What can Wales learn about financing affordable housing supply from elsewhere? WHQ asked Ken Gibb of the University of Glasgow, co-author of a review of evidence from around the world, to set the scene for our special issue on supply and demand. Detailed coverage of innovations in Wales follows on page 22
The UK’s constituent nations are not alone in seeking new ways to finance non-market cheap housing supply. Recent research1 for the Joseph Rowntree Foundation1 examined international academic, policy and grey literatures before drawing out possible innovations from practice in Europe, North America, Australia and from across the UK. In this short account of the research we do the following:
• Identify common themes shaping the context confronting different housing systems that lead to similar approaches and familiar challenges.
• Focus on six specific national policies worthy of further interest and discussion.
• Draw out a number of conclusions including a degree of reflection on how we should use and evaluate international evidence of this sort.
Common themes
There is a general shift apparent in many of the countries studied, characterised by a move upmarket in the nature of the subsidy and terms and conditions offered for new housing supply. It is typically affordable rather than social. Rents are correspondingly higher and the tenancy terms more limited. In a context of declining welfare benefits, of in-work poverty, job insecurity and uneven economic recovery from recession, these trends are not good news for low- income households in Britain. In the long term, housing need can only be met by new social housing programmes and by addressing fundamental market failures in the credit market and particularly the land market.
The research identified recurring themes from the trawl of housing supply financing innovations. These included: the use of guarantees, a degree of federal-local flexibility in instrument design,the ‘bottom-up’ blending of local and national supports, evidence also of ‘solidarity-based’ partnerships across providers and examples of both complex models involving separating out income streams but also simple easy to follow or transparent policies. A further recurring idea was of internal financing through ‘sweating equity’, and the importance of the wider not-for-profit regulatory context, both for not-for-profit governance but also their relationship with the commercial for-profit sector who increasingly partner them.
Let’s look at these in a little more detail.
Guarantees While there is a growing appetite for forms of guarantee used in the UK housing system, witness Help to Buy and other recent announcements relating to new affordable housing, the research team concluded that there should be caution. Europe has debated the competitive advantages that guarantees offer to privileged providers. There have also been concerns expressed about market distortions (for example in the Montague Review in England). We also note that with current historically low interest rates it is not on the face of it that obvious that there are significantly large cost savings to justify participation for many providers. We did think, however, that specific models like the Scottish National Housing Trust partnerships did offer clear exit routes, value for money to the taxpayer and something additional at the margin.
The Scottish NHT variation might involve both parties investing in an unfinished private development to let mid market rent affordable properties for five to 10 years before resale with the social provider’s capital (and any void losses) protected by the state guarantee – usually less than £4,000 a unit. The Rettie resonance variation is a private-led partnership deal between a housing association and a developer. In this case the developer builds for the association but with the land cost element deferred until resale and the association is guaranteed ownership of a small proportion (for example, two of 15) of the properties developed.
Federal-local flexibility: National or federal subsidy can be distributed to local tiers of government, the latter possessing local freedoms to engineer more tailored and locally-sensitive packages or affordable housing solutions. We think this kind of approach is potentially suitable for the UK with its mix of reserved and devolved housing powers and would support locally-tailored experimentation.
Bottom-up blending: The national supports are often relatively simple that can then be locally ‘blended’ to serve different local purposes. Value for money concerns, however, necessitate that concerns must be addressed about possible subsidy over-provision or double counting.
Solidarity: Europe provides several examples of collaboration or solidarity between providers through shared insurance/guarantees and surplus funds. While recognizing that there has been patchy (at best) enthusiasm for this turn of mind in the UK, that is not always true, for example community-based housing associations could mimic the Danish pooling of rental surpluses to create a fund that could be recycled to help with upfront development costs.
Complex models of partnership: There is much interest in splitting management income out of ownership through sale and leaseback and related models (for example, Real Estate Investment Trusts) and this can also be seen in variations of Anglo-Saxon affordable models too (and also speaks to some ideas associated with institutional market rental investment). This is an important source of potential income for providers but is not guaranteed in a competitive environment and brings its own risks.
Simple models: There remain many simple models and ideas that could be more widely used such as Canadian silent mortgages (a second top-up loan that may or may not be forgiven or otherwise repayment deferred until resale – and again could be recycled) that are flexible local ways of supporting access to affordable home ownership. Simple models are more likely (though never completely) to avoid unintended consequences and should be more available as clubs in the policy tool bag.
Sweating equity: For providers with the capacity there is scope to sweat equity and use the prospective income from, for instance, unencumbered existing stock to finance new debt. This was the essence of the Affordable Homes Programme in England though clearly it is a mechanism that shifts risk to efficient management of properties and can only be used when there is sufficient equity or reduced debt to facilitate the process. Clearly it raises gearing significantly and this may or may not be prudentially sensible for specific providers. It also depends to an extent on asset value growth. In other words, just because there is £x billion equity in the social housing stock does not mean it can all or should all be accessed in this way. Realistically, however, this will be an important feature of funding going forward.
Regulation and governance: This is not just about the fitness of purpose of regulation as special providers branch out in to new markets and with for-profit partners, it is also about the interface between social housing regulation and financial regulation more generally. In addition, public accounting rules are important to the extent to which providers can be flexible and use borrowing capacity creatively when guarantees, public loans and the like are involved.
