Uncertain times

Gloomy economic news may have been pushed off the front pages by the war in Iraq, but the problems haven’t gone away. Wednesday’s Budget proved that chancellor Gordon Brown cannot meet his spending plans without increased borrowing, just as jittery lenders are starting to put up their rates (HT 4 April, page 8).

Falling house prices in the South-east could hamper the delivery of social housing through section 106 agreements, while further north, major job losses may knock the South Yorkshire housing market renewal pathfinder off course (HT 21 March, page 7). And although most registered social landlords are savvy enough to have protected themselves from volatile interest rates through fixed-rate loans or by using a variety of borrowing instruments, government spending, including the Communities Plan, isn’t sacrosanct if tax revenues continue to fall and the cost of the war rises. It may not be time to panic, but the outlook is distinctly volatile.

Falling house prices

In the South-east, dependence on section 106 agreements for the construction of affordable homes has yoked the delivery of private and social housing together. Richard Donnell, housing analyst at FPD Savills, says: “If a private housebuilder has to reduce end sales values by 15%, it has an impact on what they can afford on section 106 and other community benefits.”

Terry Fuller, partnering director of Taylor Woodrow, adds: “Developers may mothball sites and sit on them. Land may not come

on stream until the market comes back. One London borough is predicting a 20% drop in land values – that could have a devastating impact on housing output.”

But even if building open-market homes becomes less profitable, housebuilders and developers still need to trade their way through a recession. One way would be to become contractors for housing associations with multimillion-pound grant allocations. “If the market drops severely, you could see developers go back to becoming contractors,” says Fuller. “It happened in the last recession, and could happen again.”

That would mean RSLs acquiring land on their own behalf, a possibility if the land market softens. In fact, in the interests of having as wide a range of purchasers as possible, FPD Savills’ Donnell says his firm is trying to encourage landowners to sell to RSLs. “They’re not necessarily looking for the 20% on costs that a developer is, and can afford to pay more,” he explains.

But some economists believe that planning guidance note PPG3, which directs development to a limited number of suitable brownfield sites, will shore up the cost of land. “Land prices could plateau, but given the shortage of land, prices are unlikely to fall,” says John Stewart, economic adviser to the House Builders Federation.

House prices in many parts of the Midlands, North, Scotland and Wales are historically more stable than in the South-east, and section 106 is also less significant. But that doesn’t mean social housing programmes

in these areas are immune to private sector troubles. Often, funding comes from

public-private partnership programmes, where proceeds from open-market sales or office rents are used to upgrade social housing stock. These complex schemes are already proving sensitive to dips in private sector confidence. “Private funding is still available, but deals are taking longer than we would have anticipated, and consultants are looking over their shoulder,” says Ken Dytor, chief executive of developer Urban Catalyst.

Chris Brown, chief executive of the Igloo Regeneration Partnership, says he is already seeing the effects: “In the days when we had a gap-funding programme, a recession would only have a limited impact because the grant could increase to take account of reducing residential values. Now we don’t have that and schemes that are only just viable without a grant could stop as developers see values decreasing.”

The areas most at risk are inner cities where land and house prices have risen rapidly in the past five years, and could fall back equally rapidly if demand dries up. Projects most at risk are those with extra difficulties, such as decontamination or refurbishment costs.

Falling demand for shared-ownership

Just as the output of affordable housing starts to reach critical mass – London will have 10,100 more key worker homes under the 2003/04 approved development programme allocation – the ironic prospect is that it could be delivered just in time to compete with cheaper homes for sale.

Milton Keynes’ Midsummer Housing Association, a shared-ownership specialist, confirms that it experienced a drop-off in demand in the last recession. At Circle 33, corporate services director Howard Cresswell says “demand could fall quickly if house prices drop dramatically”.

However, the consensus appears to be that demand for intermediary housing is so high that serious problems are unlikely. “Affordable housing is the most under-served market in London and the South-east. You would need a pretty severe price re-correction to make things affordable again,” says Donnell of FPD Savills.

Market renewal pathfinders

With nine pathfinders sharing just £500m over five years, securing private sector investment and expertise will be crucial. Birmingham/Sandwell, for instance, has commissioned a report on attracting significant private sector funding. “There’s no indication [this] wouldn’t be available,” says a spokesman. Along with several other pathfinders, the team is still working out its route, drawing up a draft strategic plan with a view to drawing down funding in 2004.

This long lead-in time could benefit Birmingham/Sandwell. Brendan Nevin, director of housing market renewal strategy at Stoke-on-Trent in the North Staffordshire pathfinder, draws a distinction between areas where a long history of abandonment has left empty sites – notably Manchester, Merseyside and Newcastle – and those that face a

three- to four-year haul to bring forward sites suitable for development. The former will be talking to the developers and investors at a time when the market is fragile, but the latter could actually benefit from an economic dip. “And it becomes cheaper to acquire land

and buildings in a downturn, so you can assemble sites at less cost to the Treasury,” says Nevin.

He predicts that the more advanced pathfinders will have to be flexible with their plans. “They could switch expenditure from new build to repair,” he suggests. “A downturn doesn’t mean all success stops.”

However, Nevin also recognises the unwelcome spectre of falling public sector subsidy. “Do we get our full funding if the tax base falls? The comprehensive spending reviews will become tighter if budgets are affected by recession.” Another worry is that if, as in the South Yorkshire pathfinder area, major job losses are announced, the problem of low demand will get worse despite the pathfinders’ best efforts on regeneration and redevelopment.

Human resources

“Recession can assist housing associations. It’s easier to recruit new starters, and we get a wider pool of applicants,” says Sally Jacobsen, group human resources director for London & Quadrant Housing Trust. “At times of boom, people are happy to take their chances in the private sector. But in a dip, they want to work for employers offering strong benefits.” The benefit packages and family-friendly policies offered by RSLs are attractive to staff disillusioned with the private sector and housing associations are well placed to tap

into a growing interest in working for organisations with social values.

In London, some associations that had been struggling with annual staff turnover as high as 25-30% are already noticing the effect of labour market uncertainty. Circle 33 found that its turnover rates between October and December 2002 fell 5% compared with the same period in 2001.

A more protracted recession with rising general unemployment would also make make it easier to crack the sector’s toughest recruitment nut: maintenance surveyors and development roles. “It was very noticeable in the last recession – surveying and maintenance recruitment really shifted from one extreme to another,” says Howard Cresswell.

However, the general view across the sector is that a friendlier recruitment market is only a small ray of light in an otherwise gloomy picture. With consumer and investor confidence faltering, the situation is unlikely to improve dramatically in the short term, and any signals that the sector may not be adversely affected by the uncertainty are obscured by the desert sand.