Housing associations and new policy-induced risks

The Coalition government has well and truly disrupted the trajectory of social housing policy in England. That is partly a product of austerity, but also a product of seeking to implement different ideas on tenure and funding that have been brewing for some while. Current initiatives will no doubt open up new opportunities, but they will be accompanied by new risks. How this will play out is by no means clear. I have discussed the broad scope of the changes previously, starting here. The net impact could well be to the considerable disadvantage of vulnerable households.

The trajectory of social housing had been relatively clear for thirty years. Since the arrival of the Right to Buy in 1980 council housing has been in decline both numerically and in terms of the quality and diversity of the stock. Housing associations have, in contrast, been growing. The arrival of private finance for development in 1988 gave the expansion of the housing association a significant boost. More homes could be built for the same injection of public money, but at slightly higher rents. At the same time mass transfers of housing from the council sector to newly created housing associations were funded by private finance. A key part of this picture was that the income stream used to service the private loans was underpinned by Housing Benefit, paid direct to the landlord. This allowed a healthy market in private finance for social housing capital spending to develop. The twilight of the New Labour era witnessed shifts in the regulatory structure and the innovation of allowing private for-profit providers to register and receive public funding. The mixed economy of low cost renting was set to be given another stir. The basic parameters of the system were, however, pretty stable across several changes of government.

The role of Housing Benefit in underpinning this market was clear. Back in 2000 Peter Kemp, now of Oxford University, argued that housing benefit was so central to the pursuit of the government’s objectives for changing the tenure structure of affordable housing and reducing the reliance on public funding for capital spending that it made it very difficult to reform the Housing Benefit system itself, even though everyone acknowledged it had problems. Any violent changes to Housing Benefit would lead to private funders taking fright, and the whole strategy unravelling.

And so things stayed for a decade.

However, the world looks different now. The Coalition is making a range of substantial changes to Housing Benefit, including placing various restrictions on it. In the medium term it is looking to switch to a Universal Credit paid to the household rather than the landlord. The Coalition is also proposing to create new forms of social renting; more specifically to encourage new ‘affordable renting’ with rents set at 80% of market levels. The initial expectation was that this would increase rental income and allow landlords to use additional income to service borrowing. It was subsequently pointed out that outside the South East housing association rents are already in the vicinity of 80% of market rents so this won’t increase revenues appreciably. The new affordable rent regime is supposed to be underpinned for low income households by Housing Benefit. In that aspect of policy, at least, there is continuity with policy of the last 30 years: a continued emphasis upon subsidizing people rather than properties.

Let’s take a slight detour.

The history of the private, rather than social, rented sector in the UK over the twentieth century was one of progressive decline, with signs of recovery after 1990. Part of the explanation of that long term decline was political risk. After the initial imposition of rent regulation during the First World War the history of government intervention was a succession of moves to decontrol then recontrol rents, and to change tenants’ rights around security of tenure so as to make it, at times, harder for landlords to dispose of their assets at their own convenience. The established view in the housing policy community became that the uncertainties generated by lack of policy continuity resulted in (potential) private landlords reducing investment in the sector and putting their money elsewhere.

I have a feeling that over a very short period of time the Coalition government may have achieve a very similar effect in social housing.

The move to Universal Credit, whatever its merits in terms of the coherence of the tax/benefit system and labour market incentives, will increase the economic risk from the perspective of private lenders to housing associations. The money is no longer being paid directly to landlords. That injects uncertainty associated with tenants’ spending priorities and the possibility of arrears. In an increasingly hostile economic environment the proportion of tenants receiving benefit is likely to increase, and the risks associated with the rental income stream will increase correspondingly. It should consequently come as no surprise that credit rating agencies feel moved to sound the alarm, as Inside Housing reported yesterday that Moody’s has done.

Secondly, the Coalition has demonstrated that it is quite willing to destabilise the Housing Benefit system and make changes that many thought politically too risky. Whether that is out of necessity because of the state of the public finances or a product of ideology is beside the point. The guidance associated with the affordable rent regime gives very limited assurance that the Housing Benefit regime will not be changes – for which, read ‘cut’ – again.

What is the consequence of that? Well it will increase the risk to housing providers seeking to use the new regime to assist low-income households who depend on Housing Benefit to meet the (higher) affordable rents. It would therefore be rational for housing providers thinking of engaging with affordable renting, of the type proposed by the Coalition, to target better off households who won’t be reliant on Housing Benefit. Lo and behold, as Inside Housing noted a couple of weeks ago, that is precisely what some housing associations are considering.

So the Coalition seems to be heading for a problem of its own making. The very willingness to take radical action has dramatically increased the political risk in the housing system. The Coalition has also acquired a reputation – whether justified or not is irrelevant – for doing things that it had not announced it was planning to do or, more egregiously, appeared to have explicitly ruled out doing. There appears no obligation to fulfil pledges that have been given, if it is expedient not to. In this sense, some see it as fundamentally untrustworthy. That just cranks up the risk further.

As a consequence, private lenders are likely to be more reluctant to lend to housing providers because they can’t see the secure income streams they are used to. Or they will be demanding significantly enhanced risk premiums on future lending. Similar, housing providers will have less confidence that they can plan with any certainty regarding the availability of state assistance to low-income households. So a pragmatic strategy to manage economic risk would be to shift away from housing benefit-dependent households. Net result: less social renting; higher rents or thinner margins; and less rented housing available to those who most need it.

I find it hard to believe this is intentional. It may be the opposite of what is intended. That doesn’t stop it being a potentially significant problem.

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