The Numbers Game
Increasing housing supply and
funding in hard times
‘The Numbers Game’ is the fourth in the joint PricewaterhouseCoopers and L&Q
‘Hard Times’ series of publications.
The series explores how housing associations can best respond to the new age of
austerity in public expenditure as housing policy evolves.
This fourth report examines how to boost affordable housing supply in a changing
housing market. It seeks new ways to develop a better functioning housing sector,
more strategically shaped by national and local government, and with a range of
effective funding mechanisms to try to drive new home volumes.
At its heart is the concept of social equity: both a fairer housing market that offers
more people hope of getting the homes they need at a price they can reasonably
afford, and a specific funding mechanism – the Social Equity Fund – which we believe
can help make that happen.
The paper was developed by the following group of contributors:
Sir Steve Bullock, Mayor, London Borough of Lewisham
Helen Collins, housing consultant, former President, Chartered Insititute of Housing
Andrew Cunningham, Chief Executive, Grainger plc
Richard Donnell, Director of Research, Hometrack
Ian Graham, Partner, Trowers & Hamlins LLP
Robert Grundy, Director, Savills
Grainia Long, Chief Executive, Chartered Institute of Housing
David Montague, Chief Executive, L&Q Group
Richard Parker, Partner, PwC
John Webber, Assistant Director, PwC
Piers Williamson, Chief Executive, The Housing Finance Corporation
It was written and edited by Simon Graham, Blue Sky.
We would also like to acknowledge and thank the numerous senior figures from the
housing world – in representative bodies, local authorities, government bodies, and
housing associations - who commented on various drafts. Their input was extremely
valuable in finalising our thoughts.
Contents
Introduction4
Executive summary
5
Understanding the challenge
7
A new financial model
11
Scaling up and investing new capacity effectively
18
Conclusion21
3
Introduction
Can we use the extraordinarily difficult housing and
economic context we face to fashion a better and
more sustainable housing market for the future?
Can a properly functioning sector be developed that
supports economic growth, social cohesion and
meets the needs of local communities?
In this paper we bring home the stark reality of
England’s housing challenge. The extraordinary
supply challenge, the equally imposing funding
challenge, and the ongoing land and planning
challenge.
The government’s latest package of measures to
kick-start new housebuilding marks an important
step in tackling what we regard as the ‘golden
triangle’ of issues which will make the difference
between whether enough new homes get built or not
– the availability of funding, sufficient land supply
with planning permission, and rent and asset
management flexibilities for affordable housing
providers to support new capacity generation.
That package is very welcome. But it is inevitably
limited in scope, given the government’s public
spending constraints. More has to be done, the
solutions need to be long-term, and the third point
of the triangle (rent and asset flexibility) needs full
consideration. This report focuses primarily on a
new solution to generate more capacity from the
affordable housing asset base.
4
We call for housing associations to take responsibility
not just for their own futures, in the face of
significantly increased financial risks, but for helping
to shape a better market. Independent housing
associations, sitting between the private and public
sectors, remain in a good position to help create a
new rental market that will meet the needs of lower
and middle income households more affordably, and
with better quality and choice.
A Social Equity Fund – a concept introduced in our
2011 report, ‘Where next?: Housing after 2015’ –
remains at the core of our proposed solution,
capturing value created from increased asset
management flexibility and using that value to fund
investment in new homes. We have now modified the
concept further.
Housing associations will work to generate new
capacity and new supply irrespective of action by
government or other partners. But, through strong
partnerships and with clear strategic direction, far
more can be achieved.
We therefore ask government, at national and local
levels, to exercise further strategic leadership and
provide clear frameworks and policies that support
more housing growth in continuing hard times.
Housing associations should be liberated to deliver.
Executive summary
• N
ew public investment in housing will be
constrained for years to come. But the relentless
need for new homes, and new affordable homes,
to support a rapidly growing population will
continue unabated. On current trends, a supply
shortfall of 1 million new homes or more over the
coming decade is a real risk, on top of the shortfalls
from previous decades. (p.8)
• T
he new government guarantee for up to £10 billion
in new homes funding represents a powerful
intervention to help bridge the gap between the
funding available and the homes required, but the
financial challenge still remains significant.
Delivering the scale of housing growth England
needs to stabilise prices (around 240,000 homes
a year) would require total annual investment of
£39 billion – more than double the level of funding
that has been available in the market of late.
Limiting the supply ambition to 170,000 a year
(the highest achieved in recent years) would require
annual investment of nearly £28 billion. (p.10)
• M
arket fundamentals suggest that for the
foreseeable future supply growth is most likely
to come through the market rented sector (MRS).
The MRS can play a powerful role in a better
housing market. A large scale, well managed MRS
has the potential to offer real flexibility for tenants
and support stronger social and workforce mobility.
While some MRS providers already offer a good
product and should be major players in a new
market future, the sector as a whole has several
challenges. It is the most expensive tenure type in
weekly costs, tenure can be insecure and often
short, and management and maintenance quality
is variable. A new form of rented sector is needed,
straddling the social and market sectors and open
to all, offering a range of market and sub-market
rents and able to deliver higher quality, greater
security and better affordability for the growing
numbers of families living in rented accommodation
long-term. (p.9,11)
• H
ousing associations and local authorities could
lead investment into this new, broader rental market
through a new funding mechanism – the Social
Equity Fund (SEF). By aligning rents more closely
with what people can afford and increasing asset
management flexibility on existing stock, housing
associations and stock owning local authorities
could create additional financial capacity. This
capacity could be captured in a ring-fenced Social
Equity Fund to support the provision of more new
homes. Ring-fencing the use of the Fund and
accounting for it transparently through housing
association (and potentially local authority) balance
sheets would ensure it is used solely to deliver
more affordable rented housing. (p.16)
• T
he affordable element of achieving 170,000 homes
a year over ten years would require a SEF of £5.6
billion, but there is scope for a much larger Fund to
be created. At present, the restrictions on the use
of many housing association assets are substantial
and limiting. Depending on the flexibilities
government is willing to offer, a larger SEF could
support a more ambitious supply target. It could
reduce housing market dependence on mortgage
availability by levering investment into a broader
rental market, and enable greater investment in
regeneration and existing housing stock. (p.17)
• L
&Q’s model illustrates how a Social Equity Fund
of £20 billion could be created by allowing rents to
migrate to a new affordable level, equivalent to
35% of net income, over a ten year period. The fund
could be further enhanced by offering residents the
opportunity to buy some or all of their home, and by
offering the same flexibilities to those local
authorities who have retained their housing stock.
