May 2013

Uncertain terrain Issues and challenges facing housing

associations

Alex Marsh

School for Policy Studies

University of Bristol

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1. Introduction

This paper offers a brief tour through some of the context, issues and challenges currently

facing housing associations, as I read them. It offers some thoughts on the directions in

which things may be heading. The time horizon I have in mind is the medium term – the

next five years.

Many of the points I make below will strike informed readers as uncontroversial. I am

simply summarizing issues that pretty much everyone in the sector has on their mind at the

moment. Other points are perhaps a little more contentious. Occasionally they are a little

speculative. Your reading of the situation may differ dramatically from mine. That is

perhaps inevitable, given the nature of the exercise and the context we are facing.

But in clarifying points of disagreement, and which interpretations of the situation we

favour, we move our understanding of the risks and opportunities forward. We start to see

with greater clarity our preferred future and how we might bring it about. And that

represents progress.

This paper seeks to raise issues in fairly broad terms, rather than offer any very specific

answers. The answers, if and when they come, are not mine to give. They have to be argued

through and agreed locally.

2. Economic context

Britain has already experienced half a decade of slow economic growth. Recently we have

seen some very limited signs that the economy may now be improving, but we are unlikely

to see growth rates increase significantly over the next couple of years. And we may see no

sustained period of growth before 2018. While we might hope that it turns out to be

inaccurate, talk of a lost decade is not, in my view, unreasonably hyperbolic.

This will have wide ranging consequences, including for the strength of the public finances.

It will inevitably present governments – of whichever complexion – with difficult choices.

Yet, while the overall picture is one of persistent economic weakness, the experience on the

ground is rather different depending on where you are. Regional economic trajectories

appear increasingly differentiated between London and the South East, on the one hand,

and the rest of the country, on the other. The prospects for London and its environs over the

next five years are undoubtedly more positive than for much of the rest of the country.

While we might expect this to increase inter-regional mobility towards the capital,

disparities in housing costs and affordability problems in the South East already represent a

significant disincentive.

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Unemployment has not increased as dramatically in the aftermath of the Global Financial

Crisis as many had predicted. This is something of a puzzle. Nonetheless, we can expect

public sector job losses to continue. For example, the squeeze on local government spending

in the current financial year is considerable. The impact of this squeeze on local economies

will vary significantly across the country. We await compensating private sector growth.

One of the key features of recent years is the changing profile of poverty. Rates of pensioner

poverty have decreased, and the Coalition’s triple-lock on pensions will mean that this trend

is likely to continue. In contrast, working families on low and middle incomes have seen

their incomes stagnate in real terms for several years. Where jobs are being created there has

been a growth in part-time working, under-employment and hyper-flexible employment

arrangements – such as zero hours contracts. This presents households with challenges in

budgeting, securing an adequate standard of living without state assistance, and securing

adequate housing.

3. Political context

The Chancellor shows no sign of making significant changes in the overall direction of

economic policy. This is despite increasing dissent from just about every quarter, including

influential international organisations such as the IMF. Mr Osborne has signalled that the

broad direction of fiscal policy is not going to be reconsidered.

The Government is holding fast to deficit reduction as the core of its economic strategy. This

is arguably the only major aspect of the Coalition policy platform upon which the leadership

of the two parties continue to be united. However, in lieu of increasing public spending, the

Government has become enamoured of state guarantees as an indirect mechanism for

incentivising investment. This is very evident in the way in which housing policy has

evolved.

We face a wildcard in the form of the arrival of a new Governor of the Bank of England in

June 2013. Mr Carney has already expressed concern over the health of the UK economy.

Whether this will translate into a change in monetary policy stance is yet to become clear. It

has been suggested that he may tolerate and target a higher rate of inflation as a means of

reducing the real value of debt. Such change in monetary policy would have significant

implications for households who rely on social security benefits that are not being indexed

to inflation. Whether there is a corresponding accommodation in welfare policy will be

therefore be crucial.

The Government is in the middle of a major programme of welfare reform. The contours of

changes so far are clear: changes to the basis for calculating local housing allowances in the

private rented sector, restrictions in benefit uprating, an overall benefit cap, changes in non-

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dependent deductions, the use of direct payments, changes to the rules on underoccupancy.

Layered on top of this agenda is the localisation and reduction of council tax benefit. While

the dimensions of change are clear, we are a long way from understanding the full impact

on households’ incomes and housing circumstances.

