As safe as houses? The consequences of private debt entering the social housing sector

Security of housing is fundamental to our wellbeing as we get older.  Many older people living in social housing expect to be able to remain in their homes as long as they wish. However, the current tough financial climate has resulted in two challenges to this assumption. The first is the new cap on housing benefits and the second, less reported, is the change to the way housing associations are funded.

The Sunday Times reports today that since the financial crisis the subsidy for new social housing has been cut by 63% under the government’s comprehensive spending review two years ago. Bank funding has been harder to get. The welfare reform bill is likely to end the direct payment of rents from the government to landlords making rent payment the responsibility of tenants and thereby less secure (which itself makes Bank funding more difficult to obtain).

The results are that rents for new affordable housing are likely to rise – today’s Sunday Times thinks by as much as 80% of the market rate in some areas – and housing associations will have to take on more private debt. Some are thinking of considering radical ways to raise cash such as sale and leaseback  or floating parts of their portfolios on the stock exchange.  Other possibilities are partnerships with private equity investors or insurance companies.

It is at this point that the spectre of Southern Cross raises its ugly head in most people’s minds. There there was a catastrophic collide between the commercial expectations of the property investors with the care provision – resulting in the collapse of the group. 

However, a quick scan through last year’s report by PWC and London & Quadrant, “Hard Times, New Choices“ leaves you in no doubt as to the scale of the challenge currently being faced by the housing associations, tasked to deliver 150,000 new homes by 2015 with ever dwindling government subsidies. 

Raising private finance is not new territory for housing associations who over the past 30 years have raised £60 billion of private investment on top of the £34 billion received from the government, making the sector almost as big as the private finance initiative, the controversial scheme that uses private money to build social infrastructure such as schools and hospitals. Housing associations have become increasingly sophisticated players in the property market, courted by the big City legal firms.

This is definitely a new chapter for the housing associations and shows what a long way we have come in social policy terms since the notion of “council houses”. David Montague, chief executive of London & Quadrant says that housing associations would need to be run on a higher debt, higher risk basis in future. He dismisses the idea that the industry is torn between its social purpose and the need to be commercial: “it’s our responsibility to choose not one but both”.

That balancing act is going to be very difficult to pull off and at stake is people’s homes. Risk to the housing associations will translate at some level into risk for their tenants. But without further government money, there are few choices, As Keith Exford, chairman of G15 which represents the 15 biggest London housing associations puts it : ” There’s an inconvenient truth in all this – if you want a subsidised housing product, you have to subsidise it”

To read the Housing & Quadrant and PWC report, go to http://www.lqgroup.org.uk/_assets/files/Hard-times-more-choices.pdf