Housing Associations, capital markets and housing supply Christine Whitehead LSE Housing Associations and Capital Market Finance NIESR 6 October 2015

The Housing Association Model The UK is the envy of many other countries for their Housing Association sector which has been built up through capital grants; the capacity to raise rents after 1988 to build reserves; and the large scale transfer of existing local authority stock – but also by inflation, house price growth and the capacity to be involved in implementing S106; As such over a period of nearly thirty years since private finance was introduced in 1988 they have been able to develop some of the historic benefits of LA housing while having greater freedoms to manage their assets; Three fundamentals have been their capacity to expand their capital base; their regulatory framework; and the safety net of Housing Benefit (which provides more than 50% of their income stream); Together this has increasingly given them the capacity to fund their own investment through reserves and future rent increases - following the traditional model of ‘pooling’ by which existing tenants cross-subsidising new development; The result was a system which without formal guarantee enabled associations to raise funds on the private market at interest rates comparable to those found in the Netherlands where there have always been a number of guarantees at local and national level; All these elements are now seen to be under threat from changes in government policy - although there are still enormous strengths and the industry has cried wolf too often.

A Diversified Offer Housing Associations have been the main providers of additional subsidised housing since 1980; This has included not just social rented housing, but intermediate rent, affordable home ownership through both shared ownership and partial equity products, and the management of government programmes such as Help to Buy; There are very significant differences between mixed funded associations and LSVTs – especially in terms of stock – with the associated problems to some extent addressed through mergers ; A major benefit has been geographical diversification – although this is an benefit that has not been fully realised from the tenants point of view; Increasingly, large HAs are looking to be more directly involved in building for sale and to rent at market rents – in part to cross-subsidise their mainline products; to substitute for government grant; and to support place-making and mixed tenure developments; This offer has ultimately been built on government support and regulation – so HAs have a clear responsibility to use their capacities to meet broader housing objectives.

HAs Incentives to Develop Their mission statements: provide for particular groups – mainly general needs (lower income, more vulnerable households) but also special needs; But also to fill gaps, particularly in the intermediate sector; Often seen to be government agents – so bid for opportunities (but Affordable Housing programme); Among many forward looking HAs their business strategy is to expand and diversify to reduce risks and use capacity more effectively as government support is reduced; Broader objectives of placemaking; mixed communities; partnership etc achieved only by involvement in development; HAs are non-profit (distributing) organisations - so they operate on management objectives, subject to the regulatory framework – models of such organisations tend to suggest they will be output oriented; This is reinforced by lack of market pressures towards productive efficiency. The only direct market pressure has been the capital market - that incentive now reduced by the existence of government guarantee; Can be argued that the incentives to develop have been much reduced in the last few years as a result of reduced capital grants and major policy changes.

Disincentives to Develop Vast majority of smaller HAs do not develop and many sit on development capacity (although some innovative approaches to partnerships); Development now inherently requires contributions from reserves and increased risks; Increasing incentives to merge and other organisational changes which can reduce capacity at least in short run; In many areas lack of control over allocations to either vacant or new units; Lack of control over rents; Lack of capacity to keep ownership of what will be developed if RtB goes through unchecked; Risk aversion especially with respect to public policy change – case for wait and see?; So far the case for market rented development is more about building mixed tenure developments and cross-subsid than playing a new major role; But in a different world market rented development would be part of diversification to reduce risk and to meet clear need for well-managed market rented property. Potential for some HAs to work towards complete independence at least for units that are not directly subsidised – enabling a more diversified portfolio meeting market as well as affordable requirements ?

Housing Associations and Housing Supply The government has decided to reintroduce targets- of one million homes by 2020; HAs managed to maintain relatively stable output levels around 20, ,000 pa since the GFC - but because of volatility in private sector output this has accounted for between 10% and sometimes 20% of total output; When the coalition government introduced the Affordable Homes Programme it contracted with HAs to provide 150,000 dwellings between 2011 and 2015; The government states that in fact 170,000 – now indeed 177,000 were actually generated – not all new units but more than in line with past development rates – so HAs can do what they say; On government statistics (live tables) affordable housing has grown by between 40,000 and 60,000 units per annum since the GFC – although down in the last two years; Affordable home ownership has varied around 20,000 pa (again down last year) Also management role with respect to Help to Buy ES; Clearly HAs have been more stable and more responsive to government than the market has found possible – but current capacity to respond still depends on government leadership and support; HAs have also taken on new roles notably with respect to build for sale; Developers clearly facing continued difficulties – and not prepared to be bitten again – so HA involvement massively important to any sustained increase in total levels; HAs at the forefront of initiatives to bring in international equity and development capacity in mixed tenure developments. Potential for two tier approach - with greater freedoms for well capitalised and and well run developing associations.

Conclusions: Looking forward The HA sector has been a massive success – not perfect and not productively as efficient as it should be BUT better than the alternatives – and in place; The sector not only provides the main resource for continuing the expansion of social and affordable rental housing but also is increasingly capable of playing a major role in market development; It is also contributing effectively to improving management in the private rented sector and of neighbourhoods and is core to supporting government home- ownership initiatives; HAs the experience and capacity to play a much larger role - although current government initiatives are making that less obviously desirable to HA management – and potentially to capital markets; A step change in housing output must be achieved – not only to satisfy identified needs but to meet political commitments. If anything we are seeing a reduction in the willingness to continue expand among large developers as they reach 2006/7 levels of output; Need greater development capacity, new players, product innovation and given the limited potential for additional subsidy, a better use of past government support into the future ; On these criteria HAs are the best resource immediately available.