Housing and the Credit Crunch - Communities and Local Government Committee Contents

Memorandum by the National Housing Federation (CRED 43)


    —  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 needed—whether 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 subsidy.

    —  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 services.

  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 housing supply.


  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 and governance.

  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 achievable.

  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 housing market

  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.[47]

Standards delivered by different sectors have greatly diverged

  30.  In 1992 many properties purchased by housing associations through the NAHP were street properties.[48] This was possible because standards for new housing association properties did not differ widely from basic building regulation standards.

  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".[49]

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".[50] This level of return will not be possible in a declining housing market.

    —  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 Supply—Greater 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 additional subsidy.

  42.  The Federation recognises that increased average subsidy levels will threaten Governments 2008-09—2010-11 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 rural areas.

  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.


Mortgage Rescue

  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 mortgage rescue.

  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 the sector.

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 covenants.

  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 industries.

November 2008

47   See CLG statistics Live Table number 521. Back

48   Properties purchased from the open market rather than specially commissioned by associations. Back

49   Housing Space Standards:A report by HATC Limited for the Greater London Authority. 2006. Back

50   Global accounts of housing associations 2007, Housing Corporation, March 2008. Back

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