Social Housing: the End?

The graphic is from this week's edition of the housing trade mag, not some alarmist leftist publication. It refers to the end of public subsidy for the capital costs of building social housing. If the Tories really mean what they say, we're in uncharted waters.

Housing finance is notoriously difficult and dull, so let's strip it back to its essentials: to cover the costs of building houses you can either pay a lot upfront to cover the initial costs or borrow that money and pay the loan off by hiring it out on a periodic basis. The smaller amount of money you sink into the scheme upfront the higher the periodic charge. This is not rocket science.

Since the late 1980s, we've not had 100% capital subsidy for social housing - indeed, housing associations have bid for funding partly on the basis of how little capital monies they need to deliver any given project. Naturally, the first result of this system was to send rents - the 'periodic charge' - through the roof in the early 1990s.& high rents do tend to produce very high Housing Benefit bills.

So a decade or so ago the government introduced a system of 'target rents' which apply to both council and housing association rented stock. Basically, this system sets the rent of any given socially rented property, new or existing, in accordance with a formula based on the size and value of the property and relative local manual wage rates. So this reined in the tendency to produce low capital subsidy/high rent schemes.

The Tories have decided to rip this system up: they want rents to be capped at 80% of the local market rate for all incoming tenants, even those going into existing social housing, which has enjoyed past capital subsidy. This is laughably called 'affordable'. Public capital subsidy is being reduced to more or less nothing. The promised 150,000 new 'affordable' social tenancies are supposedly going to be financed primarily from either these higher rental streams or via loans mobilised by big housing associations on existing stock where previous capital subsidy means the debt is now largely paid off.

Wake up at the back there - I know this is boring and detailed and rather more than you perhaps want to know. So let me put this in context: this means that rents for a two bedded socially rented property in Islington would rise from £91pw to £232pw: a three bed social rented house in Cambridge would go up from £93pw to £128pw. I can only assume that the application of the word 'affordable' to such rents is some kind of sick joke.

& what's more this means that the Housing Benefit bill is going to go up, not down. The housing associations' trade body is saying that, in Hackney, you'd have to earn £54,000 to escape HB eligibility and be in a position to keep the bulk of your additional salary and be better off in work.

For all the dull, grey complexity of housing finance it really is that simple: higher rents= deeper benefit traps for wider numbers of people. No amount of huffing and puffing about a Universal Credit is going to change that.

Nor is this simply a problem for the minority of the population who live in social housing. House prices are now such that it is increasingly difficult for people to get their foot on the ladder. A new report from the Home Builders Federation puts this pretty graphically:

"...the average first time buyer (FTB) would have to save every single penny of their earnings for more than two years to have a chance of getting a foot on the housing ladder. In London it would take three years.

Even over five years, young people have to save almost half of their take home pay every month to save a deposit for a house, with some areas even higher."

So rents matter: even if you're in the 70% of people who are currently home owners your children are probably not going to be any time soon if they live in London and the SE.

Addendum: the definitive explanation of the impact of the Housing Benefit changes, found in possibly the most unlikely place on earth for sensible comment, CIF.

Red Meat for the Tunbridge Wells Conservative Club Lounge Bar

Cameron has floated plans to take away basic security of tenure from new entrants to socially rented housing. This is a big step - and an important one.

It's important but not, of course, practical in any way - he's just fired the starting gun for a hail of factually based correction from Shelter, the Churches, the Chartered Institute of Housing and every Tenants' Organisation in the land and we all know what happens when 'factually based correction' hits the fan.

If implemented, this idea would create homelessness, hugely increase routine housing management costs in social housing, increase rather than decrease the benefit traps Ian Duncan Smith is supposedly unpicking, lead to all sorts of undesirable 'hard cases' making unwelcome new housing law and - here's the rub - almost certainly increase the number of people in the private rented sector, which, not being subject to rent control, is more expensive than social housing. In short, it would cost the state more money. So it ain't going to happen.

