A fine mess

Unfortunately, with the credit crunch now hitting the wider economy and the housing slump gathering momentum, government lacks the time to engineer a new model to do the job. Furthermore, the captains on the bridge are changing.

Yet another housing minister will want time to get on top of the brief and Bob Kerslake is waiting in the wings to take charge of the new Homes and Communities Agency in the New Year.

Tweaks to the existing business model are therefore more likely than radical changes such as exploiting the development potential of ALMOs and local authorities in a big way.

The government has only itself to blame for its current predicament. Over the years, the Housing Corporation been under instructions to reduce its grant rate in the belief that housing associations will be able to use bumper gains on speculative house-building to subsidise social housing.

Until recently, the financial difficulties caused by the credit crunch and the housing crash were regarded as a passing storm before a ‘return to normality’ next year. Now, there’s a growing realisation that adverse conditions will be around a lot longer.

A year ago, half a dozen funders battled to provide mega-associations with loan facilities up to £500 million on cheap costs of 0.3 per cent above market rates. Now, takeovers and mergers in the banking sector have cut the funders willing to back associations, and the cost of borrowing is higher.

Loans of more than £50 million are rare – and rates have shot up to more than 1 per cent above market levels.

Lack of sufficient loan finance is not an issue at present. Existing credit lines of almost £10 billion can meet most, if not all, of the private finance needed to deliver the Housing Corporation’s development programme. Also, there’s scope to raise private finance, albeit at high costs, through the bond market.

But will mega-associations be able – or want – to undertake large mixed funded programmes if they can’t raise long-term finance at acceptable costs? Or will they start to look at a future without big growth plans?

Most exposed are the corporation’s elite development partners reliant on profits from speculative house-building to subsidise social housing.

At Anu Vedi’s Genesis Housing Group, for instance, funding for its current £1.3 billlion development projects is expected to come from £1 billion proceeds from selling new homes and £0.3 billion corporation grant funding.

It’s no surprise that such large exposure to the housing crash has prompted Genesis to look for a merger partner, possibly its asset-rich, lowly geared neighbour Notting Hill Housing Trust. But other mega-associations are in a somewhat similar position to Genesis, heavily reliant on selling homes to make schemes work.

If loan defaults and bankruptcies are to be avoided, other mergers and takeovers among the HC’s development partners could well be needed.

Will the government persist with its 2008-11 development programme on the assumption that the housing market will recover and associations will be back as speculative house-builders?

Or will its new Homes and Communities Agency rush to tear up the programme and lift the grant rate back to levels where associations can develop social housing without depending on cross-subsidies from selling new homes?

Or perhaps Margaret Beckett will be the one to take on the Treasury and push for ALMOs and local authorities to get into social housing development in a big way?

Sebastian Taylor is a journalist and former finance editor of Social Housing.