Memorandum by the National Housing Federation
Like many other sectors in the UK
economy housing associations are exposed to global financial markets
and the housing market downturn. Grant rates for new development
are such now (about 40 per cent) that it is impossible to build
social housing at anything but a financial loss, unless associations
cross subsidise this building.
Cross subsidy has been generated,
until recently, through sales of shared ownership and through
private borrowing. With sales down and mortgages scarce on this
type of product (even for those who would like to buy), along
with lending rates up to 100 basis points higher above LIBOR (the
rate at which banks lend to each other) than they were this time
last year, this is no longer possible.
If we are to keep social home building
going, another form of subsidy is neededwhether grant or
equity stakes or land at reduced rates. If the Government does
not act soon, then social housebuilding output will soon dry up.
Associations are still building where schemes were in the pipeline,
but will not be able to bring others forward without this extra
Overall sector viability remains
strong and sound because housing associations are well run and
well managed organisations. But it is precisely this astute financial
management that means associations will not take unwise development
risk and will not continue to develop using a financial model
unsuitable for the current economic climate.
For the avoidance of doubt, the Federation
is NOT saying that more funding is required, merely that the £8.4
billion in the NAHP for 2008-11 will not generate 157,000 social
homes. Changed circumstances demand a changed approach. Despite
the "credit crunch", the housing crisis faced by the
country has not changed and so we must find a way, in partnership,
to keep the programme on track.
1. The National Housing Federation represents
some 1,300 independent, not-for-profit housing providers in England.
Our members include housing associations, co-ops, housing trusts
and transfer organisations. They develop and manage more than
two million homes provided for affordable rent, supported housing
and low cost home ownership housing for over five million people
as well as delivering a wide range of community and regeneration
2. Housing associations provide the vast
majority of new affordable housing built in England and are at
the heart of Government's plans to significantly increase new
3. The emergence of serious problems in
the international credit markets over the past year, combined
with the slowdown in the UK residential property market as well
as global and UK economic crises, has presented housing associations
with many significant challenges and some opportunities.
4. The housing association sector's model
for developing new affordable housing is very reliant on the ability
to secure private finance at competitive rates. Housing associations
have £51 billion of existing debt and were expecting to secure
between £12 billion and £16 billion between 2008-09
and 2010-11 to finance the current National Affordable Housing
Programme (NAHP) and investment in their existing stock.
5. As problems in finance markets persist
the cost of private finance is continuing to rise and further
potential increases over LIBOR are likely from the current 75-125
basis points in the wake of the collapse of credit finance. In
more normal finance market conditions housing associations have
been regularly able to borrow at LIBOR plus 25 basis points.
6. In addition to increasing loan pricing
banks have become much more conservative and careful about the
terms and conditions of their loans.
7. There is a renewed focus on risk which
is influencing banks' lending decisions and resulting in greater
price differentiation for the sector. Lenders are looking far
more closely at housing association business plans, management
8. The return of lender confidence and stability
in the financial markets will be a prerequisite to re-establishing
a reliable and regular supply of new affordable homes.
9. Lenders have made clear that as the credit
markets open up again the banks will be looking to prioritise
loans to higher return sectors. Housing associations will be able
to secure more bank funding, but this is likely to be reflected
in the price.
10. Although the core business of the housing
association sector is social rented housing and so is to some
extent insulated from housing market fluctuations, this does not
mean that the sector is not exposed to a housing market downturn.
The nature of the housing association business model is discussed
in more detail below, but the major effect of declining house
prices is to fundamentally undermine the financial model that
underpins association's supply of new affordable homes.
11. Current public subsidy only meets around
40% of the cost of each new home developed. Housing associations
fund the other 60% of development cost through a combination of
private finance (typically providing around 50% of construction
costs) and contributions from their reserves (typically around
10% of construction costs) often referred to as "cross subsidy".
The section above has described how the availability of private
finance has reduced and the costs involved increased.
