Announcements in the 2013 Spending Review were aimed at providing certainty for affordable housing, and to create the sense that development pipelines were guaranteed into the future. But the sector is undergoing a risky combination of policy change, and there are still structural challenges that must be addressed in order to avoid a collapse in affordable housing supply.
As our paper ‘The housing cliff’ explains, the combination of changes to subsidy, welfare reform, access to finance and the regulatory system are causing genuine concern. We feel it important to raise the understanding of the interrelationship between these policy areas, and their projected impact on build capacity post-2015.
Shift from capital to revenue subsidy
Under the Affordable Homes Programme, the shift away from capital and towards revenue subsidy has created a heavy reliance on Housing Benefit to make the development of new homes viable. In other words, a deliberate change to the funding model has created a controlled increase in the Housing Benefit bill.
Yet Housing Benefit – what we rely on to build new homes – is under the constant threat of further cuts. Indeed, there is a growing tension between DWP’s aim of reducing welfare spending vs DCLG’s objective of increasing housing supply. We think this tension must be urgently addressed in order to prevent a significant loss of new homes post-2015.
The reduction to capital subsidy also forces more funding to be sourced privately. This means that many providers will start to reach their borrowing limits the longer the current model remains in place.
Welfare reform
Changes to welfare reform in respect of both policy and implementation pose unprecedented challenges, and are undermining attempts by the sector (and government) to boost private investment. Administrative costs and increased arrears associated with the three main reforms –
under-occupation rules, the
benefits capand
direct payment of Universal Credit– are key considerations for ratings agencies and investors in determining the sector’s risk profile.
Not only are reforms undermining our ability to collect rents, but the benefits cap also limits our ability to escalate rents (at the government-set level of CPI+1% from 2015). This affects the viability of current properties, and the business case for new ones.
What’s the alternative?
The sector is generally quite innovative in how it absorbs increased costs, and this can be seen through our willingness to look to alternative funding sources. Some approaches, such as raising money in the bond markets, have been successful for many housing associations, including Moat. Other options, such as real estate investment trusts contain too many unanswered questions and remain largely untested in the sector. But changes to government policy – especially those that do not explicitly commit to inflation uprating – make these types of investments riskier, with the consequence of limiting the options available.
Compounding this issue is the Chancellor’s recent announcement on social rent policy – lowering the rent ‘escalator’ from RPI+0.5% to CPI+1% from 2015. This represents a reduction on current levels, which depending on the accuracy of forecasts, will almost certainly put pressure on yields. This creates another pressure point that undermines our push for increased private investment.
Regulation
Build capacity is greatly dependent on the quality of the sector’s regulation. Sound regulation provides assurances that risk is being properly managed throughout the sector, and it therefore generates confidence for investors. But the system must balance the necessity of effective oversight with the need to enable sensible innovation.
There is also a dichotomy between the rhetoric of ‘latent capacity’ and ‘asset sweating’ and a regulatory system which is effectively designed to prevent mistakes rather than enable development. We must change this approach in order to avoid a development reduction post-2015.
The bottom line is that all of these challenges cannot be seen – or dealt with – in isolation. The affordable housing sector is responsive to change, as illustrated by our willingness to manage additional risks and look to alternative sources of funding. But funding gaps cannot continue to appear, and the viability of alternative approaches cannot be repeatedly undermined without the consequence of a collapse in development.
Elizabeth Austerberry, Chief Executive, Moat