Policy Exchange is a very influential think tank, so their output is worth taking seriously. But their latest report, which proposes that housing associations should be able to opt for “Free Housing Association” status as a way of boosting housing supply, is confused, confusing and dangerous.
It sets out its stall from the outset. Apparently a “byzantine system of regulatory rules and financial constraints” is preventing housing associations from building 100,000 homes a year. Grant levels are too low, although the government’s annual housing investment of £1.1 billion is too high in a time of austerity, (the fact that we can somehow afford to spend almost £25 billion a year on housing benefits is skimmed over). What’s more, 100 percent nomination rights offer no incentives to local authorities to provide free land. Also, “Local authorities can nominate difficult and antisocial tenants for housing association homes and this is a source of complaint for many associations affected.” (Cue violins).
The solution offered by Policy Exchange is simple. Housing associations should be able to opt out of most regulatory control by buying their grant at a discount. They would then be free to sell properties without consent, to set their own rents, to pick and choose which tenants they take, and to end, or re-negotiate, local authority nomination agreements.
It’s hard to know where to start with this, but before going on, let’s just check some facts. In 2012 Housing associations in England built 27,460 homes. Last year they built just 21,770, and most of these were so-called “affordable” homes which received a much lower level of grant, and which create a bigger burden on the housing benefit bill because the rents are generally much higher. Is this reduction in supply due to a sudden surge in “byzantine” regulation? No, it came about because the coalition government reduced housing investment by 60 percent in 2010, a fact barely mentioned in the report,
On disposals the report states, “The regulatory requirement for the consent to dispose and local authority nomination rights, are impeding housing associations’ ability to strategically asset manage”. Notice how this conflates two discrete issues. I have seen no evidence that the requirement to seek consent before selling a property stops housing associations managing their assets effectively. As part of the current bidding arrangements providers have to propose the sale of high value properties. As for nomination rights, the suggestion that councils would suddenly offer up lots of free land if housing associations stopped taking their nominations is nonsensical. Any sensible local authority would simply work with another, more co-operative housing provider.
Grant reform is at the centre of this report. At present, Housing Associations have £45 billion of historic grant sitting on their balance sheets and £52 billion of debt, but their stock is worth at least £300 billion. I call that a pretty good taxpayer investment, particularly as our low-rent social housing stock is saving £3 billion a year in housing benefits, a fact that is admitted in the report. Policy Exchange proposes that housing providers should be able to buy their historic grant, at a discount, and become grant free. After a lot of evasive throat clearing, the report finally settles on a discount rate of 50 percent. In other words, our historic investment of £45 billion would be flogged off to housing associations for £22.5 billion. It would then sit on their balance sheets as debt rather than grant. So tenants would be saddled with this additional debt and the capital receipt would go to a grateful Treasury, presumably to be spent elsewhere, with no benefit to housing whatsoever. In the future, grant would be replaced by time-limited government equity, which would have to be paid back.
On gearing, the report says, “Some housing associations are already running at close to their gearing constraints, so that current levels of output of 45,000 affordable homes built a year may be unsustainable.” Another section of the report states, “In order for housing associations to repay the government grant, they would either have to borrow the money or use the cash from their surplus positions. This would inevitably use some of their financial capacity.” Not half! It’s not made clear how housing associations would deal with this gearing problem if they were suddenly lumbered with massive new debts. Gearing in the sector currently stands at 87%. How could associations convert their grant to debt and avoid breaching their loan covenants?
Take Genesis, the sponsor of this report, as an example. On its balance sheet, the historic cost of its properties is £2.84 billion, partly paid for with £1.2 billion of historic grant. Its net debt is £1.3 billion. If they bought their grant at a 50 percent discount their net debt would rise by nearly 50 percent, from £1.3 billion to £1.9 billion, which would presumably smash its gearing ratios.
The report ignores the fact that lenders like the security and stability that regulation provides, and the guaranteed income streams that come with social housing rents. Take it away and they would no doubt require more security and higher interest rates because of the greater risks involved. And if only a few housing associations became “free” it could impact upon the reputation of the sector more widely. Housing associations are already viewed with suspicion across the political spectrum due to transparency and accountability issues and this could make matters much worse.
Clearly, rents would have to rise in order to make all this work, but the impact on the rising housing benefit bill is not set out in any detail, although the report helpfully states, “Detailed modelling, beyond the scope of this report, would have to be conducted to fully understand the housing benefit impacts”. Yes indeed.
It’s hard to understand what public interest argument there could be for selling off public assets at a knockdown price, when the recipients of that largesse are then free to sell off all their best stock, to put up their rents and to stop taking tenants who need homes, other than a vague notion that these free housing associations could somehow build many more homes. I don’t believe it. It’s also worth noting that the report also ignores any mention of tenant involvement in these momentous decisions.
This Policy Exchange report proposes a massive privatisation of hard-won public assets. It would transfer billions of pounds of taxpayer money into the hands of unaccountable and secretive bodies without any guarantees that taxpayers would receive any worthwhile return on their investment. I do not believe they would be able to retain any level of charitable status as “Free Housing Associations” and the inevitable outcome for these organisations would be eventual flotation and PLC status, leaving them at the mercy of predatory shareholders. Then we would have scores of New Era Estates on our hands.
It is disappointing that a few very large housing associations have put their name to this report. The alternative approach is to support and fight for the position put forward by the SHOUT campaign – a major investment in social rented housing and a long term commitment to switch housing benefit to bricks and mortar.
(First published at Inside Housing 19th November 2014)