The Conservative government has made housing in England a key issue for this parliament. The Autumn Statement made a strong commitment to expand assistance for lower-income buyers, but housing supply for the very poorest is likely to diminish.
Analysis by Savills Residential Research shows there will be 70,000 new households each year unable to access the market that need some form of sub-market housing. Very few of these households will be able to afford starter homes, shared ownership or Help to Buy, which are all targeted at middle-income households.
The policy focus on these schemes will diversify the way in which people can access homeownership, potentially expanding the pool of demand. However, combined with the extension of Right to Buy, the likely result is a reduced supply of housing for the very poorest.
The reduction in social rent has had a detrimental effect on the development capacity of housing associations, and the need for cross-subsidy leaves them increasingly exposed to market risk, although the Autumn Statement opened up a huge opportunity to expand delivery of shared ownership.
The challenge for housing associations is finding enough cross-subsidy to continue their sub-market rental development programmes. Many are looking to expand their market sale and rental development activity, but this potentially brings the sector into competition with the major housebuilders and emerging institutional PRS investors.
Despite this, housing associations maintain a number of competitive advantages enabling an alternative approach to development. These include large balance sheets, access to low-cost capital, and a business model that spreads the product across a wide range of pricing and tenures
Access to patient capital allows housing associations to take a leading role in the delivery of large strategic housing sites, through early funding of infrastructure and the potential to increase absorption rates through investment in place, delivery of a range of tenures and ongoing management of the retained estate.
The potential to maximise absorption rates, through providing homes across a wide range of tenures and price points, makes housing associations good partners where speed of delivery is prioritised, although this exposes them to additional risks and the volatility of the housing market.
The most significant risk to private housing developers is being caught out by a downturn, following significant land acquisition or with large amounts of development in progress. Housing associations have the advantage of flexibility to switch new homes between tenures if, in a downturn, the sales market contracts.
Nevertheless, housing association boards will need to take a view on the appropriate risk-adjusted margin to build into their business plans, compared with the typical housebuilder target of 15-20% operating margin over the cycle.
They will also need to be looking for early warning signs of turning points in the market.