My best guess is we'll see a familiar cycle of small pilots followed by a range of minor tinkerings with tenure law and a dribbling away of the original political motivation that reduces to some small funding programme designed to produce a few hundred, at best, specially designed new tenancies that automatically convert to shared ownership when and if the family income reaches a certain point.

No, the importance of this announcement is that it the first sign of the end of the 'glad confident morning' for this government and the harbinger of the shit-storm they are going to face once the autumn budget is announced.

This idea is really not like the 'Free School' initiative where Tory plans can be arguably claimed to be seeking to mobilise the positive aspirations of the Daily Mail reading classes. I don't actually think that's true, but the fact that Gove has undoubtedly played his hand very badly so far doesn't mean it remains anything but a positive hand in principle. The Education policy tries to reach out to so called 'aspirational' Britain.

This housing policy doesn't: it seeks to mobilise the prejudices and ignorance of the Tory heartland.It's red meat for the Tunbridge Wells Conservative Club Lounge Bar. It offers a 'tin-ear' to every other strand of opinion and, indeed, to the pesky constraints of reality. It is therefore important in a symbolic way: it ain't going to happen, but it is a way station along the path to what a contributor to one discussion over at Blood and Treasure described as 'Thatcherism without the Falklands'.

Shiny Dave looks a little less shiny this morning. That moderate veneer is starting to peel.

Housing Associations Are 'Hybrid-Public Authorities'

Big stuff in the housing world - and potentially in the world of government strategy for 'choice and the small state' as well. Housing Associations, it seems, are 'hybrid-public authorities' according to the Court of Appeal. So they have obligations under the Human Rights Act. Why? Because:

• Their significant reliance on public funding.
• Their close working relationship with local authorities in the allocation of their stock.
• Their provision of subsidised housing should be properly regarded as a governmental activity.
• They act in the public interest.
• They are regulated by a Government agency in such a way as to promote governmental policy objectives.
• They have some functions of a public nature e.g. in relation to anti-social behaviour.

Which strikes me as potentially also being true of quite a lot of other charities and so called third sector organisations in other fields, such as social care or even health and education. A world of Judicial Review against such bodies might be about to emerge. ( Perhaps with Mr. Coates leading the charge?)

At least as interesting to me, however, is the link that the Housing Associations own trade body make to a 'separate, but allied, cause for concern': are they public bodies? Because, if they are, then their borrowing will count against public sector borrowing requirements - and their relative attractiveness compared to Councils as agents of housing development will lessen to governments of any colour. The NHF say:

"...it seems likely that carrying out a “function of a public nature” for the purposes of the Human Rights Act does not necessarily give rise to reclassification as a “public body”. However, it is stressed that classification as a “public body” does not depend on any single factor, but it based on the totality of an organisation’s relationship with the state. In this context a decision such as Weaver is certainly unhelpful even if not determinative in itself."

But its getting closer by the day, you can feel it can't you?

While We're On the Question of Living Over High On The Hog

Pop over here and check out the salaries of Housing Association CEOs, including John Belcher of Anchor Trust and his £327K.

This is the Third Sector we're talking about - the supposed Saviour of public services from the dread inheritance of top down Fabian State do-goodery and provider capture.

Duncan: I'm Locked Out...

Duncan has an interesting post about the desirability of falling house prices. He's right, but I wouldn't want to argue the point on the doorstep if I was standing for election. But we do need to get more of the nation's wealth into productive enterprise and have less locked up in housing.

I posted a comment referring to the government's mortgage rescue scheme and he asked for more details. When I tried to post them I was denied entry to his comments for reasons I don't understand. So, just in case he comes by, the link to the basic details of the scheme are here, and the trade paper lays out its flaws here and here.

Housing Again

Every so often I post about housing association finance - which normally ensures even less readers than usual*. But, sod it, it's my blog and I'm going to take this opportunity to claim a 'I-told-you-so' moment.

Moody's, the Financial Ratings Agency, have released a report on the creditworthiness of the sector and especially on the five big associations they rate: Affinity Sutton Group, Circle Anglia, Sanctuary, Shaftsbury and Places for People. These are very big organisations - Places for People alone owns or manages around 60,000 homes.