The impact on the Housing Benefit bill could be
limited by restricting rent increases to a small
proportion of non-benefit dependent residents.
This will reduce the overall value of the SEF, but to a
level which still enables the affordable element of
the 170,000 home target to be met if combined with
additional asset management flexibilities. (p16)
5
• L
&Q has modelled the Social Equity Fund against
the cost-effectiveness of three other possible
financial models to boost future affordable housing
supply: continuing with the Affordable Rent model;
a return to higher capital subsidies; and a no-grant
market rent scenario with revenue subsidies. While
100% revenue subsidy is more cost effective over
the short-term, higher capital subsidies are far more
cost efficient over the longer-term. But the scale of
the supply challenge is so great that no single
scenario provides an answer. Our modelling
indicates that the most effective long-term delivery
route is a combination of capital subsidies plus
greater operational flexibilities for housing
associations and local authorities captured
within SEFs. (p.14)
• M
anaging the broader overall supply and funding
challenge to deliver 170,000 homes a year or more
will require powerful new partnerships to form,
harnessing the additional capacity of housing
associations, local authorities, other housing
providers, private investors and government to
achieve the multiplier effect in supply and funding
that is necessary. If tenure mix remained along
current trends, mortgage finance for first time
buyers will need to increase by around £4.5 billion
a year – an increase of 20% – and around £7 billion
a year of institutional investment will be needed in
the MRS. (p.13)
6
• L
ocal authorities need to be ‘open for business’,
engaging with partners and making the most of
their new powers. They should adopt clear housing
plans, signposting their requirements across the
market spectrum and aligning their local planning
policies, land use, financial flexibilities and
partnership arrangements to help facilitate delivery.
Those that do will be in a far stronger position to
attract investment from providers than those
that don’t. (p.19)
• N
ational government also has a key role to play in
helping to create the conditions for growth and
providing the framework within which housing
providers and investors can take more measured
risks across all tenures. This role is basically
threefold – making available adequate levels of
public funding and providing incentives for private
investment; incentivising provision of sufficient land
with planning to deliver the necessary levels of
supply; and liberating those organisations prepared
to invest more to increase housing supply. The
government has taken important short-term steps
on two of these. But whatever form government
support takes post-2015 and whoever provides the
homes needed, funding will need to be on terms
which encourage large scale public, private and
independent sector participation. (p.18)
Understanding the challenge
Ultimately, the prospects of delivering a properly
functioning and affordable housing market in England
hinge on boosting supply. And the prospects for
boosting supply hinge on powering up financial
capacity across the sector, improving the pace of
land release, the success of the new planning
framework, and leadership from national and local
government in shaping the strategic principles that
create the conditions for growth.
There is little doubt that the
affordability of all parts of the
market has been seriously eroded
as the level of new supply has fallen
over the past two decades.
The government’s new measures represent an
important starting point and a vital recognition of
the role housing supply plays in a healthy economy.
Up to 70,000 additional homes over the short-term
will make a genuine difference. But the overall task
is huge, ongoing and requires long-term solutions.
The latest official government household projections,
released in 2010, anticipate household formation
running at an average of 232,000 a year in England
from 2008 to 2033. This is the figure accepted by the
government in its housing strategy, Laying the
Foundations, at the end of last year.
How many homes do we need?
There is little doubt that the affordability of all parts
of the market has been seriously eroded as the level
of new supply has fallen over the past two decades.
Figure 1 below shows how housing supply in England
compares to household formation since the 1950s,
and an estimate of new supply for this decade
based on recent trends.
3.00
2.50
2.00
1.50
1.00
0.50
30
20
21
20
10
11
20
01
-
01
New supply
20
90
91
19
80
81
19
71
-
61
19
51
19
70
0.00
60
The last comprehensive advice of the NHPAU on
supply indicated a need for between 238,000 and
290,000 new homes a year in England, simply to
keep house price affordability at the (historically
very high) 2007 average of 7.2 times lower
quartile incomes over the period to 2025.1
3.50
19
Barker recommended that to keep affordability
within reasonable limits (a range of 1.1-1.8% real
house price inflation per annum) in England would
require housebuilding completions of around
195,000 to 245,000 new homes a year.
Figure 1: Supply vs demand
£ millions
The extent of the increase needed in housing supply
has been the subject of debate for most of the last
decade. The most comprehensive analyses of
housing supply requirements in England linked to
affordability were the Barker Review of Housing
Supply of 2004 and the work of the National
Housing and Planning Advice Unit, set up on the
recommendation of Barker and abolished in 2010.
New households
1 More homes for more people, NHPAU, July 2009
7
From the 1950s to the 1990s, new housing supply
kept pace with or outstripped net new household
formation. But there is now a genuine risk that over
the next ten years supply could run at just half the
rate new households form, adding another 1 million
homes to the overall housing shortfall.
