Memorandum by the Housing Corporation
(CRED 61)
1. The Housing Corporation is the Government's
national affordable homes agency. Working in partnership at national,
regional and local level the Housing Corporation provides funding
for affordable homes and regulates nearly 2,000 housing associations
in England. Since 1964 we have supported the delivery of 1.27
million affordable homes in England. This has been achieved by
investing £33 billion of public money matched by over £30
billion of private investment[103]
which is the largest ever public-private partnership in this country.
This delivery has been achieved through growth of the housing
association sector that has a present value of some £70 billion.
In 2006 we introduced a mixed market of profit as well as non-profit
organisations, broadening the range of social housing providers;
a direction of travel consolidated by the opening up of our programme
this year to local authorities and ALMOs. We have achieved consistent
improvements in the value obtained from public investment whilst
at the same time driving through improvements in quality and leading
the way in environmental performance.
2. On 1 December the Housing Corporation
will transfer its investment role to the Homes and Communities
Agency and its regulatory function to the Tenant Services Authority.
The Housing Corporation has been working closely with the Government
to ameliorate the impact of the credit crunch and subsequent economic
downturn on affordable housing by maintaining momentum in housing
delivery and closely monitoring the financial health of affordable
housing providers. We have also been working to support the set
up of the Housing Corporation's successor bodies, ensuring that
they are well placed to take further steps to manage the impact
of the downturn on the market, communities and individual households.
IMPACT OF
THE CREDIT
CRUNCH ON
AFFORDABLE HOUSING
DELIVERY
3. The impact of the credit crunch and economic
downturn, as well as affecting the housing market as a whole,
creates particular challenges for the delivery of affordable housing.
4. Falling sentiment and the limited availability
of credit coupled with falls in the values of new build properties
have led to reductions in the rate of house building by private
developers. NHBC statistics show that there were 28,086 applications
to start new homes in the UK in the three months from May to July
2008—a 47% decrease on the same period a year ago (52,907).
The slow down in the rate of house building by the private sector
will have an both a direct and an indirect impact on the rate
of delivery of affordable homes.
5. This is because in recent years affordable
housing has increasingly been delivered through section 106 agreements.
In 2006-07 65% of affordable housing completions were delivered
though section 106 agreements, compared to just 20% in 1999-2000.
Increasing use of section 106 has increased the capture of land
values and the contribution that private developers have made
to affordable housing delivery. At the same time it has supported
the policy objective of creating more mixed and sustainable communities
by increasing the proportion of new affordable homes being delivered
in mixed tenure developments. The increased interdependency between
affordable housing delivery and market housing means that the
reduced rate of private house building is likely to affect affordable
housing output. In addition, falling land values means that there
is less land value to capture through section 106.
6. The reduction in liquidity and lending
activity that has arisen as a result of the credit crunch has
reduced the availability and increased the cost of borrowing to
support development. However, this has not had a significant impact
on development activity in the short term. The majority of housing
associations had two or more year's worth of borrowing facilities
already in place to draw down on prior to lending conditions deteriorating.
It is also important to bear in mind that as an asset class that
is closely regulated and with housing benefit providing security
for its revenue stream affordable housing remains an attractive
investment and low risk debtor. Even in the current climate where
finance is generally difficult to obtain the affordable housing
sector is better placed than other sectors. One housing association
has recently raised £250 million from the capital markets
through a bond issue with others likely to follow in due course.
7. A further impact on housing associations
development capacity arises from the effect that the downturn
is having on low cost homeownership sales. Many developing housing
associations business plans rely on the proceeds from sales. Since
the downturn a slowdown in sales has been reported in many areas
of the market, particularly for flats. Even where customer interest
is very strong the issue of mortgage availability is substantially
affecting sales. Many developing housing associations have responded
to the prospect of slower sales of low cost home ownership by
scaling back their development programmes. While sentiment remains
weak and lending conditions tight this is likely to continue to
act as a brake on development.