12. Associations generate cross subsidy
through income earning activities, most often Low Cost Home Ownership
or Shared Equity sales, although this has been complemented more
recently by receipts from open market property sales. Declining
prices in the home ownership market have essentially removed associations'
ability to generate cross subsidy. Like private developers, housing
associations are experiencing markedly reduced numbers of property
sales and, where sales do take place, reduced prices. Without
cross subsidy associations cannot maintain their development programmes
and in some cases their ability to maintain existing loan payments
could be compromised.
13. It is important to understand that if
an association is unable to cross subsidise the development of
new homes, and this shortfall is not made up with funds from other
sources eg grant or land, this does not just reduce the number
of homes they can provide, but fundamentally undermines their
ability to deliver any new homes at all. Even significantly scaling
back development ambitions will make no difference if the model
of financing each new property continues to depend on an element
of cross subsidy.
14. Housing associations are financially
sound and well managed social businesses. Whilst it is difficult
to characterise a whole sector the essence of associations' response
has been to ensure their ongoing financial viability.
15. Associations' Boards are well aware
that new supply is equivalent to only a fraction of the number
of existing homes and that the best way to ensure they continue
to meet their objectives as social businesses is to avoid placing
their existing homes and tenants and residents at risk.
16. Associations regularly revisit their
plans for new development and re-assess them in the light of changing
circumstances. For many the rapidly worsening financial and housing
market environment has meant deciding to mothball planned new
developments. This is particularly the case when the viability
for these developments was predicated on the use of cross subsidy
from low cost home ownership or market sales activity.
17. In most cases where development has
already started and is significantly advanced associations continue
to build out their development pipeline. However, even in these
cases they may be forced to re-visit the assumed mix between low
cost home ownership and social rented homes if market conditions
mean that it is no longer possible to achieve sales at viable
prices. Failure to achieve the sale of these units not only undermines
scheme viability, but has knock-on consequences for the viability
of associations' business plans.
18. Housing associations' ability to continue
to deliver new affordable homes is also directly affected by the
decline in output from the private house building sector. As much
as 60% of the National Affordable Housing Programme is dependent
on Section 106 planning contributions from private developers.
As developers abandon or mothball schemes in response to market
conditions so associations see the numbers of new homes they expected
to receive reduce.
19. The Government has set an ambition to
build three million new homes by 2020. The Federation supported
this ambition when first announced and continues to believe that
it is critically important that we significantly increase the
level of new home building. However the private developer sector,
which traditionally builds around 75% of new homes, has been badly
damaged by the current market downturn and the number of new privately
built homes is decreasing sharply. This does not mean that Government
was wrong in its ambition, but, in the Federation's view, it does
now mean that it is very unlikely that 3m new homes by 2020 is
20. To achieve the 2020 ambition would require
240,000 new homes to be built every year from 2016 onwards. Last
year saw around 165,000 new homes built and this year the number
produced could drop below 100,000 as the market falls. To recover
to build 240,000 new homes by 2016 seems unlikely and in fact,
building rates would need to rise even higher to make up for the
shortfall of new homes in 2008 and subsequent years.
21. Government housebuilding plans assumed
that around a third of these new homes would be affordable homes,
the majority of which would be delivered by the housing association
sector. Government expected 157,000 of these new homes to be delivered
through the 2008-09 to 2010-11 National Affordable Housing Programme
(NAHP). The Federation expects that associations will deliver
the expected number of homes in 2008, but that new supply in 2009
will fall rapidly without significant changes in the way in which
the NAHP is managed. The Federation's analysis of the changes
required is set out below.
22. If significant changes to the NAHP are
not forthcoming in the very short term the Government's new affordable
homes target will be unachievable. Numbers will hold up for a
brief period whilst associations build out those new homes already
in their development pipeline, but they cannot commit to providing
further new homes within the current financial framework. Grant
rates are currently at levels that make it impossible to build
social housing at anything but a financial loss, without the benefit
of cross subsidy from sales of shared ownership. As sales have
been badly affected by both the market down turn and the credit
crunch, with many banks not lending on these products, extra investment
from elsewhere is needed to make each new home stack up.