The best evidence suggests that longer-term
affordability in the housing market, whether for sale
or for rent, would be stabilised by net new supply of
around 200,000 to 250,000 new homes a year. But
the last time 250,000 homes were built in England
was in 1977. Over 200,000 new homes have been
built in a year only once since 1980 and since 1990
the best annual total for new supply is 176,650.2
Simply reaching this latter figure implies a 50%
increase in annual housebuilding from where we are
now. The latest supply figures, with 110-116,000
homes a year built in England in 2010 and 2011, are
lower than in 1947 when the country’s housing stock
had been devastated by war for six years and the
housebuilding industry had barely re-emerged.
Before that, lower figures were only seen in the early
1920s. Over the last 100 years, then, only war has
had the same impact on housing completions as we
are seeing now. This is the scale of the supply
challenge.
Consequently, the structural changes that have
appeared in the housing sector over the past decade
are looking increasingly deep and lasting. Projecting
forward, it is hard to construct a medium-term
scenario which would see them fade away.
The rise of market renting
The proportion of home owners in England has been
falling since 2004, from a high of 71% to 66% today.
The proportion of households in social rented homes
has been falling since 1981, from 32% then to 17.5%
today. And the proportion of people living in the
market rented sector (MRS) has risen from a low of
9% of households in 1992 to 16.5% now. In London
the MRS already accounts for 25% of households.4
The number of households living in the MRS has
doubled in the past decade from two million to
almost four million.
Over the last 100 years, only war has
had the same impact on housing
completions as we are seeing now.
This is the scale of the supply challenge.
The market today
The lack of new housing supply and the economics
of the housing market since 2007 have elevated the
issues we face to a new pitch. The coalition
government summarised the situation succinctly in
Laying the Foundations late last year, which said
“Buyers can’t buy…lenders are not lending enough…
builders are not building… investors are not
investing…tenants are struggling.”3
Market rent has become the default tenure for the
large and growing segment of low to middle income
households locked out of home ownership by
affordability and credit constraints and from a heavily
rationed social renting sector where waiting lists
increased 77% between 2001 and 2011.5 Housing
demand from a fast rising population has to go
somewhere and in the absence of other attainable
options it is migrating into market rent.
The ongoing macro-economic uncertainty and fiscal
challenges intensify and protract these problems.
Though prices are broadly stagnant, and partly
supported by a coalition of lenders, housebuilders
and government seeking to prevent further economic
difficulties, real incomes are still falling, making it
harder for the market to re-align and correct.
2 CLG Housing Statistics, Live Tables
3 Laying the Foundations, Executive Summary, CLG, Nov 2011
4 English Housing Survey 2010-11: households report, CLG, July 2012
5 CLG Housing Statistics, Live Tables
8
Though the aspiration for home ownership has not
altered much amongst younger age groups, the
market fundamentals appear to point towards home
ownership continuing to shrink and market renting
continuing to grow.
A recent Joseph Rowntree Foundation report
predicted that an extra 1.5 million young people will
be renting privately by 2020, and an extra 900,000
young adults (18-30 years) living with parents in 2020
compared with today, at least partly due to the cost
of housing.6 And the Halifax Bank has published
research showing that around two thirds of younger
adults do not expect to own a home in the future.7
Meanwhile, the best estimate of several reports
during the last year is that market renting is set to
grow to around a quarter of all households by 2025
and potentially a third or more of households in
London.
At its best, the MRS provides high quality, flexible
housing that supports social and economic mobility.
The good providers are very good. But the vast bulk
of the MRS is currently provided by individual
landlords with small portfolios – only 1% of MRS
landlords own more than ten properties and the
sector has a range of challenges.8
Weekly costs are, on average, higher than for other
housing tenures, Housing Benefit for those needing
subsidy is more expensive than in the social sector
(an average of £107pw compared to £71pw), and
housing costs are rising more quickly than in other
tenures. Demand has pushed up market rents in
England by 37% in the last five years, despite a deep
recession and falling living standards.
Moreover, market rent offers less security and more
variable management quality compared with other
tenures.9 As the size of the sector rapidly increases,
these issues assume greater importance and will
attract growing attention from policy makers.
The funding challenge
L&Q has produced illustrative modelling which
indicates the scale of the funding challenge involved
in increasing supply. If tenure outputs stayed broadly
in line with recent market trends (precise figures are
complex to determine, but around 50% market sale,
25% market rent including buy-to-let investment,
25% sub-market housing is our best analysis), the
relative increase in output for each sector required to
reach a medium-term ambition of 170,000 homes a
year is shown in the chart below.
The main focus of our modelling work is on this
lower target as it is the best we have achieved in
recent years – returning to this level will be a start;
delivering 240,000 homes each year will be
tougher and take longer.
Figure 2: Trend homes per tenure to reach
170,000 homes a year
180,000
160,000
25,500
140,000
17,000
Social/Affordable
LCHO
Market rent
Market sale
120,000
100,000
80,000
17,400
42,500
11,600
29,000
60,000
85,000
40,000
20,000
58,000
0
2011 supply
– 116,000
New model
– 170,000
6 Housing options and solutions for young people in 2020, JRF, June 2012
7 ‘Bank of mum & dad burdened by generation rent’, Halifax press release, 12/6/12
8 Montague Review of the Barriers to Institutional Investment in Private Rented
Homes, Aug 2012
9 English Housing Survey: households report, CLG, July 2012
9
Moving from the 2011 position of 116,000 homes to a
medium-term ambition of 170,000 homes will require
over 27,000 extra homes for market sale, and nearly
14,000 more homes each for the market rented and
sub-market rented sectors. To put this in context, on
the above tenure splits, L&Q’s model indicates that
the total investment required to build current annual
supply is in the region of £18.7 billion. Delivering
170,000 homes on the same basis would require
investment of £27.6bn.