RESPONDING TO
THE CREDIT
CRUNCH
8. The Housing Corporation has already implemented
a number of measures to adapt its National Affordable Homes Programme
(NAHP) in response to the credit crunch and to maintain momentum
in delivery and support providers in this challenging operating
environment.
9. We have taken steps to speed up our bidding
process to provide further opportunities for developers to bring
forward schemes. This process of continuous market engagement
has meant that around £600 million has been allocated during
2008-09 to additional schemes.
10. Following discussions with CLG and the
Home Builders Federation we have introduced arrangements to respond
to the current market situation by taking stock developed for
market sale into the affordable sector. The downturn in the private
housing market means that there are opportunities for housing
associations to increase the level of affordable housing above
that which would normally be available via section 106 agreements
as developers look to reduce their level of stock. We have learnt
the lessons of the Housing Market Package initiative of the early
1990's and whilst these completed homes may not meet all of our
current quality standards, we have set out additional criteria
upon which we will consider, on a case by case basis, accepting
private market sector variants which in some aspects fall below
the Corporation's published minimum standards. The consideration
criteria include what stage of development the scheme is at (schemes
which are not scheduled for early completion will be extremely
unlikely to be funded); whether the mix of homes meets regional
and local housing priorities; the extent to which the opportunities
represent significant value for money improvements (at least fully
reflecting the quality foregone); and that the organisation responsible
for the long-term ownership of the properties confirms that it
has made provision to ensure that the properties will be fit for
purpose for their clients groups over the longer term. These more
flexible arrangements have been welcomed by housing associations
and developers.
11. In support of these arrangements we
have established a "national clearing house" to give
early feedback to developers and organisations who come forward
with significant offers of stock. This process should give us
more leverage in constructing deals which both consider stock
and future supply together, and take advantage of offers which
operate across regions, whilst maintaining a national picture
of the exposure and risk profile of RSLs involved in such programmes.
The clearing house also gives us a forum to discuss offers on
strategic sites and on land as well as for stock.
12. To assist development partners with
the issue of sales risk on low cost homeownership properties,
we have introduced a "rent to buy option" where homes
can be offered on an intermediate rent basis for a period, to
be followed by the offer of conversion to LCHO. This offer will
provide us with an additional way of assisting people priced out
of the market and finding it harder to get a mortgage, while also
helping providers manage the sales risk currently associated with
LCHO. We have also moved to adopt a more flexible approach—on
a case by case basis—where associations wish to convert
properties from LCHO to either social housing for rent or (for
a defined period) to intermediate rent. This should reduce the
sales risk associated with new development and help in situations
where properties were in danger of remaining unoccupied for a
period of time. We must however, ensure that we do not lose sight
of the need for mixed income, diverse communities.
13. The staging of payments under the National
Affordable Housing Programme has been made more flexible such
that 60% of grant is now paid at start on site (compared to 50%
previously).
NEXT STEPS
IN MANAGING
THE DOWNTURN
14. The Housing Corporation is also working
to implement some of the further measures, including Homebuy Direct
and the Mortgage Rescue Scheme, that were announced by the then
Housing Minister on 2 September 2008.
15. £300 million is being made available
across 2008-09 and 2009-10 to enable delivery of a shared equity
product to be bid for by developers—Homebuy Direct. Purchasers
will be eligible for an equity loan of up to 30% of the purchase
price of a new build home. The equity loan will be funded equally
by the Homes and Communities Agency and the developer. The first
round of developer bidding for HomeBuy Direct allocations closed
on 7 November 2008. The first allocations will be made in early
Decemebr 2008 by the Homes and Communities Agency.
16. A second part of the package identified
£205 million for a mortgage rescue scheme that we are currently
working with CLG to implement. The scheme will involve lenders,
local authorities, money advice agencies and RSLs working together
to assist households who are at risk of repossession which could
be avoided through the provision of a mortgage rescue product
where they would otherwise be likely to qualify for homelessness
assistance from the local authority.
17. A further measure is that £400
million will be brought forward from year 3 of the NAHP—split
between £100 million in the current year and £300 million
next year—primarily to support the delivery social housing
for rent. We will need to use this flexibility to help us achieve
2008-09 programme targets while maintaining the competitive pressure
that we need to ensure delivery in future years.