23. The Federation is not suggesting that
the Government needs to invest more than its allocated £8.4
billion, merely that it cannot now deliver the same number of
social homes, unless for example land was made available at no
cost. The flexibilities the Federation are proposing are likely
result to an overall increase in the level of public subsidy per
unit and are likely to mean that the overall target of 157,000
homes may not now be achievable. The choice for Government is
between almost no new homes in 2009-10 and 2010-11 or a continuing
supply of new affordable homes, but at reduced levels.
24. In considering how best to respond to
the current finance and housing market downturn it is important
to understand the current context correctly and, in particular,
they way in which it differs from previous housing market downturns.
25. The current housing market downturn
has resulted in Government and other stakeholders contemplating
direct strategic intervention in the housing market for the first
time in more than a decade. Although seeking to address similar
housing market problems, the causes of the current downturn, and
the operating context of the housing association sector, are fundamentally
different from the downturn of the early 1990s and require a different
set of policy responses.
26. In November 1992 the then Government
responded to the severe housing market downturn of the early 1990s
by announcing a special Housing Market Package (HMP) of around
£600m to be invested in housing associations buying up unsold
private sector homes. In total £590m was invested and 18,400
homes were purchased by the housing association sector.
27. Learning from the experience of the
1992 HMP will help build a policy response that avoids the weaknesses
and unintended consequences of that approach. The points below
briefly summarise the transferable lessons from the 1992 HMP programme
and summarise the main differences in the characteristics of the
housing association sector of 2008 compared to that of 1992.
Interventions of this level do not change the
28. The normal level of transactions and
current house prices combine to severely limit the impact of any
subsidised intervention in the market. Over the past two years
the average number of transactions has exceeded 1.7 million per
year at an average price of £200,000, giving an aggregate
transaction value in excess of £300 billion per year. Even
when matched with £12 billion of private borrowing the £8.4
billion National Affordable Housing Programme (NAHP) amounts to
less than 7% of this value, sufficient to fund only around 6%
of all transactions. Even if the whole of this programme was committed
in this year an intervention of this size would not impact on
the wider housing market.
29. Evidence from 1992 confirms this. Despite
the 1992 HMP, house price inflation continued to be negative until
the end of 1993 with house price growth remaining very weak until
the second half of 1996.
Standards delivered by different sectors have
30. In 1992 many properties purchased by
housing associations through the NAHP were street properties.
This was possible because standards for new housing association
properties did not differ widely from basic building regulation
31. Today homes developed by housing associations
must meet significantly higher environmental and space standards
than those required of private developers. New housing association
homes are compliant with Level 3 of the Code for Sustainable Homes
whereas those delivered by private developer for the open market
often fall below even Level 1 of the code. This means that on
average housing association homes are at least 25% more energy
efficient, reducing their level of carbon emissions and making
them cheaper to run for residents. Currently only 2% of private
developer homes meet any environmental standard.
32. The divergences not only affect environmental
standards but also room and property sizes. Housing associations
homes are on average larger than those provided by private developers.
Research for the London Mayor in 2006 concluded, "House builders
consistently produce dwellings which are 5-10m2 below published
public sector standards, for equivalent occupancy".
Housing associations' business model is different
33. From the evidence set out above it is
clear that today's housing association business model is very
different to that employed in the early 1990s. In 1992 housing
associations had almost no exposure to housing and financial market
risk, benefited from significant capital subsidy when developing
new homes and had a wider revenue subsidy framework. The current
situation is very different:
Grant rates for new homes in 1992
were 70.5%; they are now around 40%.
In 1992 social rented homes were
a viable business proposition; now they make a loss and require
subsidy from other activities.