In the current financial markets, accessing the
finance to produce even at existing poor supply
levels is not easy. Extracting significantly more debt
capacity is an enormous challenge demanding
radical new thinking and investment mechanisms.
The government’s guarantee for up to £10 billion in
new finance, the additional £300 million in capital
funding for affordable homes and the £280 million
extension to FirstBuy is a powerful supportive
intervention, provided institutional lenders play ball.
But far more capacity from lenders would still be
necessary to finance extra development debt and
new mortgages for purchase and buy-to-let. There
would also be real impacts on Housing Benefit costs
to government, given that around 63% of social
sector tenants and 25% of MRS tenants receive a
level of revenue subsidy.
10
On the alternative assumption that the market for sale
and the social and affordable sector are basically
operating at the limits of what the financial markets
will currently fund, then the burden of increases in
supply falls squarely on the market rented sector.
This would require the MRS to find the capacity
to deliver an extra 54,000 new homes a year.
Again, questions remain as to how the mortgage
and development costs will be financed,
the attractiveness of the MRS to new providers,
and the impact on Housing Benefit if increased
numbers of households need financial subsidy to
pay the market sector rents.
Getting housing supply up to the levels England
actually needs – around 240,000 new homes a year
– would have a further huge impact on the scale of
the funding challenge. A total investment in new
homes of around £39 billion a year would be needed,
more than double the funding currently available.
A new financial model
Somehow the divide between the funding available
and the homes required has to be bridged. The scale
of the housing supply and funding challenge is such
that any substantial growth in new homes can only be
achieved by increasing financial capacity across the
market, combining the efforts and investments of
government, local authorities, housing associations,
housebuilders, lenders and other private providers
and investors.
The key point here is associations’ ability to operate
flexibly across the rental market and their strong
continuing creditworthiness in an uncertain world.
This offers the opportunity to create a new larger
rented sector that could keep a lid on prices, provide
more variety of price points within the market,
including more affordable options, and produce a
new kind of landlord able to focus on high quality
management and longer, more secure tenancies.
Creating a new rental market
Not all housing associations will want to go down
this path, and those which do will be challenged as
they rapidly approach gearing limits and the outer
boundaries of their risk appetite. But with more lower
income tenants likely to be housed in the MRS for
longer, it is a legitimate part of the market for housing
associations to support, while maintaining their
primary social purpose of delivering affordable homes.
In ‘Where next? – Housing after 2015’, published in
Autumn 2011, we highlighted how housing
associations could help create a new rental market
open to everyone. If market rent is set for significant
further growth, the looming issues of insecurity of
tenure, variable housing and management quality and
rapidly rising prices will need to be addressed.
Sir Adrian Montague’s recent report for the
government, ‘Review of the barriers to institutional
investment in private rented homes’, highlighted the
importance of tackling these issues and encouraging
more institutional investment. He made special note of
the potentially valuable role housing associations
could play in an expanded sector, using their strong
balance sheets to raise capital and their asset
management expertise as a strong platform to
offer a professional service to tenants.10
Some housing associations already provide a level of
market rent, as well as social housing, intermediate
rents, shared ownership and outright market sale.
They are well placed to provide more for the MRS,
using their management expertise to develop mature
market portfolios attractive to investors.
The Grainger ‘Build to Rent’ initiative presents a
model for how market rent homes delivered at
scale by large providers could look in the future,
with rent levels averaging 30-40% of local net
incomes, high property management standards,
and the opportunity for tenants to renew their
tenancies from year to year, without the need to tie
themselves to long-term contracts.11
The MRS has been playing a stronger role in providing
subsidised affordable homes for people on lower
incomes in recent years. Post-2015, it will almost
certainly continue to form part of the ongoing
‘affordable’ settlement. But the best way to maximise
affordable housing delivery after 2015 remains to be
decided. Delivering the scale of supply increase
needed requires a new financial model.
10 Montague Review, Aug 2012
11 Case study in Montague Review, Aug 2012.
11
The scale of this funding challenge
is vast given the economic and
financial context England faces over
the coming years.
Affordable housing financial scenarios
To examine how this can best be achieved, L&Q has
modelled four possible financial scenarios,
recognising that new public investment in housing
will be in short supply for years to come:
•
Continuing Affordable Rent – with capital grant at
an average of £22,000 per home and rents for new
homes set at up to 80% of market levels (we have
assumed an average of 70% across the country)
•
A return to higher capital subsidies – increasing
capital grant to £60,000 per home and reducing
rents on new homes to social rent levels (we have
assumed an average of £79 per week)
These scenarios were tested against the overall
funding costs of providing 170,000 new homes a year
and 240,000 new homes a year. It is important to make
clear that the modelling is illustrative – designed to
indicate the quantum of funding changes that would
be required for each sector, as a way of initiating the
public debate – it is not definitive.
Given the difficulty of predicting how far market rent
might expand, the current trends in output were
assumed to continue – 50% open market sale (85,000
homes), 25% market rent (42,500 homes) and 25%
sub-market housing, including low cost home
ownership (42,500 homes).
Other key assumptions are as follows:
•Average UK build price of £138,000, with an
average market value of £160,000
•Operating costs at 29% of sub-market rents
and 21% of market rent levels
• Average market rent £160 a week
• Average social rent £79 a week
•
A no-grant, 100% market rent scenario – all new
homes let at a market rent (we have assumed an
average of £160 per week) with revenue subsidies
rising to compensate for higher rents
• House price and rental inflation of 3% a year
•
The establishment of a Social Equity Fund (SEF)
– a proposal put forward first in our report ‘Where
next?: Housing after 2015’. By raising rents and
increasing asset management flexibility on existing
stock, housing associations can create additional
financial capacity. This capacity is captured in a
ring-fenced Social Equity Fund to support the
provision of more new homes. The concept is
explained more fully on page 16.
