The Conservative Government has made housing in England a key issue for this parliament. They are particularly intent on reversing the decline in owner occupation seen over the last two decades. To do this the Government is moving ahead with a range of policies and reforms that are focussed on increasing the supply of market housing. It remains to be seen how successful this approach will be given the number of outstanding questions.

The policies are likely to have a long lasting effect on the sub-market housing sector and the ability to provide enough homes across the spectrum of housing need. The future role of housing associations is clearly up for debate and the Government wants to see them acting more ‘efficiently’, delivering more market and sub-market homes for ownership rather than social or affordable rent.

Right to Buy

The original Right to Buy for local authority tenants has helped almost 1.9 million households buy their home since its introduction in the early 1980s. Following the 2008/09 downturn, there had been low numbers of purchases given the affordability constraints in the market. However, the recent changes to eligibility and discounts combined with a buoyant market have helped increase the number of local authority homes sold and we expect further small increases in coming years.

The Government is keen to replicate the success of the original Right to Buy with its extension to housing association tenants. Based on the evidence available we have calculated that around 20% of existing housing association tenants would be both eligible for the first time and able to buy their own home.

Our analysis indicates that around 24,000 households could exercise their Right to Buy per annum although activity is likely to be higher at launch given the widespread attention on the scheme. Full compensation for housing associations for the discount would require in the order of £1.5 billion per year.

High value council homes

Local authorities will be expected to raise revenue for Government through the sale of high value council homes as they fall vacant. This is intended to compensate housing associations for the discounts given on homes sold through Right to Buy. The Housing Bill states that the amount of payment to Government will be determined by a formula, but the definition of ‘high value’ remains in question. Whether councils actually sell homes to raise this revenue is likely to be left for the local authority to decide.

Replacement

The high value homes sold, and those homes sold under Right to Buy, will need to be replaced, but the funding for this is uncertain and largely in the hands of the Secretary of State. Figure 1 shows the number of possible shared ownership units that could be provided to replace each home sold under the extended Right to Buy, taking account of build costs and likely first tranche sales but disregarding land costs. This shows that across 90% of local authority areas, at least 1:1 replacement may be possible with shared ownership. In reality, the probable requirement for a land value will reduce this in many cases and there may not be demand for shared ownership in all areas. Replacement at 1:1 with new affordable rented homes is likely to be impossible in all but a handful of areas.

If replacement homes are provided in addition to existing development volumes, this would require a 70% increase in new affordable homes delivery from 2013/14 levels. This demonstrates the potential of the policy to boost new housing supply, but also highlights the challenge in making it work.

^{Source: Savills Research (assuming nil land value)}

Rent reduction

The reduction in social rents over the next four years will drive housing associations and local authorities to manage their assets and associated costs more efficiently. However, the cuts may also reduce some associations’ capacity for development given the lower headroom for borrowing and the uncertainty over the longer term future once the four year period expires. This policy has already disrupted Section 106 deals across the country, harming site viability and hampering development activity.

‘Pay to Stay’

Under ‘Pay to Stay’, referred to as “High Income Social Tenants: Mandatory Rents” in the Housing Bill, social housing tenants will have to move towards paying a market rent if their incomes exceed £30,000 per annum or £40,000 in London. This may help offset some of the rent reductions for housing associations in the short term. Our analysis suggests around 6% of social rented tenants will be affected by the new caps, but this rises to 12% in the South East.

The blunt use of the GLA boundary for the change in cap is likely to cause hardship for many households in the districts surrounding London, where £30,000 income is insufficient to afford a market rent. These households will probably have to look for cheaper housing options elsewhere. This will reduce the potential additional receipts for housing associations from tenants paying market rents.

In contrast, many of the affected households in the midlands and north of England, where the cap is also £30,000, will be able to afford market rents and Right to Buy.

^{Source: Savills Research using English Housing Survey}

Reclassification

On 30th October, the Office for National Statistics reclassified English housing associations as ‘public non-financial corporations’. This was a consequence of changes that pre-date the policy announcements made over the last year. In response, the Department for Communities and Local Government said it would bring forward proposals for deregulation of the housing sector, seeking ‘to allow housing associations to become private sector bodies again as soon as possible’.

This has further increased the uncertainty in the housing sector, particularly for financial institutions lending to housing associations. Being part of the public sector would improve the credit worthiness of housing associations, whilst deregulation could have an adverse effect. The move also raised questions over control associations have over their debt.

To reverse the reclassification, deregulation would need to include two changes. Firstly, giving housing associations control over the decision to dispose of assets, releasing restrictions on asset management and potentially helping associations become more efficient.

Secondly, amending the Government powers to intervene in the event of the failure of an association. When the further education sector faced similar circumstances Government substituted reserve powers for direct control. Alternatively the sector might create a guarantee fund to underwrite debt and hence retain credit quality.