Lower grant rates make associations
reliant on private finance and contributions from reserves to
fund the majority of development costs.
The credit crunch has affected associations:
costs of funds have increased and availability reduced, affecting
existing and future borrowing, reducing resources available to
invest and damaging scheme viability.
Associations have £51 billion
of existing debt and need an estimated £12 billion new borrowing
to deliver the Government's new affordable homes target for 2008-11.
Even small increases in the cost of funds will have a major impact
on the sector's financial health.
The need for reserve contributions
increases associations' exposure to market risk as they increasingly
rely on surpluses from shared ownership receipts and housing for
market sale to subsidise new rented homes.
The Housing Corporation 2007 global
accounts commented "it seems unlikely the sector would have
registered a surplus without the £542 million profit made
on disposal of properties".
This level of return will not be possible in a declining housing
Housing associations fund the full
cost of property management and maintenance. In the 1990s significant
revenue support was available to associations to help meet these
costs including; management and maintenance allowances, revenue
deficit grant and hostel deficit grant.
Social housing rent levels are controlled
through the government's rent restructuring regime. There was
no rent control regime in 1992.
34. For the reasons set out above it is
clear that assuming that housing associations can or should buy
up large swathes of unsold privately developed homes is unrealistic.
Housing associations themselves are also exposed to the impact
of failing housing and finance markets, many of the homes available
are not built to acceptable standards and any intervention is
unlikely to have a significant impact on the overall housing market.
35. Just as important a consideration is
that housing associations are likely to use any homes purchased
at higher occupancy rates than would be experienced in the home
ownership sector. Whereas a two bedroom flat for home ownership
might be occupied by a single individual or a couple, who might
well move on the birth of any children, a social rented allocation
would likely be for the longer term and could be for three or
even four persons. Homes suitable for these levels of occupancy
need to be built to suitable space standards which many, but not
all, private developer homes are not.
36. Similarly the higher environmental standards
required of the homes that housing associations develop themselves
deliver significantly higher fuel efficiency. This is very important
where many of the households housed by the association sector
will be on very low incomes and at high risk of fuel poverty if
housed in a poorly insulated and inefficient home.
37. The Federation's analysis is that homes
built to less than Code for Sustainable Homes Level 2 are unsuitable
for use as social rented homes. Although they may be appropriate
for intermediate or market rented purposes in the right locations.
38. Finally the experience of many associations
that bought homes in the 1992 market package was of markedly higher
maintenance costs driven by a number of different factors including,
lower build quality, use of unusual or different materials or
components eg non-standard boilers of different design to the
rest of an association's stock of homes and the higher costs associated
with having acquired stock in areas where the association had
no existing presence ie greater travel costs for maintenance staff.
39. An alternative approach would be for
private developers to consider using unsold homes as rented housing
with housing associations contracted to manage the properties
on their behalf. This would provide developers with a much needed
additional income stream. The Federation is exploring whether
it would be financially efficient for developers to hold these
unsold homes for rent in a Real Estate Investment Trust (REIT).
Maintaining New Affordable Housing SupplyGreater
Flexibility in the National Affordable Housing Programme (NAHP)
40. The Federation and its members are committed
to seeing the maximum possible number of new affordable homes
delivered. To this end we are grateful for NAHP flexibilities
already announced by the Housing Corporation and the Department
for Communities and Local Government (CLG) eg bringing funds forward
to enable housing associations to purchase unsold private developer
homes. However, as indicated above we believe significant additional
flexibility is urgently needed if the supply of new affordable
homes is to be maintained.
41. Current market conditions have removed
associations' ability to cross subsidise the cost of new developments
making the provision of new affordable housing non viable without
42. The Federation recognises that increased
average subsidy levels will threaten Governments 2008-092010-11
affordable homes target, but we believe that without additional
subsidy the vast majority of new supply will not be delivered.