IMPACT OF
THE CREDIT
CRUNCH ON
HOUSING ASSOCIATIONS'
BUSINESS PLANS
18. The business plans and development capacity
of the affordable housing sector is dependent on borrowing from
a small group of banks and building societies that are willing
to consider providing new funding. Associations also raise a relatively
small proportion of their funding through the capital markets
but with availability in the banking market constrained, this
is likely to change.
19. As well as there being a limited availability
of credit, the cost of borrowing will impact on housing associations.
In the current conditions, the gap between base rates and LIBOR,
which more closely reflects the actual costs of debt, is wider
than usual at around 1.5%. Following the most recent cut in base
rates the LIBOR rate has fallen by a similar margin but the gap
between the two rates has not diminished. Given the measures that
the Government has taken to recapitalise major retail banks and
action by the Bank of England to reduce the cost of borrowing,
it is important that lenders ensure that the benefit of this action
is translated into improvements in the availability of funding,
both to housing associations and individual households seeking
mortgage finance.
20. As well as borrowing, many housing associations
business plans will be predicated on achieving a certain level
of asset sales, mostly low cost homeownership sales. Associations
that are not able to meet their sales targets may have to increase
their debt requirements and arrange new facilities. Our evidence
suggests that it is housing associations which are predominantly
based in the South East, and London in particular, tending to
have a greater degree of exposure to low cost homeownership sales
that are most likely to face these risks.
21. Since the beginning of the downturn
a significant number of associations have begun to remodel their
businesses, including:
(a) reviewing all uncommitted development and
in particular scaling back on shared ownership assumptions;
(b) reviewing their operating cost base;
(c) looking at sales dependence and how the exposure
can be mitigated; and
(d) ensuring treasury management strategies are
appropriate for the current situation.
22. The unfolding situation has been monitored
by the Housing Corporation through a combination of liaison at
a sector level with relevant stakeholders as well as with individual
associations. This includes:
(a) regular liaison with the Council of Mortgage
Lenders and individual banks and building societies;
(b) a quarterly market survey of developing associations;
(c) the annual round of Business Plan receipts
and review;
(d) review of annual accounts information; and
(e) ongoing engagement at a local level with
individual associations.
23. Our October quarterly market survey
shows associations debt requirement over the next 12 months is
£5.2 billion with £4.9 billion to be drawn from existing
facilities and less than 6% (£0.3 billion) required from
new loan facilities. This is predicated on achieving asset sales
(mainly shared ownership but also including RTB and other sales)
of £1.1 billion. If these asset sales are not achieved and
the scale of new development continues as forecast, then the new
debt requirement will need to rise to compensate.
FUTURE DELIVERY
OF AFFORDABLE
HOUSING
24. The combined effect of reduced planning
gains and lower surpluses from sales provides for a very challenging
context for affordable housing delivery. However, the Homes and
Communities agency has new tools available to it and will be able
to develop new approaches to maintain momentum going forward.
25. In spite of falls in the value of homes
the affordability of market housing for sale has not improved
for those who had been priced out of the market. Any affordability
gains in lower house prices have been negated by stricter lending
criteria requiring larger capital deposits and higher borrowing
costs. Long run projections of housing market affordability produced
by the National Housing Planning Advice Unit show that affordability
will continue to be an issue. The drop off in levels of house
building in the short term may also contribute to there being
a strong "bounce" in house prices at the point where
mortgage finance becomes more readily available and sentiment
returns.
26. In the meantime, the combination of
an increased level of repossessions and continuing market affordability
problems are likely to increase pressure on the existing supply
of affordable housing, both in terms of demand from households
wanting to gain access to affordable homes[104]
and in terms of lower levels of relets as current tenants are
either unable or unwilling to move out of their homes in the current
market.[105]
27. This reinforces the extent to which,
in spite of the changing economic context, we need to keep a focus
on the long term challenges. We support Ministers emphasis on
maintaining momentum of affordable housing delivery, whilst taking
steps to ameliorate the impact of the downturn on individual households.
