Funding Affordable Housing Andrew Drury

Market opportunities; S106 schemes HATC We work for: Providers - housing associations, councils, ALMOs and private developers; Enablers (LA housing and planning teams) and Agencies Market opportunities; S106 schemes

Overview End of an era: opportunity for major review Short-term issues & long term arrangements Being able to borrow from the banks Grant, interest free loan or equity stake? Who gets the benefit of future asset growth? S106 schemes

Demand

Housing Need? Homes for the Future, Shelter 2008 242,000 new homes per annum for new households for 20 years (!) 145,000 market housing c. 100,000 affordable homes needed per annu m (2/3rds social rented; 1/3rd intermediate) Plus the backlog! 500,000 over 10 years Total: c. 150,000 affordable homes per annum. 2008/9: 48,000 Which is a lot more than usual!

Supply & Demand Significant long-term under-supply House price inflation continues to be latent Realised when credit flows again Here we go again…

Real House Prices – last 35 yrs

Real House Prices – next 35 yrs? 2020 2030 2040

Forms of Subsidy

Previous subsidy models 1974 – 1989 Very low rent (so low HB) Grant from Agency (c. 90%) Loan from Agency (commercial rate) 1989-1996 Deregulation of rents Reduction in Grant (initially 75% - 43%) Higher rents “Housing Benefit will take the strain” Housing Minister Loans from banks

Previous funding models (cont) 1996 - 2001 Same model, but rent restraint urged Higher Grant rates offered (65%) 2001 - 2008 Rent control reintroduced (Rent Restructuring) Grant rates driven down to approx 35%

Grant rates since 1989 A B

“Grant” Actually ever since 1974 “Grant” has been a loan, secured by a charge on the property ….er….that’s a mortgage….. So Grant has actually been a 0% loan, repayable on the sale of the property (primarily). Asset growth accrues to HA – adds to balance sheet strength (see graph) HAs have had the benefit: Treasury wanted it back hence B

“Investment” HCA want to employ an equity share form of subsidy Instead of an interest-bearing loan (at 0%), it’s a share in the equity, but still only repayable on sale of the property. Recoverable Grant to be a % of the asset value / net receipt If subsidy is 2/3rds of costs then 2/3rds of net receipt will be recoverable Reduction in ability of HA to benefit & strengthen reserves No opportunity to under-bid the 2/3rds subsidy level More stable funding levels? But more financially risky for HAs

More risky for HAs? 25yr / 35yr / 45yr “breakeven” loans are basically deferred interest loans i.e. the debt grows over time before it falls (mini LSVT) Is this sensible in a falling market? Is this sensible in a rising market where a large slice of the increase in value returns to the HCA? Will HAs need to return to more conventional loan arrangements, offering less long term risk exposure? Meaning that subsidy needs to be 80%, not 65%

Public Funding / Mixed Funding Banks won’t lend? (Really? Who is a better bet??) Have 100% of costs covered by public funds! Affordable loan from the HCA? at commercial rates best endeavours requirement to refinance with private loan after (say) 3 years (a version of Rent to HomeBuy!) PSBR doesn’t seem so important these days! Alternatively: don’t provide subsidy as an equity loan at all – just provide conventional debt repayable over (say) 100 years (or when sold), but at a reduced interest rate, that can be financed from net rents (say 2%).

Cross-Subsidy?

2 & 3 depend on the next bubble – which will come! Cross-Subsidy 2 & 3 depend on the next bubble – which will come! A B HC was able to cut Grant rates in half after 2003/4 by getting others to provide additional subsidy (Free/cheap land from public bodies) Free/cheap land from landowners (S106 Agreements) HA staircasing surpluses But equity loans will reduce 3, and who wants to tie the subsidised programme again to private housebuilders, waiting for the next crash?

Summary Don’t think “Grant”; think “loan” Consider what type of loan we want The main issues will be: Who gets the benefit / takes the risk on property price changes over time (Treasury or HA)? Who gets the benefit of rising rent levels (i.e. the HB payments made by the Treasury? When does the loan have to be repaid? On the sale of the property? After 25 yrs? After 10 yrs? Watch out for the temptation to ride the next bubble OR Watch out for rent deregulation, and a move from capital to revenue subsidy, augmented by churn of existing affordable housing (Localis)