We welcome recent suggestions from the Housing Corporation that
it understands the challenges facing developing associations and
is willing to engage in discussions about the amount of additional
subsidy required to keep development moving.
43. Despite this we remain concerned that
our members' experience on the ground is that the level of flexibility
on offer is insufficient to rebalance scheme viability and that
the experience in different locations is variable.
44. The Federation does not want to adopt
a prescriptive model of flexibility recognising that what is necessary
to maintain viability will differ from scheme to scheme. And we
are prepared to think widely about the different interventions
that might be adopted. There may be as much to be gained from
any additional subsidy being in the form of an equity investment
as there is from a straight increase in the amount of cash grant
invested. Similarly other schemes could be made viable by the
provision of a degree of revenue support which could be rolled
up into a loan (either interest bearing or non-interest bearing)
at a later date.
45. Flexibility should extend to a recognition
that for schemes to remain viable the mix of tenures may need
to change and that this could require converting some homes from
Low Cost Home Ownership to market or intermediate renting, rent
to mortgage or to social rented. On average rented tenures are
more subsidy dependent than partial-ownership tenures and so the
expected levels of subsidy on schemes may rise.
46. An additional mechanism for ensuring
that a continued supply of new affordable homes would be to revisit
the number of associations actively involved in developing new
homes. The Housing Corporation's Investment Partnering approach
sought to build up developer expertise and deliver efficiency
by ensuring a development programme of significant scale for each
developing association. Whilst this approach has some merits it
has meant that the financial burden of development is concentrated
on a smaller number of associations. Many associations currently
not developing are financially strong with available borrowing
capacity and reserves; this includes smaller associations who
account for a sizeable share of available sector financial capacity.
As the sector's ability to finance and cross-subsidise new developments
becomes more stretched by market conditions CLG and the Housing
Corporation should consider expanding the number and range of
associations that are involved in the development process.
47. What is most important is that the Housing
Corporation and developing associations are engaging in frank,
open and early discussions about what is necessary to preserve
scheme viability and that new models and approaches are widely
shared to maximise the benefit they provide.
48. Making more public land available to
social housing providers at discounted rates or for free could
potentially make a valuable contribution to unblocking the delivery
of new affordable homes. The Register of Surplus Public Sector
Land covers approximately 750 sites and approximately 5,000 hectares.
Even if only a small proportion of this is suitable for house-building
and is able to get planning permission, making it available at
preferential rates to housing associations could help ensure they
are able to continue building affordable homes.
49. English Partnerships and the Housing
Corporation are currently working with consultants GVA Grimley
in the South West to identify small to medium size surplus public
sector land sites in rural areas that may be suitable for development.
The 25 short-listed sites comprise around 93 hectares of land
and have the potential to deliver many hundreds of new homes.
English Partnerships is approaching landowners and it is expected
that packages of land will be made available by April 2009. The
new Homes and Communities Agency should offer this land at preferential
rates for affordable housing and prioritise the replication of
this process across all English regions and in urban as well as
50. Local authorities should also be encouraged
and incentivised to release land. Cumulatively they are banking
much more than that held by central government and its agencies
on the Register of Surplus Public Sector Land. As councils may
be reluctant to part with their land assets in a depressed market,
accelerating the roll-out of Local Housing Companies should be
considered. Currently being piloted by 14 councils, local authorities
"invest" land in the development process and investors
including housing associations provide funding of an equivalent
amount. Around 50% of new homes built by Local Housing Companies
will be for affordable sale and rent.
51. Housing associations should not be compelled
to buy up private developers' unsold stock. Very of few of these
properties meet the obligatory space and environmental standards
for socially rented homes, potentially consigning tenants to live
in cramped conditions and pay excessive energy bills. Developers'
surplus stock is also overwhelmingly 1-2 bedroom flats, whereas
it is family homes that are most needed to reduce waiting lists.