We are awaiting the roll out of Universal Credit (UC) later this year. In a very significant

move, this will extend welfare conditionality to in-work benefits for the first time. Several

steps need to be successfully negotiated before UC is fully implemented. If nothing else,

there remain major question marks over whether the bespoke software systems it relies on

will be able to cope. While we have to assume that UC will arrive, this is by no means

certain.

We can expect further changes to welfare systems and budgets in the autumn. Change will

mean cuts. Whether these cuts will fall on better off pensioners or again target the sorts of

households who have already seen their incomes reduced is unclear. This could well shape

up to be a major political battle within the Coalition.

4. Housing policy

Coalition policy towards housing has evolved over the last three years. Initially we saw

limited engagement with housing issues beyond substantial cuts in social housing capital

spending. This was followed by some limited reinstatement of a capital programme. The use

of higher Affordable Rents is favoured over conventional social rents, in part because they

should generate stronger revenue streams to underpin development with lower levels of

grant.

Fixed term tenancies have been introduced. They are being embraced by some housing

providers, while others have taken an explicit policy decision not to use them. The

Government has opened it up to local discretion to set the criteria for determining whether

such fixed-term tenancies are renewed. What sorts of conditions it is appropriate for

landlords to impose is a source of active debate.

While it is hard to envisage a return to significant grant funding for social housing in the

near term, there have been new initiatives to boost investment in the private rented sector.

Most recently we have seen the availability of the Funding for Lending scheme to Buy to Let

landlords. Buy to Let has continued to recover strongly during the first quarter of 2013.

There has been limited structural reform of the housing system under the Coalition. In this

respect there is strong policy continuity. Action on housing supply has been restricted

primarily to changes to the planning system and the use of public land, rather than broader

action to reform the housebuilding industry or the land market more generally. Action to

reform mortgage markets has been modest. The Government has announced a potentially

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huge intervention through the Help to Buy guarantee scheme. This scheme will most likely

keep house prices high but do little to increase supply. It was launched as a temporary

intervention, but it is very likely that if government does take this route then it will find it

very difficult to extricate itself from the market.

The Government’s current policy position embodies something of a tension. In both the

private rented sector and the social rented sector there is an implicit assumption that

housing benefit will be available to underpin access to new provision, if it is to be accessed

by lower income households. With the exception of the change to the underoccupancy rules,

housing benefit in the social sector have remained largely untouched. But at the same time

there is a broader concern about the size of the overall housing benefit bill.

The housing benefit bill has not been restrained as much as the Government had anticipated,

in part as a consequence of increasing numbers of claimants. There is a risk, from the

perspective of the social housing sector, that the Government will feel pressure to cut the

housing benefit bill further in an attempt to make short term savings. This would create

significant policy turbulence.

Labour housing policy is only just beginning to emerge. The focus of recent announcements

has been on the length of tenancies in private renting, in recognition of the rapid and

substantial expansion of the sector over the last decade and the fact that it accommodates

increasing numbers of families with children. There have recently been hints of a

reorientation away from reliance on housing benefit towards a greater role for grant-funded

social housing, but this is yet to firm up into policy. The Liberal Democrat official housing

policy commits to substantial grant-funded social house building. Whether this will come

into play in 2015 if there are coalition negotiations is unknown.

Housing affordability has improved in many areas of the country, although it remains

problematic. That is particularly the case in London and the South East, where there are

signs that continuing strong housing demand means affordability is again deteriorating.

The housing consequences of the recession have so far been less severe than they might have

been, largely as a result of an extended period of very low interest rates and lender

forbearance. Any substantial increase in interest rates could have significant knock-on

consequences in the housing market. Such an increase will arrive eventually, but most likely

not for a couple of years. Similarly, forbearance has its limits, but how any change of stance

by lenders would play out in housing market terms is entangled with broader questions

around the strength of bank balance sheets.

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5. Strategic choices

The context in which housing associations have to operate is one of considerable

uncertainty. Associations are facing some important and difficult strategic choices.

Understanding risks individually and cumulatively will be vital.

Questions are being asked about very fundamental issues including:

Who should social landlords be seeking to serve? With what types of housing? And

on what terms?

Is continuing to build housing in the absence of significant grant funding a viable

strategy, given the risks? How is new housing to be financed?

What, if anything, should housing associations be doing beyond providing good

quality housing? And how can these additional services be funded? Will services be

discontinued because they are no longer viable in the light of continuing cuts in local

authority funding? Or are there sufficient private payers to sustain services on a

purely commercial basis? Are there services that deliver consistent surpluses, which

are then available to be reinvested or for cross-subsidization of social housing?

What is the nature of the relationship between landlord and tenant, and how should

it be conducted? Is it increasingly to be seen simply as a commercial transaction

conducted largely at arms-length? Or is it something more multi-dimensional and

relational?