28. Going forward it will be important that
the HCA is able to maximise the benefits of bringing the Government's
housing and regeneration programmes into a single agency. In maintaining
momentum in delivery of affordable housing through the downturn
it is important that the HCA is able to use subsidy and its investment
budgets more flexibly. For example, to buy land or subsidise land
purchases for affordable housing or to use its investment budgets
to take equity stakes in developments. The current downturn is
likely to result in some restructuring of the house building and
development industry and future delivery may depend on new forms
of public-private partnerships. There may be an increase in development
on sites where the land is in public ownership, owned by a not
for profit developer or where the HCA has made an equity investment.
29. In their strategic housing role, local
authorities will be key to managing the impact of economic downturn
on local housing markets and ensuring that they are well prepared
for a future upturn. This will include effective management of
land assets and planning to enable continued development of new
affordable homes. Working with the HCA they should be able to
explore new opportunities for public sector purchase of land and
different approaches to sharing risk. The HCA and local authorities
will need to develop new approaches, because even when the recovery
begins, the previous business models are unlikely to be able to
deliver the homes we need.
30. While there is a pressing need to continue
delivery of affordable housing it is essential not to lose sight
of important policy objectives to promote mixed and sustainable
communities. If the effect of measures to maintain social housing
output is that social landlords revert to building mono-tenure
estates then we risk storing up problems for the future. The experience
of previous efforts to maintain supply during difficult economic
conditions produced some poor quality social housing that has
resulted in concentrated deprivation. We must avoid making the
same mistakes.
31. This is why, as we have to change our
approach to delivering affordable homes, we must not back away
from wider housing policy objectives. The 2007 housing green paper
set out ambitions for improving design quality and environmental
sustainability. Sustainability and quality, as well as being legitimate
objectives in their own right, should be also seen as means through
which confidence in the market for new homes can be restored.
Policy has also placed greater emphasis to support the creation
of socially and economically sustainable mixed income communities.
Markets where development has been delivered without regard to
principles of sustainable communities, for example, some developments
of small city centre flats, are particularly vulnerable in the
current downturn.
32. During an economic downturn it is equally
important to ensure that we are providing social and affordable
housing that can support economic independence and aspirations
as well as meet housing need. The importance of these issues is
demonstrated by the current debate around measures that may be
included in the forthcoming housing reform green paper. The need
to maximise the potential benefit of affordable housing to supporting
individuals' aspirations and access to the labour market is crucial.
There is also an increasing recognition of the role that housing
can play in supporting local areas ambitions for promoting economic
development and community wellbeing.
CONCLUSIONS
33. As the Housing Corporation transfers
its investment functions to the Homes and Communities Agency and
its regulatory responsibilities to the Tenant Services Authority
these successor bodies face a very challenging operating environment.
Whilst these unprecedented economic difficulties predate the process
of institutional reforms, the additional scope and resources available
to the HCA and the greater regulatory powers of the TSA provide
the Government with agencies that will be well placed to sustain
delivery and manage the impact of the downturn. The rationale
for creating the HCA and TSA is even stronger in the current economic
climate.
34. While it is uncertain as to how long
and deep the downturn is likely to be, we do know that it is already
having a significant impact on the housing market, the house building
industry, the affordable housing sector and households' ability
to secure and maintain a decent home that meets their needs. However,
it is essential that we do not lose sight of the need over the
long term to maintain housing supply, address the affordability,
quality and sustainability of our homes and support the creation
of mixed income sustainable communities.
November 2008
103 Public money figure based on amount invested since
1964 up until 2007-08. Private money based on figures from the
Global Accounts of housing associations 2007 which showed that
debt in the sector was at £30.9 billion at the end of 2006-07. Back
104
Over the last 10 years the number of households registered on
local authority housing waiting lists in England has increased
by 64% to over 1.6 million. Back
105
Over the same period the annual number of general needs social
housing lettings have fallen by 44% to 304,934. Back
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