A radical shift in policy is required for HAs to continue addressing housing need

Meanwhile, Legal & General estimates that traditional not-for-profit housing associations will be able to build 20,000 fewer homes per year, with their ‘theoretical capacity’ dropping a third from 65,000 to 45,000 homes.

Sadly, Southern Housing is no exception to this downward trend. Our development activity will fall to a low of 250 starts over the next few years, down from a peak of 2,300 starts by our two legacy organisations in 2019-20.

Building affordable housing is part of Southern Housing’s DNA, so it pains me that starts will be so depressed in the midst of the worst housing crisis in a generation. Starts will only begin to recover from 2027 onwards, by which time we anticipate some of the operational and financial challenges will have eased.

The reasons for this downturn in housing association development are complex and manifold. On the one hand, housing associations’ output – just like that of commercial house builders – will be impacted by the perfect storm described by the Home Builders Federation. The steep rise in gilts is hitting for-profit and not-for-profit homebuilders alike.

The government’s proposed revisions to the National Planning Policy Framework (NPPF) will undoubtedly have a suppressing impact on supply. So too will ongoing build-cost inflation, mortgage rates and the proposed Infrastructure Levy.

On the other hand, housing associations are also facing a dire mix of sector-specific challenges. Rents – our main source of income – are rising well below inflation (by seven percent for 2023-24 compared with 11.1% under the CPI+1% formula). And our expenditure is rising even more steeply, driven by a combination of inflation, building safety costs and retrofitting works. Achieving net zero carbon is likely to cost over £100bn alone.

What makes things worse is that the sector’s three traditional coping mechanisms are no longer sufficient to turn the dial on development. First, larger associations, which account for most new development, have been running up against the limits of the cross-subsidy model for some time. G15 credit ratings have fallen from A1 in 2010 to A3 negative today.  

The ratings agencies consider increasing market sale as credit negative, so pulling harder on the cross-subsidy lever is no longer a viable option.

Second, reducing operating costs is now far more difficult because of rampant inflation and increasing consumer and regulatory demands.

And third, mergers – once a reliable way of boosting development capacity, are now increasingly about consolidation and boosting financial resilience. Mega-mergers between the largest HAs are likely to become less common due to refinancing costs. In short, the old ‘playbook’ won’t fix the problem.

What’s needed is a radical shift in housing policy – more so than any of the main political parties are currently proposing. Top of my wish list is for the government to offer housing associations genuine long-term certainty over their key income streams.

That would involve not only a new long-term CPI-linked rent settlement. But also an increase in the duration of Affordable Homes Programmes with grant indexed to a measure of build-cost inflation. And the provision of long-term rather than piecemeal funding through the Social Housing Decarbonisation Fund (with awards again index-linked) to better equip housing associations to decarbonise their 3.1 million homes.

With the holy triumvirate of rent, grant and retrofitting funding certainty, housing associations would be much more strongly positioned to help solve the housing supply crisis.

Then there are measures to tackle the perfect storm of industry-wide headwinds set out by the Home Builders Federation. Many of the proposed revisions to the NPPF are retrograde steps that will exacerbate the chronic shortage of affordable housing. A future government needs to take a far firmer stance on local authority housing targets and recognise that the housing crisis will only be solved through a combination of carrot and stick.

We also need a fundamental rethink of the proposed Infrastructure Levy. With local authorities not obliged to use their ‘right to require’, the government cannot realistically offer any firm reassurances the Infrastructure Levy will deliver at least as much affordable housing as the current system. Surely reforming Section 106 would be a quicker and better solution?

Affordable housing supply is the most tried and trusted means of alleviating the housing crisis. Yet, housing associations, which usually rise to the challenge in times of housing market duress, are hamstrung by a combination of industry-wide and sector-specific challenges.

Whichever party (or parties) is victorious at the next general election, needs to take bold action to ensure housing associations can play their critical role in addressing ever increasing housing need.

Paul Hackett, chief executive, Southern Housing