Does the organisation have the range of skills it needs at senior level to operate

effectively in a new environment that is less comfortable, less predictable, more

complex and more risky? Is it well-placed to diagnose its own deficiencies?

Housing associations have a legal obligation to co-operate with local authorities to

the extent that is reasonable. What is reasonable in the new context?

6. Customers and construction

The delivery of current services to existing tenants is the key task. The uncertainties of the

current environment, such as the likely increase in rent arrears resulting from the arrival of

direct payments, mean that simply maintaining satisfactory levels of performance – both in

service delivery and financial terms – has become more of a challenge. Landlords are putting

considerable additional resources into support to tenants and into rent and debt collection.

This may mitigate the risk of increasing bad debts, but in itself it places additional pressure

on the bottom line or diverts resources from other activities.

Associations are exploring the scope for providing rented housing at intermediate or market

rents aimed at tenants who are better-off than traditional social housing tenants. Or they are

providing various forms of low cost home ownership to such households. These approaches

have been around for years, and for quite a while they have been necessary to make

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development schemes financially viable. But housing activities other than conventional

social housing assume a new significance in a low-grant/no-grant world.

Lack of government grant means limited amounts of conventional low-rent social housing.

Strategies for continuing development will mean some or all of the housing will be at higher

rents. Such properties may well appeal to different types of tenant. Or an association may

wish to target tenants who are able to pay from their own pocket without state assistance, in

order to avoid creating a cohort of tenants facing even deeper poverty and benefit traps.

Some landlords see market renting as a means of cross-subsidising continued provision of

properties at rents substantially below market levels. However, it is by no means self-

evident that this approach always stacks up financially.

In relation to service delivery, do new ways of interacting with customers need to be

explored? Commercial service providers are increasingly managing relationships online and

off the desktop, on mobile devices. Does the social housing world need to move more

decisively in that direction? Even the benefit system is placing greater emphasis upon digital

delivery. That may in itself raise questions about assumed levels of digital literacy, but it is

indicative of a direction of travel.

Housing associations need to consider how they relate to different groups of tenants

through their management services. Is a standardised service a realistic approach, when

some tenants are paying considerably more than others? What would represent meaningful

and valuable enhancements for those who are paying (near)market rents? How can offering

enhanced services be squared with attempts to generate revenue for cross-subsidy? And

how can it be squared with a situation in which the management costs associated with

tenancies may be inversely related to the amount the tenants contribute from their own

pocket towards the cost of the service?

Rather than cross-subsidy through intermediate or market housing, an alternative strategy is

to look towards non-housing activities to provide revenue to underwrite continued social

rent housing operations. Clearly, many housing associations have a well-established

tradition of working in social care or community development alongside providing housing.

But activities such as social care are low margin and unlikely to provide cross-subsidy on a

more substantial scale in future. Housing associations are taking on a range of community

activities and facilities, such as shops, leisure centres, or provision of public wifi.

There is plenty of innovation occurring. It is limited only by imagination. Such new ventures

may well mean that important local amenities remain available, but we are yet to see

whether they generate financial resources available for other uses.

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7. Social housing allocations and displacement

Many landlords – both local authorities and housing associations– are reviewing their

allocations schemes and policies. They are asking who social housing is for. In particular,

should more of it be for households who are simply priced out of local housing markets, but

do not necessarily have any other identified needs? They are asking whether housing at

Affordable Rent is best targeted at different types of tenant. They are also asking, perhaps

less explicitly, who can we, as an organisation, afford to house?

With business plans to deliver and loan covenants to satisfy, income streams need to be

predictable and reliable. If an increasing proportion of the tenants traditionally

accommodated in social housing are going to struggle to meet the rent, as a result of benefit

restrictions and direct payments, then does the balance of lettings need to be adjusted so

fewer tenants are exposed to the vagaries of the benefit system?

This could be achieved by reprofiling allocations away from those likely to rely on benefits.

Or it could be achieved by putting more effort into supporting tenants into work more

quickly. The former is likely to be considered a surer route to stabilizing the business model

than the latter.

Changing priorities in allocations will almost inevitably create tensions between local

authorities and housing associations. Local authorities may well perceive that their statutory

obligations to accommodate particular types of household should take precedence over

housing association attempts to manage risks affecting the delivery of their business plans.

Changes to the use of the private rented sector for discharging homelessness duties may

mitigate tensions somewhat. Increasing common understandings of the conflicting pressures

upon landlords will be vital to maintaining productive relationships.

