Cross-subsidy might be struggling, but it’s not a dead cat yet

Schrödinger’s Cat might seem an odd place to start when discussing how to finance affordable housing. But just as the unfortunate feline in the well-known thought experiment is simultaneously both alive and dead, I would argue that the cross-subsidy model is both broken and not broken. Let me explain.

Housing associations operating in London are coping with a slowdown where falling prices have somewhat stalled the market. This undoubtedly makes it harder for them to generate capital through sales to fuel the further development of affordable homes.

But the same is not currently true elsewhere in the country where – although the market is not exactly buoyant – properties are being sold and the system is working.

Housing associations with a portfolio outside London, including my own organisation, are continuing to sell homes and use that revenue to fund development. We built just over 1,100 homes last year and although the vast majority were for affordable housing tenures, a healthy number of them were sold on the open market.

We’re also seeing shared ownership buck recent trends, with confidence in the tenure from lenders at an all-time high. We now have almost 30 mainstream mortgage lenders comfortably operating in the shared ownership market, fortified by increasing interest from prospective homeowners.

“There is uncertainty in the market right now but the demand for high-quality homes remains”

We receive between 50 and 60 registrations a month for our shared ownership schemes. This represents record levels of interest and is why we plan to build nearly 3,000 shared ownership homes over the next five years, taking our total stock to more than 5,000 by 2024.

I will accept that this has not been the experience of housing associations operating predominantly within the M25. But we must not be too hasty in overhauling a system that has, by and large, worked for some time.

What we don’t need to do is reinvent the wheel. Yes, there is room for improvement, but I am hoping that we are not going to see a complete change of direction after this week’s General Election, whoever leads the new government.

This goes for the cross-subsidy model as a whole, too. As we speak, the model is still working in many parts of the country, so what we need is patience. There is uncertainty in the market right now but the demand for high-quality homes remains, as evidenced by the increasing numbers of people looking to shared ownership as an alternative to the traditional mortgage. This current cycle will end and we will return to an economic environment that suits the cross-subsidy model.

The UK housing market has always been up and down. And while it’s true to an extent that housing associations are more exposed to market fluctuations under the current system, it’s also the case that we need to deliver affordable housing regardless of the economic headwinds. In fact it is even more vital when times are hard.

What’s more, housing associations are far less susceptible to downturns than other parts of the property sector and can still operate, I would argue, somewhat counter-cyclically. An association’s ability to reassign stock – from open-market sale to affordable rent, for example – makes it much more versatile and robust in a declining market than a traditional housebuilder is.

As a result, housing associations are far more likely to be able to invest in building new homes when the rest of the industry feels the need to batten down the hatches.

The sector will always need government backing to unlock its full potential and I join many of my peers in calling for more grant to help associations build even more social and affordable rented homes.

Yet we should be wary of becoming overly reliant on grant funding to hit our delivery targets. When the market does bounce back, we will want to have maintained the commercially-savvy, self-supporting social housing sector that has developed over the past few years. Cross-subsidy has been a vital part of that journey.

The model isn’t working well for some right now. But there is enough uncertainty already without introducing a completely new approach to funding social and affordable housing or reverting to over-reliance on grant.

The current environment is a phase that we must allow to pass. Once it does, I believe we will benefit from having not made a rash decision to abandon cross-subsidy.

Better the cat be both alive and dead than not there at all.

Bjorn Howard is chief executive of Aster Group