• Cost of debt at 6.5% a year
12
•Average mortgage loan to value of 80% for
outright sale and LCHO
• A gross average market rent yield of 5% a year
The costs to government, mortgage lenders, housing
associations and market rent investors were
considered over ten years and in perpetuity.
Table 1: Four scenarios for financial investment in affordable homes
Scenarios – 170,000 homes per year
over 10 years
Social Housing Grant levels
Affordable
Rent
Higher Capital
Subsidy
100% Revenue
Subsidy
Social Equity
Fund
£22k / unit
£60k / unit
£0k / unit
£0k / unit
0
0
0
£22k / unit
Social Equity Fund levels (for rent only)
Housing Benefit cost over a 10 yr period
£11.7bn
£8.0bn
£15.3bn
£11.7bn
Total Cash Cost to Gov yr1-10
£17.3bn
£23.3bn
£15.3bn
£11.7bn
£131.1bn
£101.3bn
£164.0bn
£125.5bn
Total Cash Cost to Gov over 40 years
SHG expressed in NPV terms over 40 years
Total Housing Benefit Bill in NPV terms over 40 years
Cost to Gov expressed in NPV terms over 40 years
Total Mortgage Finance required for 10 years
£4.3bn
£11.8bn
-
-
£40.5bn
£27.8bn
£52.9bn
£40.5bn
£44.8bn
£39.6bn
£52.9bn
£40.5bn
£141.2bn
£141.2bn
£141.2bn
£141.2bn
£5.6 bn
£15.3 bn
-
-
-
-
-
£5.6bn
Social Housing Grant
Total Social Equity Fund (£m)
Total RSL Funding for Sub-MR & LCHO (Debt + Equity)
£52.4bn
£42.7bn
£58.0bn
£52.4bn
Total Private Finance required for MR (Debt + Equity)
£69.0bn
£69.0bn
£69.0bn
£69.0bn
The outcomes from the four scenarios, based on
producing 170,000 homes a year, are in Table 1.
For the base case, to deliver 170,000 new homes
a year on the tenure balance assumptions above,
in addition to the capital grant and revenue costs
to government:
•gross mortgage lending for first time buyers
would need to rise by around £4.5 billion a year
– an increase of 20%
•Market rented sector debt and equity (whoever
provides the homes) would need to grow to
£6.9 billion a year – a rise of approximately 46%
•The affordable housing sector would need to raise
in the region of £5.2 billion a year, plus a one-off
amount of £5.6 billion to meet its SEF commitment.
The scale of this funding challenge is vast given the
economic and financial context England faces over the
coming years. It illustrates graphically the need to
make bold decisions – the potential importance of
discounted public sector land, faster planning,
bringing new institutional investors into the frame,
and the ongoing role for government subsidy and
policy supports such as financial guarantees.
The government took some important measures
towards tackling some of these key issues in early
September, but the challenge demands long-term
political will and action. If that political will exists,
which is the most effective funding route?
L&Q’s modelling illustrates that, while 100% revenue
subsidy is more effective over the medium-term
(requiring government investment of around £15 billion
over ten years compared with £23 billion for higher
capital grant), higher capital subsidies are more cost
efficient over the longer-term (requiring £40 billion
government investment in present value terms
compared with £53 billion for 100% market rent and
£45 billion for Affordable Rent). Broadly, this is because
cash ‘up front’, if granted at levels seen during the
2008-11 comprehensive spending review, significantly
reduces the long-term Housing Benefit bill.
13
The Social Equity Fund is more cost effective for
government on a short and long-term basis.
But the scale of the supply challenge is so great that
no single scenario provides an answer. The most
effective delivery route is a combination of capital
subsidies plus greater operational flexibilities for
housing associations and local authorities captured
within SEFs.
Over the last four years, according to the housing
regulator’s ‘global accounts’ reports, housing
associations have reduced their operating costs,
improved their operating margins, boosted their
bottom lines, raised additional private investment,
managed reducing grant rates, provided more
affordable homes and increased resident satisfaction
year on year. In short, they have responded powerfully
to the significant financial and operational headwinds
buffeting the economy and the sector. These efforts
will continue and more will be needed.
Even so, as supply levels rise, the ability of housing
associations to finance and service additional debt
becomes more restricted. Over time, extra capacity
from local authorities will become more and more
important in delivering higher volumes of new housing.
Achieving the increases in supply that are needed will
clearly require much stronger partnership working to
deliver for the long-term.
To produce 240,000 new homes a year, all figures
would rise proportionately, ie. the variation in relative
cost to government between the investment scenarios
would increase, as would the direct financing
demands of all providers. L&Q’s model estimates
that total investment required will increase to
£39 billion per year.
Assessment of the scenarios
The Hard Times group considered the relative
prospects and merits of each of the four scenarios in
helping to meet the affordable housing supply and
funding challenge.
Continuing with Affordable Rent
In ‘Where next?’, we suggested the pace at which
Affordable Rent is consuming housing association
financial capacity means it is unlikely to be a long-term
solution.
That view has not changed. Getting new Affordable
Rent homes built is proving a slow, costly business.
The reality is housing associations are reaching a
tipping point; in many local markets the risks of
developing Affordable Rent homes are becoming
greater than the risks of developing for market rent.
Housing associations have to fund around 85% of the
cost of each Affordable Rent home upfront, with rents
under the new system averaging around 60-80% of
market levels, depending on local factors. In the
majority of cases, local authority partners have as
much say over how the property is used and by whom
as the providing housing association.
Essentially, housing associations are receiving a low
level of grant to deliver an inflexible asset and with
limited influence or control over the customer profile.
