In his Autumn Statement, George Osborne confirmed that the Right to Buy scheme would be extended to housing association tenants. So what does this mean for housing associations and the housing sector more broadly?
One of Margaret Thatcher’s most famous policies as prime minister was helping council house tenants buy their homes at a discount. That 1980 Right to Buy (RTB) scheme is still with us and will soon be extended, via the current government’s Housing and Planning Bill, to housing association tenants in England.
Around 1.3 million tenants will be able to use RTB-level discounts, worth £77,900 across England and £103,900 in London, to become a homeowner. Housing associations will voluntarily offer the scheme, with the government then compensating them for using discounts and selling below market value. The associations will retain the sales receipts, enabling them to reinvest in the delivery of new ‘one-for-one replacement’ homes, including other tenures such as shared ownership. Portable discounts, which tenants can use on properties other than their own, will also be introduced.
To fund the scheme, local authorities (LAs) will sell off their most valuable council houses when they become vacant, raising £4.5bn a year, in government estimates. The councils will then build replacement homes with the money raised, with the surplus going to fund RTB.
Uncertainties about cost
The plan has been slammed by the Institute for Fiscal Studies, which expects 210,000 households to take up the RTB, representing a £11.6bn bill over the next parliament. It warns that there are “considerable uncertainties” surrounding the government’s £4.5bn costing and believes public finances could take a large hit.
The Chartered Institute of Housing reckons that 7,000 council homes could be lost each year as LAs are left with little cash to replace the homes they will be forced to sell. Nevertheless, the government claims the scheme is proving popular, with more than 11,000 housing association tenants having registered their interest so far.
The government has also launched a pilot scheme with five housing associations, whereby successful applicants will be able to progress up to the point of sale, but will not be able to complete until the Housing and Planning Bill becomes law. It is currently going through the Commons.
Flexibility to turn down sales
So what does the housing sector think? Catherine Ryder, adviser to the chief executive at the National Housing Federation, says that the key principle of the agreement is flexibility, meaning that associations have the ability to manage their own assets and turn down sales if there are compelling business reasons not to sell. “This, combined with a firm guarantee from government of 100% compensation for every home sold, means associations can still plan out finances taking into account the effects of this scheme and commit to minimum one-to-one replacement. It does not mean the death of social housing in any way.”
Sovereign Housing Association is taking part in the pilot scheme in Oxfordshire with an initial limit of 200 sales. “It is an opportunity for us to help shape the scheme – as one of the largest associations, we felt it was our responsibility,” explains director of strategy Clare Powell. “I think the scheme will be very popular with tenants, and feel reasonably confident that we can replace what we sell with new homes, with expected average receipts of over £200,000. We can build replacement homes in areas where they are really needed.”
However, she identifies the influx of cash from sales as a challenge as well as a benefit. “We don’t like sitting on cash, and, during the pilot, we will look at the periods between selling and replacement and how that works with our plans for new and replacement homes,” she says. “How much future funding will we need? How much of a difference will the sale receipts make to that need? Meeting expectations will be quite a difficult treasury juggling act.”
Notting Hill Housing will also offer the voluntary RTB, though not in the pilot scheme. “I believe people in home ownership is a good thing,” says chief executive Kate Davies. “If you get to old age then you can use property as an asset to pay for care, and if you are a mum and dad it provides security and stability for your family. We should facilitate it.”
Issues of affordability
However, she sees issues of affordability in the leafy environs of Notting Hill.
“The average value of stock here is £400,000, so even with a discount you need to be earning a lot of money to be able to buy. I don’t envisage a great rush to buy in this area, but you don’t know until it starts,” she says. “Perhaps you could see family and friends coming together to buy the house as an investment. But I believe it will be more attractive in the North, where social housing is cheaper. The discounts will be irresistible for tenants there.”
As for benefits, she agrees with Sovereign that the cash influx from sales can lead to more new homes being built. “If we do sell a £400,000 property then we would have that amount to spend on two or three bigger homes elsewhere to meet growing need. We will have more cash coming in and therefore less need to borrow and pay interest from banks or take out bonds,” she states.
High Wycombe-based Red Kite Community Housing voted against the voluntary RTB proposal. Chief executive Trevor Morrow remains uncertain whether they will be able to afford to replace sold properties. “It’s still not clear to us how we will be expected to do this financially,” he says
“If we do sell a £400,000 property then we would have that amount to spend on two or three bigger homes elsewhere to meet growing need”
Kate Davies, chief executive, Notting Hill Housing
In addition, despite being in favour of supporting those tenants expressing a desire to own their own homes, Red Kite believes associations should have more control over the process. “We want to be able to say we don’t want to sell when the home is just going to be used as an asset to be passed on to a future generation. If we can sell our homes to families who will live in them now, then we will offer the voluntary scheme,” he states.
He says the RTB scheme is more government interference in the sector, citing the instability caused by recent rate-setting schemes. The government had proposed that the Consumer Prices Index (CPI) plus 1% would form the basis of social housing rent increases for the next 10 years from April 2015, but announced in the summer that rents would be reduced by 1% for four years.
“It’s frustrating, as you need to plan your business and know how much you can invest,” says Morrow. “We need government to stop chopping and changing.”
Credit rating agency Standard & Poor’s believes that the way housing associations plan the RTB changes will be vital in retaining their attractiveness to investors. In a recent note, it said rural areas and the North faced the biggest credit risk, as the unpredictability of RTB sales “make accurate business planning more difficult”. Associations might choose not to replace stock or deleverage, but instead spend their additional cash on refurbishing existing stock.
It also warned that unpredictable sales would make it difficult for associations to expand their existing development programmes at short notice. This would be especially difficult for smaller associations, which may not have development programmes in place. They would have to spend some of their new cash on creating programmes, bringing the risks associated with moving into new business areas.
Another concern is that associations may use their new cash to build non-social stock, thus reducing the attractiveness of their long-term rental homes to investors.
Standard & Poor’s believes the Office for National Statistics (ONS) decision in October to reclassify housing associations as public non-financial corporations could also have risk implications for the sector. Primary credit analyst Robin Froggatt-Smith says the move results in housing associations’ liabilities, around £63bn, being counted in public sector net debt. “The government might just do nothing, deregulate or it could increase its regulatory control, particularly perhaps over future borrowing,” he says.
Davies of Notting Hill Housing believes the government will look to get the sector back in private hands. That could lead to lighter regulation and allow associations more flexibility to manage their assets and boost revenues. “We are not public sector bodies; we are social enterprises,” she says. “Being out of the public sector would mean more flexibility.”
Davies stresses, however, that debates over RTB and the ONS decision are very much “secondary” to its core business: “We continue to do what we need to do and meet our objectives in providing people with much-needed homes.”
If we do sell a £400,000 property then we would have that amount to spend on two or three bigger homes elsewhere to meet growing need