1. Funding Affordable Housing
Andrew Drury

2. 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

3. 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

4. Demand

5. 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!

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

7. Real House Prices – last 35 yrs

8. Real House Prices – next 35 yrs?
2020
2030
2040

9. Forms of Subsidy

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

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

12. Grant rates since 1989 A B

13. “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

14. “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

15. 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%

16. 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%).

17. Cross-Subsidy?

18. 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?

19. 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)