Overview of the Age of Austerity
The Social Housing Magazine Finance Conference was ominously titled “Affordable Housing in an Age of Austerity”. The timing of the conference was unfortunate given that very little about housing policy has been announced by the new Government. Many predictions were made from various people within the housing industry as to factors likely to affect the housing sector.
The general consensus was that Social Housing Grant will be substantially cut back meaning “focussed” HAs that run development programmes funded by little to no grant will be successful whilst “coasting” HAs and most ALMOs fall into demise. Many HAs have pre-empted this by cutting back development and building up reserves. These reserves are being squirrelled away to protect gearing covenants and to ensure that money is available in future for such things as retrofitting. The other major concern related to Housing Benefit “reform” (ie cutting it) which is a likely prospect given the noises coming from government at the moment.
“Localism” is a watchword at present, describing the philosophy behind “the bonfire of the quangos”. This relates to a potentially major shift towards specifics of housing policy being taken very much at the local level with much more involvement of local councils. Some of this change may be promoted through reform of the Housing Revenue Account (HRA) allowing councils to develop more social housing. However, it is not clear that the Treasury will sanction the further Public Works Loan Board (PWLB) borrowing that is the key to unlocking HRA.
The housing market as a whole is expected to remain flat as undersupply of new build property, the continued economic recovery and low interest rates are countered by fiscal tightening, possible interest rate rises, continued scarcity of first-time buyer mortages and prices still being overvalued compared to long term trends. Inflation should be below the 2% target after 2010 and base rate is forecast to remain on hold at 0.5% this year and probably part way into 2011.
The banks have tightened their belts making pricing less competitive and decreasing flexibility on loans. The banks now set much lower funding limits on Housing Associations and will insist on re-pricing the current loan book before arranging new facilities. There is currently no generic housing association loan product on the market with banks preferring to look at each HA on a case by case basis. With banks tightening covenants, insisting on re-pricing at any opportunity (Mike Jones of Tribal related some specific instances of painful levels of bank repricing) and increasing margins it makes alternative forms of finance more desirable to HAs. The growth of capital markets funding was seen as testament to this trend and Alex Pilato of Traderisks concluded that the capital markets are indeed thriving.
Alternative models for cross subsidy were considered including successful examples of using the Private Rented Sector, procurement savings, investing in overseas rental markets (a high risk given the current nervousness around European markets?) and the strategic acquisition of listed companies.
All in all a very useful conference and even though exact outcomes may not be known likely scenarios have been covered.
Photo: thanks to /\itus on flickr.com (CCL)