How do housing associations meet their capital costs and still have sufficient money to invest in new projects, bearing in mind the low rents which they charge?
Housing associations are bodies “established for the purpose of, and among whose objects or powers are included those of, providing, constructing, improving or managing, or facilitating or encouraging the construction or improvement of, housing accommodation” — section 1(1)(a) Housing Associations Act 1985. Housing association rents are generally governed by Part VI of the Rent Act 1977. This means that housing associations can generally charge only “fair” rents and that their rental income covers only a small percentage of their capital costs.
Two questions arise: (1) how do associations pay these costs; and (2) what will be the effect of the Government’s proposals (see White Paper: Housing: The Government’s Proposals)?
Public finance — the “housing association grant”
The Housing Association Grant is the principal means of financing associations for capital projects. Provision for it is made by section 41 of the Housing Associations Act, which provides that:
The Secretary of State may make grants (“housing association grants”) to registered housing associations in respect of their expenditure in connection with housing projects which are approved by him or fall within an approved development programme.
A housing association grant is payable only to “registered” housing associations, ie those associations registered with the Housing Corporation (under Part III of the Act). The way that applications for grants are administered (as well as the way they are allocated) will be dealt with below, but a grant is provided for the following purposes:
(1) Providing dwellings for letting or licensing including the grant of a shared ownership lease;
(2)Providing hostel accommodation;
(3)Improving and repairing such accommodation;
(4)Providing land or buildings which, in the opinion of the Secretary of State, will be for the benefit of the persons housed;
(5) Repairing, improving or converting houses, and then disposing of them in their finished state;
(6) Repairing or improving houses where a tenant has exercised, or has claimed to exercise, the right to buy or the right to a shared ownership lease under Part V of the Housing Act 1985;
(7) Disposing of a property acquired for sale at a discount to a tenant of a charitable housing association.
Amount and payment of grant
Applications for grants are made to the Housing Corporation, which is the body established by the Secretary of State to pay loans and grants to registered housing associations and generally to assist them (see Part III of the Act). A grant is calculated on the basis of an estimate of “approved” expenditure on a particular project. The corporation will pay to the particular association the difference between the estimate of the project and the estimate of the amount of income the association is expected to receive.
Payment by the Housing Corporation will be made either when there is approval by the Secretary of State for a particular project or because that project comes within an “approved development programme”.
What is an “approved development programme”
An “approved development programme” is defined by section 41(2) of the Act as:
… a programme for the development of housing by registered housing associations prepared by the Housing Corporation or a local authority and for the time being approved by the Secretary of State for the purposes of this section.
The approved development programme is determined on an annual basis, the broad principles for the allocation of the grant to various projects being predetermined in the previous financial year. The money available by way of grants to approved development programmes will differ between different regions; between different groups of housing need; and between “new build” projects and “renovation” projects.
Alternatively, an application for individual approval for a scheme may be made, eg where an association is too small to come within the system of average regional grants. However, all schemes must come within the cash limit fixed for the financial year.
Other public assistance
Numerous other grants and loan schemes exist, one of the more important being the “revenue deficit grant”. As we have seen, the housing association grant is of a capital nature, financing and assisting capital projects. The revenue deficit grant is, as the name suggests, for the purpose of making up deficiencies on the association’s “revenue” account for the financial year. Provision for these grants is made by section 54 of the Act. The revenue deficit grant is payable for relevant expenditure attributable to a housing association’s activities.
Proposals for reform
The Government has published proposals for sweeping changes in the law relating to private lettings. Under these proposals greater use would have to be made by associations of assured tenancies and protected shorthold tenancies. Under these lettings, fair rents would no longer be registerable and, in theory at least, associations could charge market rents. To prevent this, subsidies by way of housing association grants would continue. But, the significance of the changes is that, if they are implemented, rents will be increased to allow a greater percentage of development costs to be met out of rental income rather than out of the public purse. The schemes would involve low rents at the start, with an increasing level of rents as the association becomes less dependent on public money over the years.
Conclusions
Housing associations are generally regarded as efficient providers of low-cost housing. The Government has recognised their usefulness in the recent White Paper but has recommended a greater degree of management initiative from them. The basic means of finance remains the housing association grant along with certain other miscellaneous grants and loans too numerous to mention here. Certain methods are used by which an annual development programme is worked out and the majority of funding in any one year is within that scheme. This article, however, cannot be more than an overview of a very complicated subject.