Wednesday 8th July 2015. A date anyone involved in the housebuilding, residential land or planning system more generally, may very-well regard as ‘black Wednesday’ – or perhaps just ‘pain-in-the-backside’ / ‘huge-unforeseen-consequences’ Wednesday.
It was on this day that George Osbourne – whilst rattling through his first Budget to Parliament as Chancellor of the Exchequer of a Conservative Government – announced that he would be ripping up a previously agreed 10 year, above-inflation annual rent settlement with the country’s housing associations and replacing it with a completely unexpected cut of 1% in all existing social and affordable rents (that’s 2 out of the 3 NPPF-approved tenures of ‘affordable housing’ – the other being intermediate housing); for four years from next April. This 1% reduction is in reality a 3-4% annual cut in income to housing associations when CPI is accounted for.
The Treasury forecasts suggest the new cuts could save £1.45bn a year – mainly from the housing benefit bill; so not an insignificant amount of money given the desire of the Government to try and rebalance the wider UK balance-sheet deficit as quickly as possible. But at what cost to housing delivery? This of course being something the Government has promised to greatly improve on, both previously whilst in coalition with the Liberal Democrats – and more recently as a key tenet of their election campaign.
It is our view, and the view of many others in the industry, that it has come at a high cost indeed.
To illustrate this point, David Orr, Chief Executive of the National Housing Federation (the body who represents housing associations nationally) stated that “at the very least” 27,000 planned homes – intended to be rented out – would not now be built. He went on:
“The cut will massively constrain housing associations’ ability to meet the shared ambition of themselves and government to drive housing growth and new jobs”
To put things into perspective, housing associations built nearly 60,000 homes last year.
So the move is all the more bizarre when you consider that it is widely recognised by industry commentators and political parties of all persuasions that we are living through (and are failing to remedy) a national housing crisis – where demand continues to far-outstrip supply. To illustrate the point, the Office of Budget Responsibility’s (OBR’s) own analysis suggests that the 1% rent cut will lead to 14,000 fewer affordable homes being built in 2021. So an ‘official’ analysis prepared for Government confirms that the move will only serve to exacerbate the issue and not improve on the fundamental structural problem of a lack of overall supply of both market and affordable homes.
Many in the industry expect that overall rental income achievable by the housing associations will be down by around 15% by 2020 compared to their pre-Budget business plans. The impact that such a reduction of a key source of revenue would have on any business is obvious – hence it’s entirely understandable why the housing associations are currently very wary of agreeing deals on any new affordable stock / sites until they are confident that they can continue to operate a viable business. Sadly, the word coming from many housing associations is that following the Budget announcement they will have to oversee major reductions in their pre-Budget delivery programmes (with some
fearing much-worse – including having to close-up shop completely). Anyone involved in areas of the country where the affordable housing market was already sticky pre-Budget (parts of Leicestershire for example) – know that this could mean many sites having to have their affordable obligations completely overhauled or else sites will become unviable.
From the outside looking in, it is as if the consequences of the Budget announcement were not fully-thought through by the Government. Not only has it created great uncertainty regarding new affordable housing (ironically at a time when the Government is supposedly trying to increase the number of new homes built, particularly affordable ones) but it could also have disastrous effects on housing association’s existing portfolio, business model and banking covenants which are based on the assumption that their income (rent from affordable housing stock) would grow by CPI + 1% rather than reducing by 1% per annum for the next 4 years as now required. Many of the housing associations have already had their credit rating downgraded as a result of the changes.
In what could be defined as anything from ‘unfortunate’ to ‘the bleeding ridiculous’ (take your pick dependent on how badly the changes have impacted upon you!), we understand that The Homes & Communities Agency –the Regulatory Body for housing associations – were apparently not even aware of or consulted on the proposed changes until they were announced in the Budget on the 8th July. Not consulting with the housing associations themselves could be said, at best, to be misguided; but not consulting with your own Regulatory Body responsible for the very industry your policy will impact upon? If true, this appears nothing short of reckless.
As Simon Graham wryly pointed out in his excellent piece in the August edition of Show House magazine:
“Imagine ministers imposing a direct 1% cut in rents for four years on all private rented sector landlords with no consultation. A presumably unthinkable intervention in a free market. Buy to let lending and purchasing would collapse overnight, and larger portfolio landlords would run for the hills, worried not just about the next four years but the uncertainty of what happens after that”
Practically speaking, anyone involved in trying to secure a housing association offer for the affordable element of a planning permission since the beginning of July will know of the huge impact the Budget announcement has had on the housing associations and the consequent impact on land deals having to be revised accordingly. Our local experience is that where we had existing offers on the table from housing associations for the purchase of the Section 106A affordable element of our sites, that they have often been reduced by £15,000 – £20,000 per rented plot in the likes of Warwickshire and the surrounds – with the reduction even more significant further south where property values are higher (we are aware of reductions as much as £35,000 per dwelling).
Of course the reduction in offers from the housing associations for the social rent and affordable rent stock on sites means a reduction in the amount the house builders are ultimately able to pay landowners for their land. Simply put, it has caused pre-budget land deals to be substantially altered – and at worst, deals completely stalling or being reneged. Hardly the type of policy that ‘boosts significantly’ the supply of homes!
Looking forward, we are aware that high-level meetings have taken place between the Homes and Communities Agency, senior Government officials and important figures in both the market housing and affordable housing industry to try and work up a way of ‘easing the pain’ caused by the announcement. However, our latest understanding is that the Government is unlikely to budge from its principal position of requiring the 1% reduction over the next four years; thus a U-turn appears unlikely, and it seems it’s a case of watch-this-space (and hold on tight) for the foreseeable future.
Jonathan Bloor, Regional Director, Richborough Estates
Further Reading
You only have to do a quick Google search to find articles produced by a broad-spectrum of sources, ranging from traditional national print-media (The Telegraph, The Independent, The Guardian); to more specialised commentators (New Statesman, The Huffington Post); to charity and other interest groups (Shelter, Unison).
Given the multitude of articles available to view, I’ve listed below several which I feel either provide a concise, pithy summary of the matter – or that provide an interesting perspective on the situation:
- The Independent: http://www.independent.co.uk/news/uk/politics/budget-2015-live-george-osborne-s-new-housing-policy-will-cut-affordable-house-building-by-14000-10375355.html
- Shelter: http://blog.shelter.org.uk/2015/07/budget-2015-the-impact-on-social-housing/
- New Statesman: http://www.newstatesman.com/politics/2015/07/governments-plans-are-nothing-short-attack-social-housing