Triple whammy

House prices in London are going through the roof (no pun intended)! The latest London Research Centre statistics show that the average price for first-time buyers in the first quarter of 1999 finally broke the £100,000 barrier! This represented a rise of 9 per cent from the previous quarter and an annual increase of 14 per cent.

But it is not just potential homeowners on low to medium incomes who are finding that they are suddenly being priced out of the capital's ludicrously expensive property market. Research commissioned earlier this year by the London Housing Federation Development Group shows that rapidly rising costs combined with low grant rates and rent caps are forcing RSLs to abandon many potential new housing schemes at the appraisal stage. This is bad news in a city with a very severe homelessness problem and chronic shortages of affordable housing.

RSLs faced with having to deliver new build schemes within the tight constraints of the annual development cycle have three options. They either don't develop new general needs building schemes; they try and plug scheme deficits themselves by injecting substantial levels of internal subsidy (not always an option for many RSLs); and/or concentrate new development in the very cheapest parts of the borough (more often than not both). In the case of the more expensive, usually central London boroughs "cheap" sites may not be an option that exists.

RSLs are becoming increasingly reluctant to pump in ever larger amounts of internal subsidy or run long-term cumulative scheme revenue deficits to make schemes work. For many it is a position that is unsustainable in the long term and one gaining considerably more attention from both their own Boards and the Housing Corporation as the emphasis on managing risk moves more directly under the spotlight. The third option of trying to target the very cheapest areas of expensive Boroughs (expensive in London means most Boroughs) runs directly counter to the Governments own broader aims of building sustainable and mixed communities. The end result is increasingly polarised communities of rich and poor.

The Theory: So why is this happening, and what can be done in the short term? In theory at least the Housing Corporation's investment model is structured so that RSLs should not have to subsidise scheme shortfalls. Grant rates are fixed at a level so that RSLs can set rents that are "affordable" (Housing Corporation annual guideline rents) while also taking account of annual estimates of the total costs for building new homes in different parts of the country (TCIs). The level of grant is also determined by a set of assumptions laid out in their Grant Rate Model that includes estimates of general inflation, long term borrowing costs, management & maintenance costs, rent inflation etc.

RSLs bidding at the published grant rate should therefore be able to develop new build schemes within TCIs at affordable rents. The rent should be sufficient to cover all future costs incurred by the RSL without the need for internal subsidy. That, at least, is the theory. In practice however, this is not happening.

The reality: Firstly, the LHF research illustrated that Total Cost Indicators are failing to keep pace with the rapidly rising costs of new development in a number of London Boroughs. Annual Housing Corporation TCI uplifts (now a regular fixture on the annual London development calendar) to try and ease the problem in boroughs such as Westminster, Camden, Islington, Kensington & Chelsea are having only a very limited success. The real problem is grant rates. Without a corresponding increase in the grant rate percentage many schemes simply do not work without significant injections of internal subsidy. To make matters worse published grant rates covering TCI area A (the majority of London boroughs) for new build in 2000/2001 have fallen again.

Secondly, there are wide variations in the assumptions used by the Housing Corporation in their Grant Rate Model compared to those used by RSLs on actual schemes and contained in RSL business plans. One of the most significant of these differences was the long term borrowing costs used by the corporation which bear little resemblance to the actual terms used by most RSLs that took part in the study. The grant rate model assumes current rates of borrowing while many RSLs are locked into historic borrowing agreements. Other major differences included the corporation assuming lower maintenance costs and the exclusion of service charges from their model.

London RSLs, and those operating in other parts of the country where prices are rising quickly, face a "triple whammy" of rocketing prices, falling grant rates and increasing pressure to keep rents down. This is making it practically impossible to provide the new affordable homes that the capital so badly needs. While a full review of the current TCI/Grant Rate investment framework has now been promised by the Housing Corporation later this year there is an urgent need in the meantime for short-term solutions. In London this means explicit recognition of the problems facing RSLs operating in high cost boroughs and a TCI and grant rate regime equipped to deliver new affordable housing.

Below are examples from schemes that were offered to one London association, in the past six months, that it was unable to deliver:

Example 1: New Build 31 homes. Land price £2,000,000, equal to £17,000 per habitable room Scheme cost 127% TCI To afford the scheme an additional £300,000 and a grant rate of 63% instead of the max. 56.5% would be needed.

Example 2: Action 7 large family homes. Land price £780,000 equal to £200,000 per habitable room. Scheme cost 135% TCI To afford to do the scheme an additional £200,000 and a grant rate of 72.3% instead of 56.6% would be needed.