Every little helps - but with the government targeting 300,000 net additions per annum by the mid-2020s, more guarantees is hardly game-changing stuff.
Housing is currently enjoying a rare period near the top of the political agenda and the run up to the Autumn Budget saw all manner of speculation as to whether “Spreadsheet Phil” Hammond (regular Social Housing readers might be scratching their heads and asking what on earth is wrong with spreadsheets?) would pull a rabbit out of the hat and announce some game-changing initiatives to support the provision of new housing.
The headlines were certainly impressive with The Times reporting “Budget 2017 in brief: £44bn for 300,000 new homes a year”.
But as is often the case with budget announcements, the headlines were somewhat less impressive with the benefit of analysis.
All but £15.3bn of the £44bn had already been announced, with the focus predominantly on private sector rather than affordable housing output.
The Chancellor chose to follow other avenues rather than supporting the reported pitch by a group of housing associations for a £100bn of funding to build new sub market rented housing.
Instead, the new £15.3bn is expected to comprise capital grants, loans, funds earmarked for estate regeneration and strategic sites as well as £8bn of guaranteed funding.
This latter initiative has naturally piqued the interest of HAs wondering whether this heralds the revival of the Affordable Homes Guarantees Programme, administered to date by Affordable Housing Finance (AHF).
When the original AHGP was announced, we pondered whether this might be a “solution looking for a problem”.
If you throw debt priced well below market clearing levels at any rational corporate borrower, they will generally fill their boots – after all, why wouldn’t they?
And from the public sector’s perspective, loan guarantees are a great way of announcing new policy initiatives with big numbers attached without actually spending cold hard cash.
However, while you don’t have to look too hard to see dysfunctional parts of the housing market (“Help to Buy Equity Loan” – more like “Help To Pay Bonuses To Executives At Housebuilders”), in terms of HA access to funding it is the most successful private finance model in the UK with no evidence of market failure that I can see.
Indeed, we would argue that the debt market for housing associations has never been in better health with more active participants across the banking and institutional market than ever before.
Shifting the dial?
The real question therefore is whether reducing the lending margins on housing associations’ marginal cost of debt has any meaningful bearing on HAs’ delivery of new affordable housing.
Arguably there are a number of factors impacting the appetite and capacity of housing associations to up the ante in terms of supply. These include:
Clearly cost of debt has an impact on interest cover and profitability (and to a lesser extent credit metrics) but with AHF operating at the margins of the overall debt committed to the sector does this really shift the dial?
Scribbles on the back of our envelope would suggest not.
The AHGP was sized at £3.5bn which we understand was mostly allocated.
For illustrative purposes, we might assume that on average, participating HAs saved 100 basis points on their cost of debt versus where they might otherwise have raised long term debt via AHF parent and long-standing bond aggregator The Housing Finance Corporation (THFC), or in the commercial market.
This translates into savings of £35m per annum across a sector which in 2016 generated total surpluses of £3.3bn after total interest costs of £2.9bn.
Doesn’t sound like very much – 1 per cent saved from the interest bill whilst adding 5% to the level of indebtedness.
Put another way, the annual savings of £35m would, using an indicative “economic subsidy” of £100k per rented home, pay for an additional 350 houses per annum over and above what the sector might anyway deliver.
Every little helps, but with the government targeting 300,000 net additions per annum by the mid-2020s, it is hardly game-changing stuff in the face of a widely accepted supply side crisis.
Even if the entire £8bn earmarked for loan guarantees was used for AHF Mark-2, the additionality would only amount to around 800 units per annum.
Guaranteed debt is cheap money rather than free money.
As an illustration, if the government instead took the debt itself and provided more grant, one would expect a bigger impact.
For example, at a grant level of the same £100k per unit, £8bn would generate 80,000 homes on a one-off basis.
Rather more than 800 per annum which even over a twenty-year period is still only 16,000.
Whether guarantees have any cash cost at all for government (i.e. the tax-payer) in terms of higher gilt rates or losses from default is not a straightforward question; neither is the impact on land markets of more grant – planning needs to release the potential as well.
But if more housing is part of the solution to the political and economic woes of the UK then an increase in the grant programme looks like a more relevant solution to the problem than simply throwing more - albeit very cheap - debt at housing associations.
On the face of it the Budget represents more of the same, in terms of stamp duty cuts to prop up house prices and a guarantee programme which has added little in terms of affordable housing and modest changes in terms of private housing.
It will be interesting to see whether the small tweaks to the town planning system have more of a meaningful impact but it falls well short of the radical game changer for housing that many of us were hoping to see.