If the profile of social housing tenants is changed then that raises an obvious question:

where are those who would previously have lived in social housing going to live? If they are

going to live independently in conventional housing at all then it will be at the bottom end

of the conventional private rented sector. There is increasing demand for good quality

market rented accommodation at non-exploitative rents within reach of low income

households. To what extent should housing associations be contributing to meeting that

demand?

8. Future trajectories

Over the next five years we can anticipate housing associations taking rather different

trajectories. There will be an increasing contrast between the large, developing associations

and the smaller community-focused, management-oriented associations.

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We can anticipate a further move towards larger association. A key driver will be private

financing for development. Although syndication of smaller loans is possible, private

finance generally works better at scale. Large housing associations will go in search of

unencumbered assets to borrow against, leading to mergers and acquisitions.

Increasing innovation and complexity in financing without government grant will place

additional demands on boards and senior management teams. Treasury management will

need to be more sophisticated, as will risk management. Ensuring the right skills are

available will be crucial. Over-confidence is an ever-present risk. There is a pressing need for

self-awareness. I expect there will be further organisational casualties at some point:

associations that think they have been smart in putting together complex packages of

funding, only to discover that they haven’t understood the risks properly and they are in

over their heads.

The operational challenge that comes with greater scale is to organise in a way that avoids

the organisation becoming remote. It needs to stay in touch and in tune with tenants. The

efficient scale for financing and efficient scale for effective housing management are rather

different.

With economic growth continuing to be relatively weak, incomes stagnating and

affordability still a problem in the private sector, we can anticipate that demand for social

housing – particularly social housing that is not in areas or on estates with a poor reputation

locally – will continue to be high.

We can therefore anticipate the profile of housing association tenants changing towards a

greater proportion of people in low income work who are expecting – or at least hoping - to

occupy properties for relatively short periods of time before moving on. Those who are

found to be statutorily homeless and the long term benefit-dependent will increasingly be

housed in the private rented sector.

Despite the beginnings of a different narrative from Labour about social housing in the last

few weeks, and a strong substantive case for doing things differently, it is unlikely that a

change of government in 2015 would lead to a significant reorientation in housing policy

before 2018. I expect that the external constraints on public spending will be perceived to be

too great for policy to strike out in a substantially different direction.

We are going to see housing associations experimenting with new activities and new lines of

business in pursuit of sustainable business models in a low-grant world. Some such

initiatives will succeed, while others will turn out to have been unwise. Having a reflexive

and agile organisation will be absolutely key: associations need to learn quickly what’s

working and what isn’t, and to take decisive action to deal with the latter.

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9. Values

Housing associations are being pulled in sharply different directions, perhaps to a greater

extent than ever before. There is an ever-present risk that commercial imperatives

overwhelm social purpose. Maintaining a balance between the two requires constant

vigilance. It is more important than ever that senior management – and Boards of Trustees

in particular – have a very clear understanding of the organisation’s mission and values.

All proposals for future business directions and developments need to be checked against

that mission and values.

It is not simply a question of deciding whether proposals are consonant with the

organisation’s mission and values on their face, but also whether new initiatives set up

incentives that will work in opposition to, or undermine, those values in the longer term.

The current generation of senior managers across the housing association sector is

overwhelmingly committed to preserving housing associations’ sense of social purpose. But

we need to look beyond those individuals and think about systems and changing cohorts of

staff. Greater complexity and connection with the world of private finance requires new

skills and new people. Changing imperatives will create pressures for a shift in focus. The

current generation of chief executives will eventually move on. The skillset required of the

next generation, and the next, will differ, as most likely will their orientation towards the

notion of social purpose. Notions of social purpose therefore need to be hardwired into the

organisational systems and culture if they are not incrementally and unintentionally to be

lost as organisations evolve.

About the author

Alex Marsh is Professor of Public Policy at the University of Bristol. He has been Head of the

School for Policy Studies since 2007. Alex’s research and writing has encompassed a wide

range of topics in the field of housing studies, particularly concerned with policy in the

social and private rented housing sectors and with issues of regulation.

Between 2005 and 2009 Alex has been managing editor of Housing Studies, the leading

international academic journal in the field. He continues as a member of the journal’s

Management Board.

Alex worked part-time as a Visiting Academic Consultant to the Public Law team at the Law

Commission between 2006 and 2010. His work with the Commission addressed compliance

issues in the private rented sector and systems of redress against public bodies.

From 2004 until 2012 Alex was a trustee of Brunelcare, a Bristol-based charity providing

housing, care and support for older people. For six years he chaired Brunelcare's Audit and

Scrutiny Committee.

www.alex-marsh.net