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01.12.12

The ongoing roles of councils providing or enabling the provision of affordable housing

Source: Public Sector Executive Nov/Dec 2012

“It feels like the 1960s again to those of us who can remember the scandals of the private rented sector and lack of decent affordable housing.”

Despite Government statements that it will be the house building industry that will boost the economy, new build starts have slowed down over the last 12 months, with the worst decline in London, and there being no signs of an immediate recovery in the short to medium term.

Waiting lists for both council housing and housing association property are growing, yet the Government is incentivising schemes that promote home ownership and private renting.

We are witnessing a rapid restructuring of the social housing sector as sources of finance shift from grant funding to commercial investment bringing with it both opportunities and risks. The objective of this article is to try and explain why and how these changes are taking place, and what the key issues are for social housing providers.

The Government’s housing strategy is heavily influenced by concerns to reduce the welfare benefits bill. Hence it is looking to market solutions to meet housing need through introducing market level rents, providing a range of home ownership options and reinvigorating the private rented sector.

These are at the expense of the social rented sector and to the detriment of those on benefits and low incomes who can’t afford higher housing costs.

Both stock holding councils and housing associations find themselves in the sticky situation of having to navigate their way through the current economic context and consequences of Government reforms in order to generate funding to increase housing supply. This is proving to be a very complex and challenging undertaking and progress is slow.

In simple terms, grant funding for new housing schemes is now tied in with affordable rents, at up to 80% market value, and fixed term tenancies. Stock holding councils and housing associations are expected to make up the deficit from increased rental income and ‘additional’ borrowing capacity from private investments.

Integral to this process has been the reform of the housing revenue account in April 2012, which enabled 171 stock holding local authorities in England to become self-financing; a measure started by the previous Labour Government and implemented through the Coalition Government’s Localism Act 2011. This reform places local authorities on the same footing as housing associations, in that they are allowed to retain rent income and borrow relatively cheaply from the Public Works Loan Board on the strength of their balance sheets in order to develop longer term business plans.

In return however, councils have taken on £29.2bn of historic debt and find themselves subject to government diktats such as caps on borrowing, increasing the right to buy discount, and changes to rent formulas, all of which can impact negatively on the business plan assumptions.

Moreover, as self-financing has increased levels of public sector borrowing more than expected, there is anticipation that the Government’s autumn budget will bring further restrictions creating yet more uncertainties.

Every council settlement was different, with some councils better off than others allowing them to develop asset management strategies for repairing and improving existing stock, invest in new build, make service improvements or pay off debt, all depending upon local priorities. Councils hardest hit are those still to complete decent homes works and with limited head room to borrow. Hence we have seen some councils bring Arms Length Management Organisations back in-house and nonstatutory services being cut, such as programmes to support vulnerable people, presented as efficiency measures. There are also councils up and down the country drawing up plans to demolish rented stock where it is simply not economic to make any further investments.

Housing associations too are feeling the pinch. Grant rates for new housing have been reduced to 25% rather than the previous 60%, leading to pressure on balance sheets. In addition, cashflow problems are making it difficult to acquire sites. The sector has previously been able to borrow at preferential interest rates from banks and building societies in order to fund new build and acquire land, but due to the economic climate, housing associations running out of equity against which to secure loans for development are exploring new taxefficient forms of funding with the aim of attracting institutional investors and pension funds. These include bond issues, and setting up Real Investment Housing Trusts (REITS) where once established investors will trade shares and housing associations manage the stock.

Forecasts indicate that Government targets of 80,000 affordable new homes to be built by 2015 are unlikely to be achieved. A combination of factors including delays in signing contracts by housing associations for the new grant funding; grants not being confirmed until building on site starts; difficulties in raising finance and securing land because of competition, together with uncertainty about whether any grant funding will be available post-2015 when the current round of funding comes to an end, have all contributed to the slowdown of the production of affordable housing.

Overlaying this situation are anxieties about the likely wide-ranging impact of the welfare benefit reforms on future rental income. In response, with the aim of increasing investor confidence, the Government in September 2012 launched a series of measures including loan guarantees to help reduce the cost of borrowing and increase housing supply. There was also additional funding allocated to the development of both affordable housing and private rented homes.

Not all councils are landlords but all councils have broader strategic housing functions to meet housing needs in their area through working in partnership with others. Other Government measures to get Britain building again and kickstart stalled schemes include a series of planning reforms designed to release public sector land for development, provide financial incentives to communities to agree to new developments and to allow developers to renegotiate schemes where they believe that inclusion of affordable housing makes any housing schemes unviable (known as S106).

Fears are that these renegotiations will bring additional delay to the house building programme and hasten the demise of S106 housing.

The numbers of affordable housing being built has already been adversely affected by the Community Infrastructure Levy (CIL), which is paid to councils by developers to contribute to infrastructure costs of new developments.

Across the country deals are being struck to reduce the amount of levy paid by developers to councils through lowering affordable housing targets to make schemes more financially attractive. In other words, some councils are accepting cash in lieu of affordable housing, with the receipt generated not necessarily being ploughed back into generating new housing supply – resulting in a loss of an overall housing resource.

The Government is backing the findings of the Montague Report, which has recommended that institutional investment be encouraged and local housing strategies revised to give private renting greater priority. Councils are therefore being given 12 months to April 2013 to develop a housing strategy, if there is not one already in place, which specifies housing targets and tenure mix. The objective is to encourage developers to include larger scale private rented schemes in the plans so encouraging institutional investment.

A concern is that some councils will do nothing, wary of local community opposition to any new developments, so continuing the uncertainty for developers rather than proactively brokering partnership schemes. In contrast, some housing associations are developing schemes in partnership with developers and financial institutions that will take them into private renting themselves and/or provide management services. The policy intention is that this will lead to an improvement of standards in the sector and provide more housing options for people on benefits in a sector which has not tended to entertain people on benefits.

The biggest risks to increasing housing supply are the Government’s welfare reforms, including housing benefit, reducing the amount of money people on low incomes have in their pockets to spend on household costs. Housing benefit caps following on from the redefinition of local housing allowances have already resulted in claimants either having to make up the difference between what housing benefit covers and the rent being charged, or move to less expensive areas.

Despite councils being provided with additional Discretionary Housing Benefit to keep people in their homes evictions across the private and social rented sectors are increasing. Homelessness too and stays in bed and breakfast beyond the six-week recommended period are also on the increase.

There are reports of councils placing homeless families in properties awaiting demolition and trying to move them out of higher into lower-priced areas. Investigative reporting in the media is highlighting examples of people living in unsuitable housing, such as sheds and garages, as well as increased levels of multi-occupation in both the private and social rented sectors. It feels like the 1960s again to those of us who can remember the scandals of the private rented sector and lack of decent affordable housing. And there are more benefit cuts are to come in 2013 including the bedroom tax for under occupying working age households in rented accommodation.

As a consequence of these reforms we are likely to see a restructuring of the social housing sector on a huge scale leading to both a decrease in stock numbers and emergence of new market orientated products. For housing associations registered as charities this also raises all kinds of status, ethical and philosophical issues. From a council perspective there are pressures to work with partners to improve housing supply and ensure that colleagues from across the authority work together to maximise housing supply in their area. Decision making over the distribution of resources needs to be open and transparent. There has to be a willingness to pull together as times are not going to get any easier.

Acknowledgements Thank you to Abigail Davis, assistant director of policy & practice at the Chartered Institute of Housing, and the housing professionals on LinkedIn who helped with this article.

Tell us what you think – have your say below, or email us directly at opinion@publicsectorexecutive.com

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