With further welfare reforms in the offing, Affordable
Rent development will become riskier still. Housing
associations will be much more heavily debt-laden,
but dependent on less certain income streams to
service the debt.
In comparison, for market rent, while the full price of
provision must be funded, rent levels, usage and
tenancy terms are fully flexible, offering stronger
opportunities to build capacity and flex use. The ability
to quickly mitigate risk as circumstances change is a
key advantage.
14
If Affordable Rent continues in its current form after
2015, housing associations may be unable to continue
development under the programme. Whatever form
government support takes post-2015 and whoever
provides the homes needed, funding will need to be
on terms which encourage large scale public, private
and independent sector participation.
100% markets rents with revenue subsidies
Reintroducing higher capital subsidies
But public expenditure then becomes increasingly
problematic as Housing Benefit costs continue to rise
significantly. Over both the medium and longer-terms,
this is easily the most expensive option for
government unless further action is taken to reduce
the benefit bill. If such action is taken while rents are
allowed to rise to market levels, the vulnerable and low
paid in work are unlikely to be able to fund the
difference.
Homes let at sub-market rents will always need
subsidy, and ‘safety net’ social rent homes that meet
the needs of more vulnerable people will continue to
require a capital subsidy of some form.
The L&Q modelling shows that an investment
regime based on the average level of capital subsidy
available during 2008-11 would be more costly for
government in the short to medium-term (1-10 years)
than the alternative funding models we appraised.
But longer-term it would prove more cost effective
than Affordable Rent, because Housing Benefit
costs remain lower into the future than under
other scenarios.
Whatever form government support
takes post-2015 and whoever provides
the homes needed, funding will need to
be on terms which encourage large
scale public, private and independent
sector participation.
The costs to government of all affordable homes being
provided in the open market and subsidy for those
unable to pay market rents coming entirely through
Housing Benefit do not appear much different to
Affordable Rent over the first ten years.
The only way of avoiding this is for a much higher
proportion of tenants to be non-dependent on
benefits. This either involves housing a different
segment of people (in which case where will the more
vulnerable be housed?) or far greater numbers of
tenants working in jobs sufficiently well paid that HB is
not required. However, an investment system based
purely on market rents makes escaping benefit
dependency much more difficult than one based on
sub-market rents.
Based on our analysis, capital grants in combination
with some other form of innovative investment model
will be more cost effective for government than a full
market rent based system likely to require heavy and
increasing benefit subsidies.
However, economic and political circumstances make
a return to higher capital subsidies unlikely anytime
soon and other solutions will need to be found for the
post-2015 period.
Capital grant remains, though, vitally important to the
future of social and affordable housing. Retaining
housing grant post-2015 at current levels or higher,
and increasing it as economic conditions ease, would
make a very significant difference to the capacity of
the affordable housing sector to deliver more homes.
15
The Social Equity Fund
By raising rents and increasing asset management
flexibility on existing stock, housing associations can
create additional financial capacity. This capacity can
be captured in a ’Social Equity Fund’ to support the
provision of more new homes.
The captured value would be held on the housing
association’s balance sheet and ring-fenced for
reinvestment in developing and regenerating homes
for people in need of housing at below market rent
levels. As money from the Fund is released to
subsidise new affordable homes, so the value on the
balance sheet would reduce.
At present, approximately 37% of social
tenants do not receive HB. If just 5% of
all housing association tenants paid a
higher but still affordable rent, new
capacity of around £3.75 billion would
be generated.
Holding the Social Equity Fund on the balance sheet,
ring-fencing its use and accounting for it year by year
would ensure full transparency over how the Fund is
managed. Effectively, it would act as an insurance to
make sure value created from assets originally
developed with a level of public grant do not leak into
other activities of the organisation, but contribute
solely to the provision of new affordable homes.
In ‘Where next?’, our modelling showed that
converging all housing association social rents over a
ten year period to a higher, yet affordable, level
averaging 55% of market rents - the equivalent of 35%
of net income - could produce extra borrowing
capacity of around £20 billion for the sector.
16
At present, according to the English Housing Survey,
market renters spend a greater proportion of their
income on housing compared to any other tenure.
A target benchmark of around 35% of income for
government-supported housing products would
provide a safeguard, capping the average rent level
that could be charged in any specific local market
to ensure affordability.
However, the obvious difficulty with this approach
would be its impact on the Housing Benefit bill.
Whilst it is arguably fairer to spread the cost of new
housing supply across all residents, whether or not
benefit dependent, we have now remodelled how the
SEF could work to avoid any benefit implications.
The new Social Equity Fund would be created by
using the current rent formula to raise rents for a small
proportion of better off social tenants, non-dependent
on Housing Benefit, by RPI + 0.5% plus £2 a year until
they reached Affordable Rent levels (in L&Q’s example
this averages 65% of market rent levels in London).
This works with the grain of current government
thinking that tenants living in social rented homes
who have higher incomes should pay a fairer
contribution in rent.
At present, approximately 37% of social tenants do
not receive HB. If just 5% of all housing association
tenants paid a higher but still affordable rent, new
capacity of around £3.75 billion would be generated.
At the moment, housing association development
contracts with the Homes and Communities Agency
factor in an agreed level of conversions from social
rent to Affordable Rent as homes naturally become
empty. This mechanism could be adapted to allow
additional flexibility along the above lines.
Enhancing the Social Equity Fund offer to
government
The ultimate size of the Social Equity Fund is entirely
dependent on the level of operational flexibility at
housing associations’ disposal.
