Written evidence submitted by Positive Money [FSS 019]

Positive Money welcomes the opportunity to respond to this inquiry.

Positive Money is a not-for-profit research and campaigning organisation, working towards reform of the money and banking system to support a fair, democratic and sustainable economy. We are funded by trusts, foundations and small donations.

Our submission draws on evidence from our 2022 report Banking on Property, and other research and policy work we have been involved with relevant to this consultation.

Response

How would you assess the financial resilience of the social housing sector currently?

1. The social housing sector is concentrating into an increasingly small pool of larger providers, and an emerging set of for-profit companies. The Regulator of Social Housing’s register of Social Housing providers reveals 457 social housing providers de-registered since 2013, and just 249 registered. At the same time, the number of households living in social housing increased 8.1%,[1] suggesting a concentration of larger providers. The number of for-profit providers is rapidly increasing. Although they comprise only 4% of the register, they made up 22% of new registrations over the last ten years. This illustrates decreasing financial resilience among non-profit providers, and strengthening opportunities for private investors, explored more below. 

Figure 1: annual change in the number of organisations on the Register of Social Housing providers. Source: Positive Money analysis of the Register of Social Housing Providers.

2. The decreasing financial stability of the non-profit and local authority social housing system is exacerbated by a combination of rising house prices and the shift in government investments away from ‘bricks and mortar’ social housing creation and maintenance towards social rent subsidies. In 1975 more than 80% of housing subsidies were supply-side subsidies intended to promote the construction of social homes, by 2000 more than 85% of housing subsidies were on the demand side aimed at helping individual tenants pay the required rent.[2] This has meant that non-profit social housing providers have become more reliant on borrowing to create, modify and purchase homes. This has interacted with (and been a contributing factor to) rapidly inflating house and land prices since the 80s, which has further limited the ability of social housing providers to expand and adapt their portfolios due to the exorbitant costs of new construction or purchase of existing homes from homeowners and the private rental sector. This has also caused a feedback loop: social housing has been lost under Right to Buy and sell-offs to a growing private rental market. The growing PRS has contributed to rising house prices and costs*,  which have further prevented non-profit providers from buying back or expanding their portfolios, and caused them to fall even further behind. This has set the stage for the emergence of for-profit housing providers (Figure 1) who use private equity as capital to access building stock and seek to cash in on the expectation of rising house price growth alongside rental income.

*(IMF research indicates that a 10% growth in mortgage credit as a percentage of GDP is associated with a 6% growth of real house prices.[3] It is estimated that 10-15% of mortgages are Buy-to-Let,[4] and 62% of landlords have used loans to purchase properties.[5])

3. Challenging financial conditions for non-profit providers have also been exacerbated by decades of debilitating fiscal and regulatory conditions. A recent JRF report[6] summarises growing financial challenges for housing associations succinctly: ‘constrained finances, lower grant rates and an increased reliance on cross-subsidy from market supply, which is facing a downturn as house prices stagnate. Twelve years of austerity have brought rent cuts, benefit freezes and reduced grant rates. Repeated changes to the grant and rent regimes have made long-term financial planning harder.’

Is the current Departmental policy on social housing and affordable homes appropriately focused?

4. Recent efforts to reform social housing, for the benefit of those living in social housing, the wider housing market and the health of the sector as a whole, are essential steps towards a more resilient sector. However, they do not go far enough. The social housing green and white papers in 2018 and 2020 outline essential steps to ensuring the continuing viability and popular support for the system, not to mention ensuring dignified and safe conditions for UK residents. The Commons Library summary[7] notes that the proposed reforms were been widely supported, but that commentators have felt they have not gone far enough, noting, for example:
1. A slow pace to implement reforms;
2. Failure to fully address the issue of stigma, exacerbated by the Government’s strong focus on home ownership;
3. Potential challenges for social landlords in resourcing new requirements;

The Social Housing Bill provides some further detail and clarity on the 2018-20 papers, but the criticisms listed above have not been resolved.

5. More broadly, we strongly support the emerging efforts by the Department of Levelling Up to join up the thinking between management of different tenure types. Balancing more locally appropriate house building requirements with both social and private renter sector reform is essential to ensuring that everyone in England and Wales have safe, affordable and secure homes, regardless of tenure.[8] This will help stabilise house prices and bridge the growing divide between those from families of renters and those from property-owning households[9] - which is a particularly stark driver of wealth and racial inequities in the UK.[10]

6. However, we would argue that these regulatory and planning reforms, while welcome, fail to tackle the underlying financial, legal and tax conditions that are the primary drivers of high house prices and the associated lack of stability in the social housing sector. Table 1 lists four critical drivers of house prices rises and instability in the housing system related to taxes and fiscal policy that are neglected in current policy packages. The Department for Levelling Up must reform the outdated property tax system, work with the Bank of England to manage mortgage lending with the goal of stabilising house prices[11] (rather than simply encouraging First Time Buyers - for example, by introducing credit allocation and targeted lending policies to divert private investors to more productive parts of the economy), and rebalance housing subsidies.[12] More ambitious policies to shift land to public and community ownership would also go a long way to supporting the genuine growth of the social housing sector - such as reforming the land registry to improve transparency around land ownership and value, coupled with concrete mechanisms for non-profit social housing providers and community groups to have Right of First Refusal and Compulsory Purchase Powers for land sales.

