Will raising social housing rent work?

As the chancellor George Osborne stood up in the House of Commons last week to unveil the biggest peacetime cuts to public spending for 70 years, Countryside Properties was pitching to a council for an estate regeneration scheme.

As details of Osborne’s speech emerged, Countryside rapidly rethought its proposal. Michael Hill, one of the housebuilder’s directors, says its pitch was rewritten to exclude any money for affordable housing. “We had to work out how we could eliminate grant from the scheme. It meant restructuring and reprofiling it, and some community benefits couldn’t be afforded,” he says.

And no wonder. Because for housing at least, there’s no money left. What was trailed to journalists as a 50% reduction in spending actually turned out (as Building predicted on Tuesday) to be a 75% cut in capital spending by the communities department.

It seems the chancellor’s decisions represent the end of social housing procurement as we have known it. Developments under way will be completed, but all new ones will be based on a low-grant model. And forget about the use of public money to support private schemes for sale - those days are over.

These huge cuts come as the housing market is stumbling again: consumer confidence is low and mortgage approvals have slipped back to where they were in March 2009. These factors led Bellway Homes, Britain’s fourth biggest housebuilder, to reduce its sales forecast last week, despite the fact that 128,000 units were completed in the past year - the lowest total ever recorded.

Osborne’s gamble is that the shortfall in public funding will be offset by the tenants: housing associations will be allowed to put up rents to 80% of market rates to raise more money for development. The chancellor estimates this will fund 150,000 social housing units over the next four years. The question is: will it?

What does a pound buy these days?
The flexibility to raise rents as a way of generating development capital is something housing associations had been quietly campaigning for. Labour was ferociously opposed, and brought in regulations to force associations to set rents at the same level as councils. According to a report by the London & Quadrant housing association and Pricewaterhouse Coopers, raising social tenants’ rent by one pound a week generates £432m over a year. What’s more, assuming banks would like a yield of 6% on loans, this extra cash enables associations and councils to borrow up to £4bn a year on top of that.

With social housing rents in London standing at less than half the market rate, there is clearly the potential to raise a lot of money. Brendan Sarsfield, chief executive
of London-based association Family Mosaic, says: “We’ve got to be positive. As a developer it’s a great solution - it turns a capital subsidy problem into a revenue one.”

A number of associations have been talking to the government and London mayor Boris Johnson for some time about what are called “intermediate rental” products funded with low or zero grant. This is housing minister Grant Shapps’ justification for the move. “If you want to build a million homes to take the waiting list down, at traditional grant rates that costs £50bn. Clearly that money isn’t there. There has to be another way,” he says.

Problems, problems
But it’s not that simple. This model depends on associations or developers being willing and able to borrow more. Sarsfield says: “There are risks for lenders. While the reduction in security of tenure [under the new “affordable rents” model] might improve things a little, higher gearing for associations increases their risk.” Nothing on this scale has been tried before. A Homes and Communities Agency source described the 150,000 target as “pretty heroic”.

Countryside’s Hill says quick calculations suggest it may be achievable, but it is a step into the unknown. “I don’t think people are taking the number particularly seriously. It’s the cuts they’re taking seriously,” he says.

The problems multiply outside the South-east. In many parts of England, private renters do not pay much more than social tenants, so charging 80% of market rates will not yield much, yet these organisations still face a huge reduction in their subsidy. Derek Long, northern chair of the National Housing Federation, says: “In some places, sticking up rents won’t work. Poorer places will be left in stasis. They just can’t build without a big slug of grant.”

The issue is exacerbated by other measures in the spending review. In the past two years, subsidies for new-build private housing, such as HomeBuy Direct and Kickstart, have propped up activity in marginal markets. These programmes, which would have financed 20,000 sales if they had run until 2012, have been axed. And a series of funding streams for regeneration, worth more than £7bn over the past three years, have been cut to just under £1bn for the next four years.

This makes the housing market outside the capital even tougher. Tony Pidgley, the Berkeley chairman who is planning to build rental homes in London and the South-east under the new model, says: “There’s going to be a growing North-South divide. It’s the first time in my career I’ve had people offering me land for nothing.”

Another concern is estate redevelopment, which has been a large part of the workload of builders such as Berkeley and Countryside, and the big housing associations. These schemes often require demolition. Tenants are allowed a veto, and are likely to exercise it rather than take on a much more expensive tenancy agreement.

Hill says: “If tenants aren’t treated as special cases [under estate redevelopment] it will stop schemes going forward. You’d be asking turkeys to vote for Christmas.”

The NHBC says the spending review represents a “significant threat” to any housebuilding recovery. And that’s without tackling whether social housing tenants can afford big rent rises. For the industry it’s a huge gamble. As Osborne says: “There is no plan B.”

It could have been worse …

A 75% cut in the capital budget of the communities department sounds like bad news, but Building understands that the original proposals were even harsher. Separate sources have told us that two weeks before the spending review, the plan was to cut the affordable housing budget entirely. Only money for legally contracted commitments would have been found. To fight back, the communities department offered senior government figures a deal: give us a little money and we’ll push through a fundamental reform of social housing. The reforms were inspired by a report, Hard Times, produced by housing association London & Quadrant with Pricewaterhouse Coopers, which described how a new model might work. Only in the final days before the review was the deal agreed.

That “50%” cut explained

George Osborne called the settlement a 50% cut in social housing funding - from £8.4bn to £4.4bn. However, the detail of the spending review showed that total capital spend will fall by 74% over the next four years. This disparity comes from Osborne only considering narrow “social” housing funding in his top line. But the chancellor has also cancelled private housing subsidy schemes and cut regeneration funding. A host of programmes worth £7bn between 2008 and 2011 have gone. Instead eco-towns, Thames Gateway regeneration, housing market renewal, growth areas, regional development agencies will now have to struggle for a £900m slice of the new regional growth fund. That’s an 87% drop. Regeneration, which was such a buzzword under Labour, was not mentioned once in the 105 pages of the spending review.