The base case 170,000 home target as outlined in
Table 1 requires an SEF of £5.6 billion to deliver 42,500
affordable homes a year. To reach that figure, as well
as increasing rents for a small proportion of new
tenants depending on their income level, our proposal
is to raise around £1.87 billion through conversions of
a small number of social rent homes to shared
ownership. In ‘Where Next?’ we estimated that
capacity of £2 billion would be released for
reinvestment if 1% of existing tenants were given the
opportunity to buy some or all of their home.
The benefits generated by the Social Equity Fund
could be much greater. Through relatively limited
additional asset management flexibilities, such as
selling economically unviable or lower yield homes on
the open market, releasing more existing social homes
for shared ownership sale to tenants, or raising rents
on a higher proportion of homes as they become
vacant, the overall Social Equity Fund for the sector
could be boosted significantly.12
A larger fund could support a more ambitious supply
target. It could reduce housing market dependence on
mortgage availability by levering institutional
investment into a broader rental market and enable
greater investment in regeneration and existing
housing stock.
We estimate that every £1 billion of value transferred
to the SEF would generate up to 45,000 affordable
rented homes, assuming housing associations could
gear up against a £22,000 SEF contribution for each
new home. This may be possible in the short to
medium-term, but gearing constraints will prevent
‘straight line’ growth over the longer-term.
Maximising SEF value will fundamentally challenge the
existing housing association financial model and
present associations with a choice – to operate within
existing limits or adopt a new model and develop the
skills and expertise required to manage it.
For those associations which choose to adapt their
model, capturing and using this very substantial latent
capacity to create new affordable homes would
represent a major contribution to new housing supply
at no additional cost to the HM Treasury.
At the same time, it would provide a natural motivation
for housing associations to achieve an ongoing level of
stock churn to improve the efficiency in use and tenure
flexibility of the existing social sector stock.
This inevitably implies government support to increase
housing associations’ freedom and flexibility to
manoeuvre. At present, rent levels and usage of a
large proportion of association stock are restricted in
numerous ways, including planning agreements,
nominations and other legal requirements, and
restrictive covenants. In an era of severe public
spending constraint, when other avenues of funding
have become so much more important, these
restrictions assume far greater significance.
The crucial point is that, by accounting in a
transparent way for the funds generated through the
SEF and ring-fencing their use, greater operational
flexibilities can create continuing and increasing social
value over the long-term from housing association
assets.
The scope and scale of the SEF could be flexed
according to the housing type and tenure
requirements of strategic partners, particularly local
authorities. It will remain vitally important to maintain
a strong mix of tenures and incomes across
communities to sustain social cohesion and support
economic growth.
12 However, there is a balance to be struck. Considerable care would need to be
taken to ensure rents remain affordable and to avoid work disincentives.
17
Scaling up and investing
new capacity effectively
Many housing associations will look to improve
their capacity to invest in new affordable housing
irrespective of the investment model the government
adopts for the future.
The possibility arises of new types of partnership
between the government, local authorities, housing
associations and other affordable housing providers to
drive up supply through the sharing of risk.
But through the additional flexibilities and freedoms
implicit in an enhanced Social Equity Fund, there
would be a new opportunity to make a real difference
to affordable supply levels in a new rental market
spanning the social and market rent sectors.
Factoring in the additional capacity that can be
harnessed from all providers and investors offers
some hope of achieving the kind of multiplier effect
needed to produce the volume change in new housing
supply the country desperately requires.
Even so, the Social Equity Fund alone will not be
enough. As third sector organisations, housing
associations will always need to balance their
exposure to financial and commercial risk against their
social ethos and ongoing responsibilities to existing
residents.
Strategic leadership
History suggests that 200,000-250,000 new homes a
year can only be achieved if the private and the public
sector both deliver. The mid-50s to the late 1970s,
when production was at its peak and of the order
required again today, was characterised by
housebuilders and local authorities each producing
a minimum 100,000 homes a year and often
considerably more.
Private housebuilders’ attitudes to volume will
understandably continue to be determined by
their analysis of market risk and an assessment of
the market for their product. But local authorities,
for the first time since the 1980s, now have
significantly more say over how they use and drive
their local assets, through investment of rental
income and the use of land.
The expectation that difficult market conditions will
endure for some time to come could be used to
advantage. Housing associations, local authorities,
housebuilders and investors are more open to ideas
and partnerships to deliver new supply than for many
years. Five years on from the start of the credit crunch,
no one is under any illusions as to the likely length of
the difficulties in the housing market and most are
receptive to innovative ways to deliver.
18
In this context, national government has a key role to
play in setting the strategic framework and
establishing the conditions for growth that allow
new capacity to be generated and used effectively
and providers to take further measured risks across
all tenures.
Several of the major changes to institutional levers the
government has put in place, including the National
Planning Policy Framework, reform of the Housing
Revenue Account, and the new housing regulatory
framework, are welcome, as are initiatives like the
New Homes Bonus and Build Now Pay Later. It is
now vital to take action to make sure these changes
bring the real growth in housing supply they were
designed to facilitate.
A ‘golden triangle’ of finance, land with planning
permission, and rent and asset flexibility will be
necessary to maintain housing production and
generate extra supply after 2015.
The government has now made some critical further
short-term interventions to support the availability of
lower cost finance and a better supply of land with
planning permission. Vital now is securing these goals
for the longer-term and ensuring housing providers
can maximise the delivery of new affordable rented
homes for people unable to afford full market prices.
Signposting strategic market needs
Using local authority capacity
The government’s policy of localism and the abolition
of regional and national housebuilding targets requires
local authorities to determine the scale of their
housebuilding needs and the preferred shape of their
local housing markets.
Like housing associations, local authorities now need
to rely more on their own resources and take more
decisions and measured risks themselves. This opens
the way to new, potentially much more powerful
partnerships between councils and housing
associations at local level, able to make a significant
difference to housing supply.
