'Insidious problem' means longer debt payback period for many housing associations
Finance experts have warned housing associations against the "insidious problem" of low inflation. It can lead to larger debt and longer repayment periods, they say.

Speaking at the National Housing Federation's annual conference last week, Rosemary Radcliffe, chief economic adviser to PricewaterhouseCoopers, said: "I think we're destined for a period of reasonably low inflation and interest rates unless there are serious external shocks. People in the UK will have to get used to a rather different environment in which they service their debts."

The problem has arisen since the Bank of England became independent of the Treasury.

Interest rates are set by the Bank's monetary policy committee. Ironically, it is its success in keeping inflation below the 2.5% target set by government that is causing problems for social landlords.

This is because housing associations factor in a certain level of inflation – normally 2.5% – over the lifetime of a loan, as this will erode the value of the borrowed funds.

If inflation falls to a lower level, such as the current 1.9%, then the buffer that would normally be provided by inflation growth will be smaller, extending the repayment period beyond the agreed term.

David Rider, director at financial consultant Sector Treasury Services, said most housing associations would not be able to pay back their debt in the planned 25 or 30 years if they used inflation rates of 1-2% in business plans.

Bank of Scotland director Richard Hughes described the situation as "an insidious problem that nibbles away".

He said: "It is always a concern. If you have inflation at 2-2.5% then debt will fall [over time]. However, if inflation is lower, the buffer will not accumulate as quickly."

David Levenson, group finance director of housing association Genesis, said that linking finances to the retail price index could mitigate exposure to falls in inflation. It would allow inflation risk to be offset, he said.