Innovations
Despite looking at a wide range of UK and international policy innovations, six specific policies were of genuine further interest:
1. The Spanish VPO (translated as ‘officially protected housing’) developer/occupier new supply subsidy combines support to developers and to targeted customers who may be either owners or tenants. It has provided scale, responsiveness and efficient subsidy but arguably, while means-tested, was less tightly targeted and has to an extent succumbed to the economic crisis. It is in principle flexible (if not completely transparent). It is readily transferable (and so it would not require new UK institutional infrastructure) and could support stimulus activity.
2. The Australian National Rental Affordability Scheme (NRAS) tax credit application of the US low-income housing tax credit model. Developers (or investors) receive tax breaks to enable moderately targeted households to consume new affordable rental properties. The combination of competition between providers, opportunities to blend subsidy and the beneficial place making aspects of the policy are all attractive innovations in a UK context. NRAS is targeted at moderate income households, with capped subsidy and has shown capacity to operate responsively and to scale.
3. Loan guarantees backed by the state but more on the lines of the Scottish National Housing Trust rather than as a way of generally lowering the cost of bonds (as it appears the new English £10 billion fund will do) or developing a Dutch-style guarantee and governance model. The Scottish model has taken time to get up to scale but, particularly in its second iteration, it offers a range of tailored outcomes and is only a marginal public finance commitment.
4. More modest in scope but supportive of the wider housing market are policies that assist sustainable home ownership. First-time buyer policies that assist with the deposit barrier – either via the Canadian silent mortgage or through adjustment to the earlier FirstBuy or NewBuy models such that the indemnity for the latter allows for a slightly higher (or more conservative) deposit percentage than the current 5 per cent.
5. The Danish housing association national surplus fund, while based on principles of solidarity that may seem alien to the UK, allows surplus funds to be used creatively, though government may simply offset the fund with lower subsidy. However, more fundamentally, this may be a more acceptable way voluntarily to unlock housing association long-term ‘free’ reserves.
6. The Irish private renting discounted rent long lease model that also serves to address work incentives and augment affordable supply by binding the private landlord into long leases and sub-market rents. Not only does this approach offer a constructive contribution to multiple solutions, it has quickly achieved scale in Ireland and may act to limit future social security expenditure.
To be clear – it is not that these models are simply transplantable to the UK or parts of the UK in their current form. There is, of course, an array of institutional constraints and barriers set against what would be foolhardy crude policy transfer. Rather, it is that the policies contain the germ of ideas that could be usefully further discussed, amended and elaborated on to help find ways forward either ultimately to a degree of scale or simply to make more localised or micro improvement that might unlock specific affordable housing or regeneration opportunities.
Conclusions
Making sense of the applicability and transferability of these and other innovative finance policies is not straightforward. The research adopted a number of tests to assess to which extent interesting policies might be applicable to the UK or shared across the UK (and indeed whether they were desirable). These included:
• Housing system embeddedness (were different national housing systems really alike enough to warrant transfer of policies and, if not, thinking through carefully the potential differences and how the transferring policy would require to be tailored)
• Effective targeting to those in most need
• Public sector and wider value for money/efficiency
• Minimising waste and unintended consequences
• Piloting and time to get up to momentum
• A sense of minimum scale required to justify policy promotion and
investment
• Working with the grain of market sentiment (is there potential appetite from those who need to participate in the given policy?).
A second point is that, regardless of the portfolio of innovative
supply financing policies, there is no escaping the wider need to address the big market failures and focus on rising housing need numbers that require a large response. We need to find new ways to support genuinely low-cost housing and not just thinner shallower subsidy solutions. At the same time, one clearly has to avoid significant policy errors, for example the price bubble ramifications of Help to Buy.
Third, like many analysts, we continue to note the lack of a systematic vision for housing policy. We (analysts, commentators and policy makers) need to work more on the policy vision, who will deliver it and, crucially, shape a long-term delivery mechanism that all parties can have confidence in.
All of this is joined up to welfare reform, the evolution of the labour market and the economic recovery and broader questions about mortgage indebtedness, house prices, market
supply, land and housing taxation and their relationship with cross subsidy of non-market housing through planning and other interventions.
That said, fourth, small-scale innovations can be good. Specific low-cost instruments can unlock larger developments, and should not be thrown out as a useful tool tailored to specific situations and scenarios even if it does not of itself generate scale solutions. The world moves on and new innovations rise and fall. As a result, the context for affordable housing shifts. Nonetheless the ideas and policies contained in this report can, to a greater or lesser extent, provide the means with which to debate ideas and germs of ideas that might in due course grow into something substantial tailored for the specific policy frameworks and requirements of local housing need in cities such as Cardiff, Liverpool, Glasgow or Belfast.
Professor Ken Gibb is director of Policy Scotland at the University of Glasgow. He blogs about housing, economics, academia, culture and public policy at kengibb.wordpress.com
1. Gibb, K, Maclennan, D and Stephens, M (2013) Innovative Financing of Affordable Housing: International and UK Perspectives. Joseph Rowntree Foundation: York. Available to download at www.jrf.org.uk/publications/innovative-financing-affordable-housing.