The delivery of new homes is at the centre of government’s plans for growth, and its radical moves so far to unblock planning are very welcome, but they won’t deliver unless we get the foundations right. The changes needed to get even close to 1.5m homes are much deeper, and more difficult, but it is also possible that only this government with its will to build could deliver them.
Housing associations deliver most of Britain’s affordable housing and the “mixed funding” model we use is a product of the 1988 Housing Act that enabled private borrowing to improve Britain’s housing at scale for the first time. At the time, before the fall of the Berlin Wall and when Bros topped the charts, the investment this enabled led to very real improvements to the homes of millions of people.
Through this model, housing associations invest in homes using debt supported by the net rents from existing homes, after covering normal costs of management and maintenance. This enabled significant private finance to be raised for investment into social homes. As of 31 March 2024, the housing association sector had £99.7bn of drawn debt, which has been invested in existing and new homes.
But now that it has reached its fifth decade, the model is showing strain. There are limits to sector borrowing, with the model stretched by rent reductions and the rent cap that was right at the time but came without any mechanism to recoup lost income. This income deficit continues to be compounded by maintenance costs soaring far above the headline rates of inflation, older homes that are reaching the end of their practical lifespan, and ever-increasing expectations of service delivery policed by stringent regulation.
In basic terms, the cost of managing and maintaining many social homes is above the level of income that the home generates, primarily through rents. This is unsustainable, and it does not even benefit existing social housing residents as providers make increasingly tough choices where to invest dwindling resource.
The strain on the housing association sector is evidenced by the average interest cover ratio[1] for the sector now being below 100% for the first time since the 2007/08 global financial crisis. This is a key measure of an organisation’s ability to cover finance costs from operating income and contrasts to a sector average in 2019 of over 150%. Some of this deterioration is down to a sustained rise in borrowing costs due to the current interest rate environment but that is not expected to change in the medium-term.
In the more recent past some organisations sought to create more ongoing capacity through cross-subsidy from developing and selling homes for sale. While sometimes effective, this brought additional risk and complexity, which is still being worked through in some organisations. Recent surges in construction costs, far above increases in values in most cases, and increased regulatory requirements in the construction of new homes also undermine this model. It simply doesn’t work in many areas of the country, where costs of constructing a home are now above its value.
This doesn’t just damage social housing. One symptom of the model failing that has bled into the wider development market is that Section 106 homes, the affordable element of most market development schemes, have remained unsold to housing associations at record levels as associations focus limited resource on meeting regulatory requirements for existing homes. This jams up the delivery of all new homes.
Housing associations suffer because they offer a practical solution to a political problem, neither satisfying those who believe that affordable housing should be provided primarily by the state, or those who see housing simply as a market.
This isn’t good enough, and a new model needs to be created that sets ideology to one side and enables a sustainable affordable housing sector. The Government can’t fully fund a huge building programme at the same time as retrofitting the oldest and draftiest homes in Europe, nor will the market alone deliver the affordable homes we need.
The development of this new model should be collaborative, and that government should bring together a group, possibly similar to the New Towns Taskforce, for a once in a generation revision of the funding of social homes. This group should carefully consider a range of options and the costs, requirements, and rents underpinning social landlords as organisations.
In the meantime, a ten-year CPI+1% rent settlement with convergence would give the breathing space for this work to happen. If this group’s work starts now then there would be a fundamentally different sector in ten years’ time, doing much more for current and future residents.
[1]Earnings before interest, tax, depreciation and amortisation inclusive of capitalised major repairs (EBITDA MRI) interest cover which measures net revenues before interest, tax, depreciation and amortisation less spend on capitalised major repairs as a percentage of the organisations’ contractual interest payments in the year.