Capacity For Cross-Subsidy

Ask a minister what the Government is doing about the housing crisis and the response is likely to include a long list of past and future policies. Shared ownership, Help to Buy and Starter Homes are all sure to be mentioned. Having identified 70,000 emerging households per year whose needs are not met by market housing, we have assessed the working of the current schemes, the impact of the new policies and what is needed to fill the gaps.

Our analysis indicates that the number of households unable to access the market, unsurprisingly, is particularly large in parts of inner London and house price to income ratios have reached double digits in some boroughs. Efforts to improve the affordability of homeownership are welcome, particularly where deposit affordability is the key barrier.

Need for cross-subsidy

Looking at the incomes required to access homes under the various schemes, it is clear that they overlap, as illustrated in Figure 6, which is based on a typical inner London borough.

The combination of Starter Homes, shared ownership and Help to Buy all help households with £45,000 to £90,000 annual income. The emerging policy focus on these overlapping schemes introduces a new risk that total take-up of new homes and therefore housing delivery will be limited.

In 2014 the affordable rent element of delivery was well priced to help households excluded from the market, albeit that some relied on benefit to pay the rent. However, the policy changes will cause a shift away from government funded sub-market rental products towards shared ownership and probably Starter Homes.

This will happen despite many housing associations wanting to continue provision of sub-market rental products (two thirds according to Inside Housing), because the capacity to support this activity through cross-subsidy from other activities will act as a constraint.

In our typical London borough, market rent levels would need to be reduced by at least half to make them affordable to the excluded households. This would require a substantial level of cross-subsidy. Lower levels of discount will be sufficient in more affordable parts of the country.

^{Source: Savills Research}

Cross-subsidy capacity

The challenge for housing associations is to find enough cross-subsidy to continue their sub-market rental development programmes in the absence of support from Government. Many are looking to expand their market sale and rent development activity, but this brings the sector into competition with the major housebuilders and emerging institutional PRS investors.

So housing associations need to use their competitive advantages, namely large balance sheets, access to low cost capital and a business model that spreads the product across a wide range of pricing and tenures.

Access to patient capital allows housing associations to take a leading role in delivery of large strategic housing sites, through early funding of infrastructure and the potential to increase absorption rates (the speed at which new homes are sold or let) through investment in place, delivery of a range of tenures and ongoing management of the retained estate.

This is likely to include selling land parcels or granting long leases to housebuilders as well as development of market rented housing, sub-market rented housing, shared ownership and Starter Homes.

This potential to maximise absorption rates, though providing homes across a wide range of tenures and price points, makes housing associations good partners where speed of delivery is a high priority for the planning authority, a public sector landowner or a private sector landowner looking to establish a sense of place on a large site. This requires additional construction capacity, with off-site construction technologies likely to be part of the answer.

All of this exposes housing associations to additional risks and the volatility of the housing market.