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Policy Exchange calls for housing associations to have great financial freedom

Financial constraints and regulatory rules are holding back housing associations from delivering 100,000 affordable homes a year, according to a new report by a centre-right think tank.

Research by Policy Exchange in its report Freeing Housing Associations [see attached file] said HAs have sufficient financial capacity to build many more affordable and market homes than are currently being built, with the sector as a whole having the potential to deliver 100,000 homes a year.

The HA sector reported a surplus of £1.9bn in 2013, which was enough to build 45,000 affordable homes when used alongside government grant levels, section 106 and sustainable borrowing.  

But the research showed the sector could be making a much larger surplus of £3bn a year, if HAs were given the freedom to use their balance sheet capacity through strategic asset management, had access to cheaper debt finance and had more support to build more market homes for sale.

The report said the current system of government funding through modest levels of capital grant was “no longer fit for purpose”.

Capital grant funding costs the Exchequer £1.1bn a year at a time when public finances remain constrained and the current benefits of grant levels on offer to HAs are no longer equal to the risks and burdens they place on associations.

A zero grant model, where the government invested “generous” amounts of repayable equity in HA homes, instead of the current grant could be a more attractive option, it said, costing the government nothing since the investment could be treated as a financial transaction.

It added that too few HAs are building market housing for sale to cross subsidise the delivery of new affordable homes.

In 2013/14, half of the top 50 housing associations built market housing for sale, with 2,200 homes. Of that, 87 per cent was concentrated on the top 12 HAs.

HAs have predicted they will build 7,500 market homes for sale a year from 2015, generating £300m a year in profit – making up 15 per cent of their projected overall surpluses of £2bn a year, the report said.

The profit margin on market sale is around 20 per cent, so selling a house at £150,000 could generate £30,000 of cross subsidy to build or acquire affordable homes.

The report estimated that if all of the 71 major HAs built the same volume of homes for market sale of the top 12 cited, they would build 17,000 market homes in an average year.

It said there is a “culture of risk aversion” at the regulator level, which is driven by a need to protect public assets as well as within HAs themselves and has called for greater recognition that an increase in homes for market sale will ease the pressure on social housing.

“The government has to signal its support for this as part of an integral strategy of reducing the waiting lists. The regulator too needs urgently to fulfil its role in helping housing associations to better understand the risks of more market activity and in managing their risk exposures.”

Recommendations include:

  • Create a new category of HAs, independent of historical housing grant
  • Government equity investment in new affordable homes, rather than capital grant funding
  • More government support and guidance for HAs to build homes for market sale
  • Require and supporting inactive HAs to become more active

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