The government hopes that allowing housing associations to charge higher rents will lead to more new homes built with less subsidy. But many in the sector think it will have exactly the opposite effect.

Buried in last week’s construction economy predictions from the Construction Products Association and Experian were some pretty scary numbers for those working in affordable housing. The CPA thinks just 65,100 publicly funded social homes will be built between 2011 and 2013, compared with about 100,000 in the last three years. According to Experian, the annual volume of business will fall by about 40%, to £2.6bn, a level lower than any since the middle of the last decade.

This pessimism is a response to the 60% annual cut in funding for social housing, but is also a sign of how much the government will have to incentivise the private sector to supply affordable homes if it is to get close to its target of building up to 150,000 social homes between now and 2015. Some, though, think even the Experian and CPA forecasts - let alone the government’s predictions - are optimistic. The government’s idea is that its “affordable rent” plan will enable housing associations to build more homes by allowing them to charge up to 80% of the market rent in any area - and therefore raise more private finance up front. It was a policy latched onto as a defensive move in the last days before October’s Comprehensive Spending Review, when officials feared briefings by the right-wing Policy Exchange think-tank had persuaded ministers to cut all social housing funding completely. But was it worth the gamble? Bids from housing associations wanting to be part of the new regime are due in on 3 May, and all eyes are on the number of submissions. Furthermore, the change is prompting some to ask whether they should even remain as social landlords, or change their businesses altogether.

Increased risk

In September last year, housing association giant L&Q and Pricewaterhouse Coopers called for a revolution in the funding of affordable housing: allow higher rents to be charged, but in return get more homes for less government subsidy. Their report was the inspiration for the government’s subsequent policy, and many blame it for giving the government an excuse to cut funding. But the policy in reality is quite different from what was asked for - piling steep rent increases on the few who get new homes, rather than making all pay a little bit more - and herein lie the problems. Even David Montague, chief executive of L&Q, says the body has now little choice but to build fewer homes under the new regime.

So what are the issues? The new model envisages associations borrowing a huge amount more from the private sector than they have before, to pay for the homes up front - over £20bn, according to the Chartered Institute of Housing. “The fundamental question,” says Richard Capie, deputy chief executive at the institute, “is where is that money going to come from?” Policy changes are making associations more of a risk to lenders, meaning the huge expansion in gearing is harder to achieve. This creates problems. First, plans to cap the amount of benefits paid out mean the rents in some areas won’t be underwritten by a tacit government guarantee. Second, plans to pay housing benefit direct to tenants, rather than landlords, will make money harder to get hold of. Third is the fear that housing policy will change at a later date, bringing rents back down. As Keith Exford, chief executive of association Affinity Sutton, says: “It’s hellishly complicated. But it’s also pretty risky.”

Fewer houses

Exford’s organisation is among many that are planning, in response to the changes, to cut the number of homes they build in half. In Affinity’s case the reduction is from 1,400 to about 750 homes a year. A survey of the 15 biggest associations operating in London and the South-east - including Affinity and L&Q, as well as Family Mosaic, Notting Hill and Hyde Group - found 11 were planning to cut output, most of those by half or more. According to one senior former housebuilder, who sits on a number of association boards, reaction is split between different camps: some gung ho, some wanting nothing to do with it, and others putting in a minimal bid simply to stay in the development game.

He said: “It’s pretty clear we’ll see dramatically less housing built.” Exford says: “Until we’re clear how this will work, it’d be pretty reckless to commit too much of our funding to it.”

So far, the government is providing little comment on the issue, saying it is waiting for the bid deadline before it can assess how many homes will be built. Anything more than a 25% fall on 2011’s prediction of record-high social housing numbers and it risks missing its 150,000 target. And it does indeed seem the government is preparing to miss - or massage - its targets. Fiona MacGregor, deputy director of investment at the Homes and Communities Agency, told the Housing Forum last week that bids for the whole programme were being asked for up front because: “We need to know early on if we’re going to get close to the 150,000 output.” Richard McCarthy, director general of the communities department, at the same event said: “Given the record years we’ve just had, I think we can manage a period where fewer homes are built.”

Charity or developer?

Beyond borrowing, it is the sheer unaffordability of the new homes to potential tenants that is leading most associations to rein in their plans. L&Q’s David Montague estimates the average rent for a family home in Haringey will rise from £126 a week to £390 if it went up to 80% of market rates. This would leave a family on housing benefit with just £110 per week to live on under the new benefit rules. Any hopes that London would get special treatment from the Treasury - mayor Boris Johnson has been battling for a “London settlement” on housing benefit behind the scenes - has now receded. Montague says the association will therefore only be able to pitch rents at 60% of market rents, again limiting the number of homes it can build. He says: “To build more it will require a far stronger partnership between local authorities and associations than currently exists.”

As all of this is happening, associations are wrestling with their consciences to decide whether to build homes for rents at higher levels - are they charities, or developers? While some may opt out of the new, market-led economy, others see it as the only way forward and are preparing to transform their businesses. A number of social landlords are known to be examining whether to change their constitutions, by either floating on the stock market or becoming mutualised social enterprises - and may even start to challenge commercial developers and housebuilders. The former housebuilder says: “Boards are discussing their status, and housebuilders are getting nearer to associations, and associations are becoming more like housebuilders.” With the government’s affordable rent plan pushing the sector out of its comfort zone, social housing is likely to be a very different place in five years’ time.

Social housing in numbers

  • Homes built 2008-11: about 100,000

Grant: £8.4bn

  • Homes built 2011-15: ’aspiration’ 150,000

Grant: £4.5bn

  • HCA completions target for 2010/11: 62, 495, of which 53, 590 affordable and 8,905 market sale

What is affordable rent?

Associations will be given grants to build new homes of on average £25,000 per home, down from about £65,000. In return they can charge up to 80% of the market rental rate in the area and offer short-term tenancies. In addition, a number of re-lets of existing tenancies will be able to be charged at the higher rate. Grant will be paid on completion of the home, rather than up-front, and bids for the whole four-year funding pot have to be in by 3 May.