The report helpfully explains how Moody's ratings work:

"..ratings are composed of two principal inputs: the association’s intrinsic credit profile (Baseline Credit Assessment or “BCA”); and the likelihood of extraordinary support from the central government in case of need."

& what do you find when you look at appendix 3? A list showing that their Baseline Credit Assessments are relatively low, but the likelihood of extraordinary support from government is 'high', thus making them very creditworthy indeed.

So the big guys are seen as very creditworthy because the government backs them. (Which does seem to rather undermine associations' fight not be considered as public bodies, but I digress...)

Nonetheless, one in five associations - not the ones mentioned above - are seen as having shaky finances. This is very largely because they have business models based on sales, not just rental income, and the sales have dried up. Moody's notes the recently introduced split of funding and regulatory functions and says the two new bodies - the Homes and Community Agency and the Tenants Services Authority - need to get their act together because,

" ...the institutional capacities to assist weaker associations now require more ‘joined-up’ policy and actions, which may be tested under what may be the worst recession in decades."

18% of the country live in housing association owned properties. Just thought you'd like to know that.

*Did you see what I did there? I used the word 'readers' in the plural without apparent irony...

Housing Finance: Holding it Together With String..

"Housing associations are set to start trading complex financial instruments with each other to sidestep spiralling bank fees", says the trade press. Golly, that sounds impressive!

I wonder why the bank fees for doing this have gone up so much? Oh yes, I remember - it's because the trade in 'complex financial instruments' proved not to reliably offset risk after all, just to accumulate it in 'difficult-to-unravel' bundles which exploded in their faces.

In reality this is a sign that the basic logic of the capital funding system for social housing is under pressure. Since the late 1980s associations have been unable to access 100% public funding for new developments. Instead they have to bid for a level of public subsidy and top this up with private loans or finance from other sources. All other things being equal, the lower the public subsidy you asked for the more likely you were to get it - and thus the more private finance you needed. This came in many varied and splendid forms with many different kinds of strings attached - and different repayment dates and interest rates. Hence the need to 'smooth' out the terms by trading with the banks. Now the banks will only do this at painfully high rates, so the associations are trying to do it amongst themselves.

It's a pretty desperate move. It may buy some time - a year? two years? who knows? - but there is no way on earth the housing association movement can replicate this function of the banking system on a permanent basis. So associations' ability to bid for low levels of public subsidy may well begin to decline, even if the regulator doesn't get the heebeejeebees about being expected to take on FSAesque type functions. So if the demand for public subsidy begins to rise the government will be facing a choice between paying more per new social housing unit created - or just building less of them...

& let's hope these 'complex financial instruments' don't go belly up the way their equivalents in the City and Wall St have done. Rescuing a single housing association is something this government knows how to do -basically it gets another association to take it over - but rescuing a chain of them linked through impenetrable and complex financial instruments is really uncharted territory...

Due to End in Tears

Crickey. The Housing Association world is in trouble, basically because of the credit crunch's effect on their sales driven business models. So what are they doing? Well, they're replacing typically fairly conventional 30 year capital financing from banks with, ahem, 'sophisticated' 5 year 'lender option borrower options' between themselves.

"Alex Pilato, chief executive of Traderisks, said the deals were so complex that associations would find it impossible to work out the true cost. ‘When the only lending that takes place takes place in a non-transparent way you are missing the opportunity to get the market moving again.’"

Rearrange the following words to discover the deeper meaning of all this: Petrol/Flames/The/Thowing/On.

Well, no, not that low cost, obviously..

The trade paper says almost half of all low cost home ownership schemes built by housing associations last year are standing empty.

"Associations have failed to shift 9,655 homes, according to a Housing Corporation survey of 215 social land­lords last month. Almost 40 per cent of the homes – with an estimated value of £640 million – have sat empty for more than six months.

The number of unsold properties is equivalent to 45 per cent of associations’ output of 21,538 low-cost homes last year. "

This is more than just a waste of a lot of homes. It might yet threaten the stability of significant numbers of associations, as I've argued before. At the very least it eats into the available cash in housing associations that might be used for buying out existing homeowners at the edge of their ability to service a mortgage through some kind of reverse shared ownership programme.

