< Back to E:gen - August 2015

The Budget 2015: A new era for social housing?

Thu 27 Aug 2015

The Conservative Government’s Budget delivered on 8 July 2015 announced a number of significant social housing reforms. The full consequences of these measures are yet unknown but the Office for Budget Responsibility has predicted that 14,000 fewer affordable homes will be built over the next five years. Many housing associations are also concerned that these changes may price lower income families out of affordable, high quality housing. There are, however, a number of housing associations who query the supposed adverse effects and may potentially see this as an opportunity to diversify their portfolios.

The pivotal policy in the Government’s package of welfare reforms is the reduction in social housing rents by 1% per annum for the next four years from April 2016. Whilst some housing associations may see the Government’s reforms as an opportunity to re-evaluate their business models and invest in alternative sectors, for example the private rental sector, many are worried that this could see fewer affordable homes built over the next five years. Housing associations fund their construction of homes and their acquisition of affordable units from national house builders (the latter referred to in this article as “new business”) by raising finance against their future rents and existing housing stock. Some housing associations have suggested that valuations attributed to future rents and existing stock may fall if social rents reduce by 1% per annum for the next four years. It should be said, however, that this is not a universally held view and that there is uncertainty across the sector as to whether valuations will or will not fall. This degree of uncertainty is only compounded by the lack of clarity about what will happen in 2020 and whether a fresh cycle of legislative rental caps will then be instituted. Against this backdrop, housing associations may find it more difficult to raise finance and budget for the future. Whilst the Office for Budget Responsibility has estimated that 14,000 fewer affordable homes will be built over the next five years, the National Housing Federation has put this figure much higher at 27,000.

This all said, social housing does ultimately generate financial returns for housing associations (as the value of the housing increases) and for this reason many housing associations operate surpluses. Looking to the future, housing associations may decide to use these surpluses to fund any “gap” that may open up between maintaining existing house building and new business levels and levels of funding. Housing associations should be careful, however, as surpluses are not unlimited. Depending on the extent of any such “gap” (if one arises at all) and whether the rental cap policy continues beyond 2020, surpluses may prove insufficient to fund any deficit. Whatever the outcome, the Government may need to provide additional funding to housing associations if affordable house building over the next five years is to meet demand.

There may also be consequences for national house builders and local authorities. At present, large scale developments almost inevitably require the provision of affordable housing to secure planning permission. If, however, housing associations are increasingly reluctant to commit to new business, whether as a result of lower valuations, involvement in other rental sectors, a combined consequence of the other Budget reforms or otherwise, house builders may struggle to dispose of the affordable elements of their schemes. As a result, house builders may need to adjust their business plans to expect delayed receipts from private sales unless the typical section 106 agreement conditions preventing private sales until a certain number of affordable units have been sold and/or occupied are relaxed. As the Government’s proposed rent reductions are reserved to social and affordable rent and will not affect shared ownership leases, it will be interesting to see if local authorities accept affordable tenure mixes that include more shared ownership units than rented units in the future.

The second limb of the Government’s social housing reforms is the so-called “Pay to Stay” policy. The Government proposes to charge full or near to full market rents to existing social tenants earning £30,000 (or more) per annum (or £40,000 (or more) per annum in London) with the additional rental income going to the Treasury. The issue here is that market rents, particularly in London and the South East, are often disproportionately high compared to incomes. The average rent for a property in London, for example, is now £1,500 per month. Many households, despite being within these income bands, will not be able to afford full or near to full market rents and may have to leave their homes and/or turn towards housing benefit. It has been commented that these adverse effects may be alleviated if the Government committed to directly reinvesting the additional rental income received into building more affordable homes. At present no such commitment has been made but the Government does intend to consult on this.

The position is also not helped by the threat contained in the Budget to remove secure tenancies. Whilst there may be a legitimate argument to promote modern day tenancy arrangements which are flexible and reflect current demands, for many people secure tenancies work and are affordable. Attention may be better directed towards possible reform of the private rental market, which could facilitate modern tenancy arrangements were it not for the often disproportionately high rents which price many people out.

Finally, one of the more controversial elements of the Government’s recent social housing reforms is the proposed extension of right to buy to housing associations. This has generated passionate debate and demands much greater discussion than given to it in this paragraph. The principal concern is that this may further reduce social housing supply as housing associations sell eligible stock at reduced value. As housing associations attempt to understand the potential consequences of this (in conjunction with the package of other reforms introduced by the Budget), a number of commentators have suggested that they may challenge this policy under Article 1, Protocol 1 of the European Convention of Human Rights for breaching the “right to peaceful enjoyment of one’s possessions”. We wait to see if this does eventuate. Extending right to buy to housing associations may not, however, be all bad. Divestment of existing stock may allow housing associations to invest in alternative sectors, such as open market rents and the private rental sector which may now seem more attractive. This could increase the supply of housing in the open rental market but some controls on rents may still be needed and/or the Government may need to directly subsidise such rents to ensure they are affordable. If the Government does go down the path of subsidising rents we may, in practice, have social housing in another guise.

Whatever gloss the Government may choose to put on the situation, the combined effect of reducing social rents, implementing a “Stay to Pay” policy and extending right to buy will have a material impact on the social housing sector. It is unclear whether the overall effect will be positive or negative but in the immediate term there are concerns that the number of affordable homes built over the next five years will fall significantly. Longer term it remains to be seen if valuations do fall as a result of reduced social rents and/or whether housing associations will be encouraged to enter new markets and positively impact the private rental sector. In truth, however, the country’s housing crisis goes far wider than the social housing sector and we build homes, whether for social rent, private rent or open market sale, far slower than demand requires. Any reduction in the pace of building new affordable homes will not help but “solving” the housing crisis may also need reform of the private rental sector and the Government to provide additional finance (whether through reinvesting additional rental income received from the “Stay to Pay” policy or otherwise) to housing associations to support house building and new business in the future.

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