You are viewing 1 of your 1 free articles
Why not fund affordable housing through extra borrowing? The last time it happened, the markets ignored it
John Perry, policy advisor at the Chartered Institute of Housing, looks at the historical precedent for increasing affordable housebuilding grants
John Perry is a policy advisor at the Chartered Institute of Housing
After the election, the new government will face levels of public sector debt not seen since the 1960s. It will also face an enormous shortage of affordable housing. Clearly, addressing the second problem with the urgency needed is likely to add to the first problem because a big increase in affordable housebuilding is likely to require more spending on grants.
For this reason, there is obvious concern that fiscal rules will prevail and housing targets won’t be met.
But could the new government draw comfort from the fact that the last time public sector debt shot up because of borrowing to building social housing, the markets ignored the change? Or, in the words of the Office for Budget Responsibility (OBR), it “did not materially affect fiscal sustainability”.
The change in question took place when the Office for National Statistics (ONS) reclassified housing associations as ‘public corporations’ in 2015 and their debt came on to the government’s books. The decision was very unwelcome – both for the housing sector and the government – but it provides us with a live example of what happens if housing investment adds to public debt.
READ MORE
Housing associations have traditionally been ‘off balance sheet’ as far as the government is concerned, despite the financial support they receive and the regulatory regime they must adhere to. This changed in the 2015 Summer Budget, when the government announced that it would force housing associations to cut rents by 1% a year for four years.
Such a drastic imposition drew the ONS’ attention to the sector. It decided that the Housing and Regeneration Act 2008 had given the government significant new controls over housing associations in England, and it reclassified them as part of the public sector from that date. Shortly afterwards, it made similar decisions affecting the rest of the UK.
“While the government had acquired a new liability, this was backed by revenue-producing assets and, in practice, the government had had a contingent liability even before the change occurred”
The government scrambled to undo this reclassification and, in the words of the OBR, took steps “precisely calibrated to relinquish just enough control to allow the ONS to reverse its decision”, and no more. ONS duly reversed the changes in 2017, with decisions relating to the rest of the UK following later. However, the government kept its rent policy.
The government and the housing sector breathed a collective sigh of relief when the ONS announced its change of mind. However, virtually unnoticed was the fact that, despite public sector debt rising by a peak of £70bn as a result and a smaller increase in the fiscal deficit, the finance markets were unbothered by the increase.
Of course, we can only speculate as to why the markets were indifferent to the change. It may have been that even an increase that was equivalent to about 3% of GDP was too small to notice. Or because they suspected the change was temporary (although this was far from clear at the time). Or because they knew that, while the government had acquired a new liability, this was backed by revenue-producing assets and, in practice, the government had had a contingent liability even before the change occurred.
When the decision was reversed and housing associations reverted to being classified as private sector bodies, this was again treated with indifference, even though associations remain closely regulated by the government and receive financial support both in the form of grants for new homes and, arguably, via the housing benefit system and its guaranteed support for tenants paying social rents.
Indeed, as the OBR puts it, the government “ultimately stands behind them”, creating the “fiscal illusion” that associations are independent. The markets don’t seem to mind.
This article is not intended to address the vexed issue of the rights and wrongs of government regulation of the sector, on which there are understandably strong feelings. Nor does it consider the question of the long-term, and almost certainly negative, effect if associations had stayed in the public sector – something which the Chartered Institute of Housing (CIH) did not and would not support.
This article simply poses the question as to whether the experience of 2015-17 provides a lesson about how markets might react if the new government’s drive to build more affordable homes affected total national debt.
“The new government knows that the most effective way of delivering 1.5 million homes in the next parliament is to provide more grant funding to build affordable housing. Perhaps it shouldn’t be nervous of testing opinion about how this would affect the market’s view of the public finances”
This might happen in two ways. The first is the obvious one: the government might borrow more to provide extra grant to build more homes. When the classification change took place in 2015, all housing association investment came on to the government’s books – this included not just existing debt, but future borrowing to build new homes.
The latter was projected to add to the budget deficit by up to £8bn annually. Yet, as with the overall debt issue, the markets took no notice. Might a similar increase now be viewed with similar indifference, given the benefits to the economy of affordable housing investment, so well set out in February by Shelter and the National Housing Federation, and of which the markets are undoubtedly aware?
The second issue is the old one of the status of council housing, which has so many similarities to housing associations, especially since it became ‘self-financing’ in 2012. Council housing finances are already treated as ‘public corporations’, separate from general government in the accounts. This was the status that housing associations also held temporarily when the ONS reclassified them.
Would the markets be worried if council housing finances were taken off the books in order to give provide more freedom to invest? When the CIH first raised this prospect 25 years ago, research by accountants Coopers & Lybrand suggested the markets would be unmoved. Perhaps the experience of the more recent accounting changes suggests the same.
The new government knows that the most effective way of delivering 1.5 million homes in the next parliament is to provide more grant funding to build affordable housing. Perhaps it shouldn’t be nervous of testing opinion about how this would affect the market’s view of the public finances. The experience of 2015-17 suggests that the market might not be very concerned.