"

Closer to the Bankers

Time was Housing Associations were everybody's favourite puppy. Back in the day they were heralded as the original 'Third Way' for housing, sitting between the great, grey council estates and the serried ranks of owner occupied suburbia. Or so the rhetoric had it when I drifted into contact with them.

But that was a long, long time ago. Since the late 1980s Associations have had to raise capital monies on the markets to part fund the building new properties - or the repair and upgrading of properties they've acquired from former Council ownership. This has precipitated a cultural and managerial shift which one ex-Association manager caustically described to me thus,

"Once upon a time we wore jeans to be close to the tenants, now we wear suits to be close to the bankers."

These people will tell you, with some force, that this has transformed Associations into little more than private sector providers by a different name. I accept people should be able to stay tenants of the Council if they want to, without financial penalty or lack of hope of a repair programme, but I don't agree, not quite, with this characterisation of Associations as such. They may sometimes ape the private sector, but they can often be excellent landlords. & their original raison d'être often peeps through when they innovate in other areas – like sponsoring Credit Unions.

Increasingly, what Associations provide is not just socially rented stock but also shared ownership or low cost home ownership schemes. & that's good and proper and an advance – making it possible for people to move between tenures more easily is surely a Good Thing. In principle Associations should be well placed to help people during the recession by moving in with shared ownership schemes for people who get into mortgage arrears problems.

Should be - but probably aren't. Why? Because their capital funding regime is based on minimising risk and cost over-runs so that they can service their private loans more comfortably. It's usually less risk to build a new property than take on an existing building with unknown repair and maintenance obligations. Somehow, however, this 'scheme-by-scheme' caution has got caught up with a strategic throwing of caution to the wind, by some Associations at least. So they adopted business plans which depend on selling - in full or on a part-ownership basis -a sufficient quantity of housing to generate enough cash to fund the building or repair of other, socially rented stock. What could possibly go wrong?

Let me join the dots: when people don't buy enough houses, Association development plans become underfunded. If the building or repair contracts haven't been signed they get postponed - but if they have been signed there is a chance the Association goes belly up as they still have to make payments on the loans they borrowed to do this....

Rumours have been flying around for some time about one or more of the big Associations getting into trouble in this way. Now the housing press are reporting that the regulator is getting its' ducks in a row to organise an unknown but potentially significant number of bail outs.

Reasons for Reading the LRB

Ross McKibbin says,

""The relationship of housing to politics in both Britain and the United States is not fully understood even by those who transformed it. They don't understand it because that would require confronting awkward facts about Anglo-American democracy. Fundamentally, private housing has become a compensation for the increasingly gross maldistribution of income. Inadequate incomes mean that large numbers of people don't have access to the style of life that has always been the ultimate justification of neoliberalism and to which, reasonably enough, they now believe they have a right. What does give them access to it (in the short term) is credit. But credit has to be secured, and that's what housing does. However, it works only if house prices keep rising and people have enough income to repay debt. When prices stop going up and people can no longer repay what they owe, the financial system begins to disintegrate. This is what has happened; and it has happened because we have replaced something like social democracy with credit democracy, or universal access to credit, and credit is a thoroughly inadequate substitute because sooner or later it has to be repaid. Which means that people's incomes have to be sufficient to repay it, and in many cases they aren't. What we have put in place is a dynamically destructive cycle. The number of houses is rationed in order to force up prices; people buy houses in order to secure credit on the strength of those prices; this encourages a heady belief in perpetual profit and thus both risky lending and risky borrowing; this renders the banking system unstable; and lending both to individuals and among banks then collapses. Such a cycle involves a paradox. Since these credit democracies still hold elections, governments are forced to underwrite savers at the expense of creditors and stockholders. And if savers are also small shareholders, as many are, the price they pay for protecting their deposits is the devaluation of their shares. This is absolutely not what was originally intended. The rationing of house building has one other consequence: it means that many cannot acquire somewhere adequate to live."

The graphic is from the Economist.