AMT Public

The current economic downturn is having a marked impact upon the affordable housing sector.  In many urban and rural areas development work on schemes that were considered viable twelve months ago has stopped; and there is anecdotal evidence to suggest that developers are pulling out of schemes and off-loading land assets in an attempt to manage risk.

The economic downturn has had a dramatic effect upon both housing markets and the house building industry.  It will be a particular challenge to meet Government, Regional Spatial Strategy and Local Area Agreement targets for new homes in the current economic climate.  With rising repossessions, falling house prices and sales, a dramatic reduction in new build activity and the inaccessibility of mortgage finance, the full impact and extent of the downturn in housing terms remains to be seen.

Government interventions to support the housing market have included increasing the stamp duty threshold; loans to assist first-time-buyers; mortgage rescue schemes; bringing forward spending on affordable housing and increasing flexibility in bidding for resources.

The recession has impacted on the housing sector in a number of areas:

• Building new affordable homes
• Homelessness
• Support for third sector organisations providing services to homeless / vulnerable people

Building new affordable homes is dependent on the ability of housing associations to fund the cost of such activity. Social Housing Grant rates have fallen and the rest of the funding required comes through borrowing money from the private sector, through planning gain from private developments, or from housing associations’ own reserves.

Over the last 20 years, the drive to increase value for money in affordable housing schemes has seen housing associations become increasingly skilled at negotiating viable and profitable developments with a mix of funding. Successful shared ownership models have generated cross-subsidy for social rented homes, and including private homes for sale enables surpluses to be reinvested in further mixed tenure developments.

However, the credit crunch has introduced new risks to the business of developing affordable housing in market towns:

• Reduced availability of mortgages to individuals has reduced demand for market price owner occupier homes;
• Reduced availability of more flexible mortgages to individuals has reduced the demand for shared ownership based homes, or ‘stair-casing’ up existing shared ownership homes, (Stair-casing” refers to the practice of selling further portions of a shared ownership home to the tenant/owner);
• Reduced demand, as a result of reduced mortgage availability, generally for private sector developments has led to large numbers of sites being ‘mothballed’ as house-builders limit their risks. This has a knock on effect to other developments as planning gain obligations for affordable housing / off site contributions are not fulfilled;
• Housing associations are subject to reduced credit availability (just like individuals) and this limits their ability to develop, either purely through lack of liquidity or the difficulty in balancing scheme business plans.
• As well as reduced lending, the terms on which banks will lend to housing associations have become more stringent, and some are seeking to renegotiate existing loans in line with these tougher policies.

• The Local Government Association (LGA) report almost nine out of ten councils are experiencing or anticipate an increase in demand for social housing because of the recession.
• A survey of council leaders conducted by the Local Government Association, which represents councils in England, shows that 57 per cent of authorities are seeing more people in need of social housing and 31 per cent expect to.
• A ‘perfect storm’ of a range of different factors is placing pressure on the country’s council housing. There has been a significant rise in demand for council housing because of repossessions, a sharp fall in mortgage lending and house prices that remain out of reach for many people on an average salary. At the same time the supply of affordable housing has dried up.

The Commission for Rural Communities have recently undertaken a call for evidence on the impact of the credit crunch on rural areas.  Submissions on affordable housing include;

• Most respondents reported that the construction industry had been the hardest hit by the ‘Credit Crunch’. The Country Land and Business Association commented that the residential market catering for social housing is having problems with tenants defaulting on their rents. Rural Housing Enablers and partners of Community Lincs are already observing a marked increase in the numbers of homes being repossessed, as have the number of people in arrears. This suggests that repossessions have yet to peak. Despite falling house prices, which are creating some challenges for existing homeowners, the lack of affordable housing is still a major concern reported by rural members of the Federation of Small Businesses (FSB) and many communities. In many rural areas it is still difficult to attract staff because the lack of affordable housing. This is made worse by difficulties faced by staff failing to obtain mortgages.

• Kent Rural Board commented on the lack of affordable houses being built, coupled with expensive mortgages and large deposits. At one end of the spectrum young people and low paid workers were still finding it difficult to buy property, whilst the other end is illustrated by an older homeowner who emailed that the drop in house prices has affected the sale of her house and her ability to provide as planned for her future and her family.

• The Regional Development Agencies joint response found rural house prices were falling as steeply as in urban areas. Building sites in rural areas are starting to mothball and the lack of new building will increase the demand for affordable housing. The mismatch between demand and supply may be made worse by the potential evictions of private landlords and reduction in private rented housing. Rural Housing Enablers at Community Lincs foresee this resulting from some private landlords being unable to keep up payments on their loans and thus may evict their tenants and raise rents, making it difficult for other tenants to stay in the property, whilst other landlords seek to sell rented property in a difficult market.

• Leicestershire Rural Partnership (LRP) reported that lending for Housing Association’s developments had become difficult. ‘Higher interest rates make schemes cost more and this may well make them financially unviable.’

• LRP do believe affordable rural housing will continue through exception sites because they don’t rely on developer contributions. It may increase efficiencies from builders as exception sites become more cost effective. The Housing Corporation may allocate more grants to increase rural housing so they can achieve their targets. Developers could also sell off ‘unsellable’ properties to the Housing Association which may also help to boost housing.
• Gloucestershire First believes the high house prices in rural areas won’t be reduced by the Government’s housing measures such as holiday on stamp duty because most of the house prices in rural Gloucestershire are above the threshold.

The Durham Economic Partnership found a possible a positive affect of the ‘Credit Crunch’; the reduction of house prices may attract more first time buyers. But there needs to be better mortgage deals on offer especially for those who are self employed or have several part time jobs.

Go to Part VIII:  Party politics and affordable housing