lend money for building to housing associations, over the normal 30-year term, when this is in effect secured only against housing benefit, which a future government might alter in ways that lenders cannot foresee? If the lenders are uncertain, they will be reluctant to lend.

Steve Trusler, strategy director of Wates Living Space, says: "Will 80% rents work? If you look at it on paper it does. But I wonder whether the funders will feel very happy because it brings in the risk over future housing benefit, so that is riskier for lenders than relying on grant."

Trusler says he fears "it may take a while for housing associations to decide how they will react, so there will be a dip before things come back, but I'm sure they will come back eventually because the demand for affordable homes is so great."

Gavin Smart, assistant director of the National Housing Federation, the housing associations' trade body, says: "If I were a housebuilder I think I'd be facing a period of considerable uncertainty, at least for the immediate future until the smoke clears. "Once that has settled down I think housebuilders will find the system recognisable, but on what scale?"

Smart says the success of financing development from affordable rents "depends on the risk appetite among housing associations, and this system introduces the risk into development calculations that future governments will tinker with housing benefit, which has not really been there before."

So which housing associations should builders talk to? According to Abi Davies, head of policy at the Chartered Institute of Housing, the answer is not necessarily the largest, but those best able to bear financial risks.

"Many of the largest associations have borrowed against pretty well everything they can borrow against, though on the other hand their size places them well financially, but builders should look for the associations best able to carry risk," she says.

Martin Nurse, chief executive of Sentinel Housing Association, has already found a lack of clarity: "Lenders are so far being very neutral over the housing benefit risk. We build 450 - 500 homes a year and hope to continue, but we have taken no decisions yet."

No homes here

The second problem arises where market rents are not much higher than social rents. The new financing mechanism works by allowing housing associations to charge rents at 80% of local market levels, rather than social levels, which are lower in most places.

But in low-value areas market and social rents are very close, so trying to charge 80% of the market rent raises very little and is unattractive to tenants. This problem is most acute in the north, but affects regeneration areas everywhere.

National Housing Federation assistant director Gavin Smart goes as far as to say: "There is a risk of there being no development at all", in these areas, while PwC's head of housing Richard Parker says: "In some areas it was grant that allowed housing development and if it is not there the risk is that you cannot build."

Eugien Jaruga, director of partnerships at Doncaster-based builder Keepmoat, says: "The idea clearly is that increased rents will replace grant. Here in the north the difference between rent levels of social and market homes is not very wide and 80% of market rents does not raise very much.

"Associations that operate nationally can spoon and ladle money around the country and may be able to make it work between regions, and I can see it might work in affluent areas, but in the north where you've depended on grant of 50-60,000 per unit they will struggle unless there is something to meet the shortfall."

Richard Kemp, chair of Plus Housing Group, and also a Liverpool councillor and a vice-chair of the Local Government Association, thinks one way out would be for associations and councils to set up joint ventures, where councils contribute land and enjoy the new homes bonus from a mix of homes for market rent, 80% rents and social rent. Associations would then borrow to develop this cheap land "so you have a sort of internal s106 where one kind of housing subsidises the other".

reduced grant

Problem three is whether associations have enough remaining grant to buy homes from builders. There is 4.5 billion in grant, of which some 2.3 billion is committed, leaving a mere 2.2 billion over four years, against a whopping 8.4 billion in the previous three years.

Housing associations had used grant to buy social homes that builders had been required to provide under section 106 planning agreements. The slump in grants means builders could be forced by existing agreements to build social housing that no housing association can then afford to buy.

Lengthy renegotiation with local authorities would be needed to undo these planning requirements, adding further unpredictability. Richard Parker, head of housing at professional services firm PwC, fears the decline in availability of grant could see builders stuck with unsaleable social housing.

"They may have had to build affordable housing under section 106 agreements and without grants you have to wonder if there will be housing associations to take those off their hands. Another issue is that having housing associations as a purchaser of affordable homes gave certainty to mixed developments by de-risking them, and will that still happen?

"The big problem for the housebuilding sector is going to be the uncertainty, this policy has not all been fully worked through."

Trusler too sees this difficulty: "There are already stories of builders who cannot build because there is no longer grant and so the section 106 demand is not viable.

"They will have to go to local authorities and say 'nothing can happen on this site unless this is renegotiated, so let's talk', but I imagine local authorities are initially going to be rather negative about that."

localism clash

Problem four comes where this reform of housing finance clashes with the government's localism reforms and the creation by communities of neighbourhood level plans.

What happens if a community, or local authority, decides that it wants new homes for the cheaper social rent, and that building homes for 80% of market rents is inappropriate and unaffordable locally?

Financial pressures might mean the affordable rent homes eventually get built, but this is hardly likely to aid market stability.

Nurse has already seen this issue raised in the Thames Valley, where Sentinel operates. "Everyone is assessing the changes very carefully before local authorities decide what is appropriate for rents and what we can carry through," he says.

"In northern Hampshire there are people on steady jobs who could not afford the 80% rent, which would be about 900 a month for a three-bedroom property, and so would need benefits."

Trusler expects that some councils will try to use new localism powers to insist that new homes are for the lower "social" because they "will not be comfortable with 80% of market rents." He adds: "It depends on how it works with localism. If their local communities say they are not happy with 80% rent and want cheaper social rents, what happens? That has got to be thought through."

Uncertainty is the overriding problem. John Slaughter, HBF head of external affairs, says the government's argument that the new system can produce 150,000 homes over four years is "perfectly respectable, but because it is not yet running we do not know how well it will work".

The government thinks this new system will deliver more homes but take less from its coffers. But whether or not it works, housebuilders face an awkward hiatus while the social housing sector sorts itself out.