Table 1: government fiscal and taxation policy that have driven house price rises

7. We would also argue that the Department is not doing enough to tackle stigma around social housing, and that this has a disproportionate impact on popular understanding of the housing system as a whole. Stigma towards social housing and social housing tenants remains prevalent, as the government has itself acknowledged, and is a deep-rooted and divisive social and cultural issue.[21] However, ‘stigma’ does not only relate to negative perceptions of social housing, but is also present in narratives by politicians, public bodies and the media that homeownership is aspirational for everyone, thus implying that those who do not own their homes have somehow failed to achieve a culturally important goal. This leads to policy systems that promote homeownership to the detriment of other tenures - as in the case of Right to Buy. Removing this stigma will require political leadership and bold policy making.[22] The Department for Levelling Up, Housing and Communities should publicly state goals to rebalance conditions between different forms of housing tenure, remove hierarchical references to different housing tenures (eg promoting homeownership as culturally aspirational or inherently better than other tenure types), and create a long-term goal of achieving housing affordability parity between different tenures (Figure 2).

Figure 2: mortgage and rent payments as a % of income, excluding housing support. 30% of income is considered an ‘affordable’ level. Source: Positive Money elaboration of English Housing Survey data.

Have for-profit Housing Associations made the sector, as a whole, more financially robust? To what extent have private equity investors, and in particular international investors, been entering the sector? What challenges does this present?

8. As noted in point (1), there has been a significant rise in for-profit social housing providers in the last ten years. According to the Register of Social Housing Providers, the number of for-profit providers has more than tripled since 2013, when there were around 20 for-profit providers, compared to 70 today. This rapid increase is against a decline in the number of non-profit providers, a loss of around 250 organisations since 2013 (Figure 1). Similarly equity financing structures, often used by for-profit providers but also by non-profits, have rocketed: about 70% of capital for new homes is sourced from private financing, up from 30-40% in the 2000s.[23] Social and affordable housing funds account for 48% of the social impact investment market.[24]

9. There is no evidence that for-profit housing providers and for-profit private equity finance structures have made the sector more financially robust. Overseas examples of the medium and long term impact of private equity investment and for-profit development indicate that in fact these structures are highly risky. In the early 2000s, a large amount of German building stock was sold to equity investors. When these groups came under financial pressure, investment in the stock dropped and the quality of homes decreased.[25] In Berlin, €42bn was spent in large-scale real estate investment between 2007 and 2020, with smaller landlords and state-owned social housing taken over by large institutional players as a vehicle for the management of global capital funds, resulting in ‘skyrocketing rents, widespread displacement and the dismantling of local communities and social bonds’ and residents eventually campaigning for the expropriation of corporate properties.[26]

10. Private equity financing in particular represents a huge risk for the social housing system. This system is inherently risky: the Regulator for Social Housing has reported that equity structures, lease structures and real estate investment trusts ‘have very limited balance sheet capacity, cash or other assets that they can call upon if there are any interruptions to their cash-flows’.[27] As a result, investors have a preference for ‘affordable’ and shared housing over social housing, meaning a loss of potential social homes,[28] resulting in new which under-deliver on promised units of social housing, or compared to the amount of social housing in the original site.[29] In some cases, investors are seeking to buy existing homes rather than build new, pumping more money into an inflated market.[30] The fragility of equity funding has already been illustrated by the case of Civitas and Home REIT.[31] Investors are open about their reliance on public funding to cover potential shortfalls.[32]

11. For-profit housing ownership and management structures threaten to reduce the resilience of the social housing sector by reducing service standards, raising costs for tenants, and decreasing the transparency of the social rented sector. Breaches of regulatory standards are already more common among private providers (including non-profit Housing Associations)[33] than local authorities, suggesting existing evidence of higher risk among company-led housing schemes. There are also reports that private organisations are less likely to have the appropriate skills to deliver social housing services. For-profit providers are more likely to outsource work,[34] are reportedly dividing up ownership and management responsibilities across multiple organisations,[35] and some private specialised supported housing providers ‘are taking on risks without the resources and skills needed to manage those risks’.[36] The opportunities for ‘ethical’ private investment in social housing have been compared favourably to the case of private investment in the rental sector by Savills, failing to mention that the average English private renters can expect to pay rents over the government’s 30% income affordability definition, and on average live in worse quality homes with less good energy performance than other types of tenure.[37][38]

How appropriate is the existing regime in respect of regulating for-profit housing associations? Does the Regulator of Social Housing have adequate powers to ensure value for money and low risk from new sources of finance such as private equity?

12. Public and transparent guidance is not available for for-profit social housing providers in the Regulator for Social Housing public documentation, nor in relation to private equity funding structures. According to the Consumer Regulation Review 2019-20, standards apply equally to for- and non-profit providers.[39] There is no specific governance and financial guidance for these companies - other than they must be legally separate from other activities - despite their vastly different operating conditions to non-profit social housing providers.[40] There are no obvious monitoring mechanisms or rules relating to the use of equity funding by for-profit registered providers, for either lease arrangement or direct investment, despite the government’s own Sector Risk Profile highlighting both types as adding risk to the social housing system.[41]

May 2023