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

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.


  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.


  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).


  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.


  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.


  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.


  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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