New models of social housing for Northern Ireland: time to get creative

Iain Lees considers options for delivering more social housing with less finance as budgets tighten in government.

When the coalition’s incoming Treasury First Secretary, David Laws, picked up the now infamous note from his predecessor, Liam Byrne (Dear Chief Secretary, I’m afraid there’s no money. Good Luck), no-one really knew how the UK was going to meet its ongoing need for new social housing.

And, with Northern Ireland reflecting higher levels of need while reflecting the overall budget settlement elsewhere in Great Britain, the regional housing challenge was at least as great.

Yet, despite some of the most painful austerity in a generation, neither the GB agencies nor their Northern Ireland counterparts have dropped the ball. In England, each of the last three years has seen an average of 59,000 new houses being built, a remarkable performance that compares favourably to less than 35,000 per annum for the first three years of the millennium.

Northern Ireland too, has seen a remarkable social house building programme with an average of more than 1,800 completions per annum in the four years following the global downturn, as compared to an average of 1,300 in the four preceding years. Whisper it quietly, as some might wish you to think otherwise, but this explains why Northern Ireland’s waiting lists and housing stress have fallen steadily over the last five years.

So what’s the problem? The answer is on its way and it’s big. Far from a few tough years, followed by a gradual relaxation in time for the next election, it increasingly looks like austerity could – and probably will – remain with us until around 2020, particularly as the Northern Ireland fiscal deficit is, on a per capita basis, proportionately higher than the UK as a whole.

While the Northern Ireland public sector accounts for 26 per cent of total regional output (and 32 per cent of employment), much of the local private sector is also dependent on public sector spending on activities undertaken by the private sector, like construction and other outsourced services. That means public expenditure in Northern Ireland represents almost 63 per cent of total output, significantly higher than the 39.8 per cent for the UK as a whole.

Consequently, public expenditure reduction of the magnitude anticipated will have significant negative consequences for economic growth and employment. Understandably therefore, unemployment and repossessions, the macro drivers of housing stress, are both rising – and accordingly the Department for Social Development (DSD) is targeting 4,600 new homes from this budget period versus 5,500 for the prior three years. But with reduced capital budgets, this will translate into a reduction in capital from more than £90,000 per house to less than £60,000 of capital per house.

This may look like alchemy, but unfortunately it’s not. Yes, house building costs have fallen – particularly labour and particularly land, although not materials. And while there was a little slack in the housing association finances (a technical term not a suggestion that staff were slacking), with gearing across the sector now around 10x EBITDA (earnings before interest, tax, depreciation and amortisation), there’s not much room for stretching balance sheets any further. That means we need to look at the income statement and the capital markets to keep social housing moving.

Let’s start with rent. In England, affordable housing is the new social housing. Since its introduction in 2011, the Affordable Rent product has become the main delivery mechanism for supplying accommodation to those in need of supported housing. Grant Shapps announced that £4.5 billion will be invested over the four years to 2015, to deliver 150,000 affordable houses, but also stated the obvious insofar as “that money must go further” – it equates to just £30,000 of capital per house. So how can that work? Even in Northern Ireland, it’s difficult to deliver social housing for less than £90,000 per unit.

The answer is in the level of the Affordable Rent; the Homes and Communities Agency (England’s oversight body for social and affordable housing) has allowed all new build under the Affordable Rent programme and a large number of re-lets of existing social housing to move to an apparently affordable level of 80 per cent of market rent. This income stream has enabled significant levels of debt to be raised through bank – and even more so, bond finance – by the housing associations in England, thereby enabling, facilitating and financing new build.

But the apparent flaw in this approach, which says: “If most people out of work or in low paid work can’t afford this; why aren’t millions homeless?” has been answered thanks to Housing Benefit. At 80 per cent of market level, Affordable Rents almost all fall under the Local Housing Allowance limit, the cap for Housing Benefit. Consequently, the affordable rent is largely picked up through the benefit system, explaining why Housing Benefit went up by a further 5.2 per cent between 2011 and 2012 (and has doubled in the last 10 years) while many other government budgets have been subject to double digit declines.

While the funding model has shifted in England, the system for the delivery of social and affordable housing in Northern Ireland has remained more constant.

Nevertheless, while this continues to deliver a high number of affordable new homes in Northern Ireland, are we missing a trick here? Why are we re-letting Housing Executive properties at £50 per week when an Affordable Rent regime might allow £80 per week? A £30 per week increase across the NI Housing Executive estate of 90,000 houses would put an additional £140 million per annum into the system – almost double the annual capital budget.

Obviously, this can’t be achieved overnight, as the Affordable Rent regime primarily applies to new build, and Housing Associations have to prove that the re-lets that it wants to re-price are affordable. However, the sooner Northern Ireland moves towards a more revenue-based model, the sooner it can start to deliver more social and affordable houses or re-allocate some of its housing capital budget to other areas of need.

The obvious flaw in all of this is that perhaps tenants can’t afford to pay any more. However, with more than 70 per cent of NI Housing Executive and housing association tenants on Housing Benefit and the remainder receiving subsidised housing, work could be done pretty quickly to assess whether new build, at least, can be more fully funded through centrally-supported rents.

In the meantime, Northern Ireland has to find affordable/social housing for tenants in need of support. So what are our other options?

Before, and indeed since, the introduction of Affordable Rent in England, we have defined affordable housing in Northern Ireland as shared ownership – and in Northern Ireland this has been delivered by the Northern Ireland Co-Ownership Housing Association, which is actually the UK’s largest shared ownership housing provider.

This model meets a need with households that have stable (but probably modest) income, and that don’t have the capital to pay for a deposit on their house. Government intervention, by way of average loans of around £30,000 per house enables tenants to get onto the housing ladder and take ownership of their housing needs. The cost of this intervention, by way of interest foregone for an average of less than 7 years, comes out at around £4,000 per house.

And, while it’s early days, there may even be ways of getting affordable housing brought forward to tenants for no grant. A small number of housing associations in Northern Ireland have started exploring leasing schemes with equity institutions (pension funds and insurance companies), which could provide good quality homes and reliable tenancy terms to those in need of housing support that are currently in the private rental sector.

Half of all properties in the Northern Ireland private rented sector are rented by recipients of housing benefit – indeed there are more housing benefit recipients in the private rented sector than in social housing. Yet the provision of housing is often neither decent nor affordable and a number of housing bodies are exploring providing affordable products for the private (unregulated) housing sector.

So, if tough times demand even tougher choices, there are already a few creative options out there that can deliver even better outcomes for tenants, social housing providers, the construction industry and ultimately government.

Iain is a Corporate Finance Director with PwC in Belfast, specialising in Infrastructure & Project Finance.

He is contactable at: iain.f.lees@uk.pwc.com and 028 9041 5847.