52. The National Housing Federation welcomed
the governments' announcement of a national mortgage rescue scheme
as an opportunity to help thousands of households avoid the misery
and trauma of repossession. The Government should be commended
on recognising that the correct focus on housing market intervention
should be on mitigating the social consequences for vulnerable
households and ensuring the supply of affordable homes. The National
Housing Federation and Council of Mortgage Lenders alongside their
members worked with the Government prior to the announcement in
order to develop proposals for a framework to support the delivery
53. The challenge to government now is to
ensure that the detail of the rescue model is right. A partnership
approach where all parties bring something to the table will ensure
that stakeholders can work together to ensure that government's
target of helping 6,000 households is deliverable. We hope that
the government will ensure that the national mortgage rescue scheme
is underpinned by support and a significant contribution from
lenders. Balancing supporting individual organisations and local
partnerships delivering schemes that respond to local circumstances
with ensuring consistent quality, transparency and an easily understandable
product will be critical. Housing associations are critical delivery
agents for mortgage rescue and government must ensure that it
is engaging with the sector to ensure that the final model is
one that shares exposure to risk and protects the liquidity of
Low Cost Home Ownership (LCHO)
54. Despite seeing some of the biggest falls
in houseprices since the early 1990s we are a long way from returning
to a market where home ownership is affordable. In a market where
supply will continue to outstrip demand low cost home ownership
will continue to play a critical role. During the credit crunch
demand for low cost home ownership products (LCHO) remains high
and HomeBuy agents continue to report high levels of enquiries
and applications for LCHO products. However, housing associations
are reporting signs of slow down in numbers and pace of conversion
nationally, especially for apartments in some regional town centres.
55. The credit crunch has led to a significant
reduction in the availability of mortgages for low cost home ownership,
with particular problems around the availability of 100% loan
to value mortgages (on the proportion of the property that the
shared ownership purchaser is buying) and lending on new build
properties. There is also currently poor lender appetite for rural
schemes with restricted staircasing and other schemes with restrictive
56. This is a critical issue for customers
and for housing associations as it prevents them from progressing
schemes as they are unable to provide assurances to buyers on
the long term availability of mortgage products. Shared ownership
lending can be regarded as higher risk and some lenders perceive
LCHO purchasers as subprime. This is misinformed as whilst no
doubt LCHO customer profile will be more "risky" than
many existing owner occupiers with high levels of equity and incomes,
LCHO purchasers are no riskier to lend to than first time buyers.
In fact lenders are offered strong risk protection through the
robust affordability and eligibility assessments that are in place
and the inclusion of a mortgagee protection clause (MPC) in share
ownership leases which offers lenders strong protection against
risk for lenders.
57. The government must ensure that in future
there will be a range of affordable and accessible mortgages available
to people purchasing LCHO schemes. It should be recognised that
many of the concerns expressed by lenders are a reflection of
their concerns on the risk of lending on new build properties,
especially flats, in the current climate. The government has a
critical role to play in ensuring that lenders are committed to
providing mortgages for low cost home ownership.
58. Government now owns one nationalised
bank and has significant stakes in others and should consider
using this position to guarantee a flow of mortgages to the shared
ownership sector. The Federation is clear that we are not advocating
risky lending, but where household's affordability is good providing
access to mortgage finance will allow households that would otherwise
have been unable to house themselves to find a home. This in turn
reduces pressure on the affordable and social rented sectors.
59. In addition as we have demonstrated
above the overall supply of new affordable housing is dependent
on housing associations' ability to cross subsidise the costs
of construction with receipts from low cost home ownerships sales.
Providing a flow of affordable mortgage finance for low cost home
ownership would help kick start new affordable housing development
and provide a much needed boost to the building and construction
47 See CLG statistics Live Table number 521. Back
Properties purchased from the open market rather than specially
commissioned by associations. Back
Housing Space Standards:A report by HATC Limited for the Greater
London Authority. 2006. Back
Global accounts of housing associations 2007, Housing Corporation,
March 2008. Back