This is an opportunity to rethink what genuinely
affordable housing markets might look like. Yet the
pressures on local authorities are intense. Most
recognise housing as a major priority, but in different
places there are difficult tensions between social and
economic imperatives; between demographic facts,
statutory duties and financial realities.
While for some northern areas and pockets elsewhere,
additional social housing may not be the answer to a
balanced market, in other places, particularly London
and parts of the south, sub-market or intermediate
market options are critical to the effective functioning
of the local economy. As councils move to determine
their housing requirements more fully over the next
year, providers will need to understand better what
kind of homes are wanted where.
Local authorities need to remain ‘open for business’
and willing to engage in deeper and stronger
partnerships with housing providers, even as they
manage the broader budgetary constraints imposed
on them.
There is little doubt that local authorities which adopt
clear housing plans, signposting their requirements
across the market spectrum and aligning their local
planning policies, land use and partnership
arrangements to help facilitate delivery, will be in a far
stronger position to attract investment than those
which don’t.
The reform of the Housing Revenue Account creates
the possibility of releasing large amounts of capacity
from local authority housing assets. In the future,
some local authorities will run big surpluses. In 2011,
PricewaterhouseCoopers and The Smith Institute
estimated that nationally, over the next 30 years, the
potential value of new local authority investment
capacity could be as much as £54 billion.
In theory, with councils still holding similar levels of
stock to housing associations, a local authority based
Social Equity Fund could virtually double the new
capacity from such funds available for investment.
In practice, local authority specific HRA debt caps will
prevent this from happening. But the combination of
some capacity release and the potential to input land
to improve development viability means local
authorities have an enormous contribution to make in
boosting new housing supply levels in the future.
There is a growing acceptance in local authorities of
the need to use assets more productively and many
are keen to take action and to attract partners and
investors to increase housing supply in their areas.
With localism in place, they now have more
opportunity to take the strategic overview, making
decisions and aligning partners to secure housing
investment and deliver growth. Whether that comes
through more social housing, more market rent,
regeneration or in other ways will depend on local
circumstances.
19
The vital public land and planning
contribution
Local authorities remain in the box seat on planning.
But the reality on the ground at present is that it is
taking time for the new systems to bed in. If anything,
as the transition to more local decision making takes
place, it is proving more difficult to get planning
permissions through and to get homes started.
Affordable Rent has also clouded the way in which
planning obligations are assessed. The combination of
severe financial constraints and the need to redefine
‘affordable housing’ to fit the new investment regime
has created a position where planning obligations are
being interpreted more liberally more often. Scheme
viability, the introduction of the Community
Infrastructure Levy, and the need to get homes
delivered are all changing decision making around
S.106 agreements by default and reducing the volume
of social housing the system produces.
S.106 agreements have been responsible for delivering
around half of all affordable housing in recent years.
It continues to play a vital role in ensuring affordable
homes are provided. In the current market conditions
it is reasonable for government to review the operation
of S.106, but the recent move to relax these
obligations is serious for affordable housing delivery.
It remains to be seen whether the additional
£300 million in capital funding is able to compensate
for the affordable homes likely to be lost as a result
of this measure.
Beyond that specific issue, getting more public land
into the system quickly and speeding up planning
are crucial actions to help boost new housing supply.
The government estimates its latest initiatives on land
and planning could boost supply by 30,000, a further
helpful short-term contribution.
A report by Cambridge University for Shelter in
October 2011 suggested that 80% of local authorities
would like national government to issue some form
of good practice guidance on estimating housing
requirements and two thirds felt that any local
flexibility should be exercised against a consistent
approach and framework.13
The National Planning Policy Framework has a key role
to play in expediting planning decisions and land
releases. For example, government could provide
incentives for new partnerships of housing
associations prepared to keep creating and using
capacity to develop and local authorities (or other
public landowners) inputting land at a fair price and
willing to fast-track planning permissions. Partnerships
where public landowners invested additional assets,
were willing to risk-share, and brought schemes to
market quickly with planning permission would have
exceptional value in boosting housing supply quickly.
13 Providing the evidence base for local housing need and demand
assessments, CCHPR, Oct 2011’
20
Conclusion
Whatever actions government takes, whatever
actions others involved in housing strategy
and provision take, housing associations will
continue to seek new ways to create additional
financial capacity to invest in new homes.
That commitment to finding and using capacity
has been amply demonstrated over recent
years and will be ongoing.
However, the government should review
the working of the Affordable Rent regime.
Our concern is that, as presently constituted,
it is unlikely to be a sustainable delivery model.
Within the report we have also highlighted a
range of other issues which we believe need
re-examination if the government’s stated goal
of increasing housing supply is to be met.
The Social Equity Fund offers a new route for
creating a more sustainable affordable housing
investment model for the long-term from within
the sector.
It will remain hard to achieve new housing supply
in the volumes needed so long as the ‘golden
triangle’ policy issues of funding, land with
planning permission, and rent and asset
management flexibilities for affordable housing
providers are unresolved. The government has
taken initial steps towards solutions on the first
two of these. The Social Equity Fund offers a
potential answer on the third.
But the scale and gravity of the challenge
demonstrated in this report is well beyond the
capacity and capability of any part of the housing
sector to overcome alone. The only effective
solution will be a partnership solution. National
and local government both have responsibilities
in housing that cannot be devolved to others.
The coalition government has instituted some
important policy changes with the potential
to make a positive difference, including the
National Planning Policy Framework, HRA
reform, regulatory change, and its recent raft of
valuable finance and planning measures.
21
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without performing appropriate due
diligence and/or obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information, and, to the extent permitted by law, PricewaterhouseCoopers LLP,
its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained or for any decision based on it.
© 2012 PricewaterhouseCoopers LLP. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers LLP which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.
22
www.psrc.pwc.com