How will the “credit crunch” affect Scotland’s social housing sector?
Recent UK wide news continues to be dominated by talk of the credit crunch but how, if at all will this affect the social housing sector across Scotland? Are we to expect similar job cuts, similar pressure or will the private sector downturn impact positively in social housing? Having sought the opinions of several respected figures amongst our client group we are cautiously optimistic that if anything, the future looks comparatively bright for the social housing sector north of the border.
Unparalleled economic prosperity since the mid 1990s has been hit harder by the credit crunch than initially expected.
- Widespread credit at historically low rates for house mortgage and remortgages over the past decade has pushed private housing prices to unsustainable levels and a corrective drop is, arguably, long overdue. A shortage of affordable housing thanks to increased private house sale values, has been exacerbated in the short term by the unavailability of credit in the private housing market, triggering recent price falls.
- Abnormally high price levels have created an increasing proportion of households who cannot afford entry into the private housing market without some form of incentive. Quotas of affordable housing in new developments have been a primary incentive to date, but have not yet made a significant impact.
- Ready access to credit has also pushed up the supply and therefore development of private housing for rent, but occupancy levels have fluctuated by region. Such developments have been funded not so much on the basis of the estimated rental incomes (based on full occupancy) but on assumed rising capital values and the ability of private landlords to continuously remortgage and/or sell on for a profit. This sector is especially vulnerable today, particularly in the large cities where there has been much speculative development. Many developers and buy-to-let landlords are trying to sell properties because of the costs of borrowing, further depressing prices.
- Dennis Rodwell, a respected architect and urban regeneration specialist says that “…for the foreseeable future, and being realistic this is likely to last 3 - 5 years and not the political or financial services industry motivated 1 - 2 years, the private housing market will be static at best, or in potentially significant decline at worst”; home ownership is beginning to be seen as an unattractive investment option in terms of medium term capital gain.
The challenge therefore now must be to address the shortage of affordable homes by looking at each in turn.
- New private house starts and completions – whether for sale or for rent - are in decline. The impact of the credit crunch on developers has been twofold – their own business model is under extreme pressure, and customers are increasingly reluctant or unable to commit to house purchases. One response has been for developers to approach Registered Social Landlords (RSLs); one of our social housing clients has received, in Q2 2008 alone, over 25 separate tentative approaches from housebuilders about acquired sites or units in development which might be made available to them for purchase. Misalignment of RSL standards and building regulations does though constitute a barrier to the Movement’s late intervention in projects. Westminster government is exploring funding RSLs for a programme to acquire up to £500m of current developments originally intended for the private market. Hugh Carr, Director of Finance of D&G Housing Partnership, Scotland’s second largest RSL, commented that “Many Scottish RSLs, ourselves included, would welcome a similar scheme from Holyrood, and could access the required funding even in the credit crunch.” Let us not forget that in Scotland house prices have not fallen so access to the market is now restricted by the unavailability of credit, as well as unaffordable prices in many towns and cities.
- Although prices are slowing, the stricter terms on mortgages (higher deposits and less attractive rates) imposed by lenders still prevent many would-be first time buyers from entering the market. The SNP’s proposed £2,000 subsidy has been dropped by the Scottish Government, but would have had little impact even if enacted.
- However, there remains a disconnect between the housing that is in over supply (inner city small flats) and what the social housing sector needs most – small family houses in attractive and safe communities in cities, towns and rural areas across Scotland, to meet new demand and to replace existing social housing that is no longer fit for purpose, because of its size, type or condition.
“There is already a clear flow of candidates who would not have considered working outside the private sector, looking to cross the line and work in social housing.
So can RSLs take advantage of this? Hugh Carr at DGHP suggests they can. He notes that although borrowing terms for RSLs have increased in the past year, they are still able to borrow at better rates than private buyers, and that the slump in house building has released significant cost pressure on developers. “This means that the pressures on the cost to Government of the grant we need to build the housing we need are lower, and the supply side is much more willing to work with us in major projects, such as our regeneration schemes in Dumfries and Stranraer, than a year ago.” Add in the Homestake low cost home ownership programme, and we have a programme that delivers for all stakeholders – Government, developers, funders, tenants and home buyers.
There appears to be a clear benefit to the sector, in terms of the potential for housing development, regeneration work, and even for staffing levels in the short to medium term. Indeed, there is already a clear flow of candidates who would not have considered working outside the private sector, looking to cross the line and work in social housing. If, as it could be argued, the Movement sees the value in now acquiring the cheaper land sites now readily available, many of these private sector staff could find valuable and viable work in social housing. As and when these factors are borne out over the next 12 – 18 months, there is every chance that social housing, buoyed by safeguards provided by government’s funding streams, will benefit despite the ails of the private housing sector.
Badenoch & Clark would like to thank Dennis Rodwell, Urban Planner, Regeneration Specialist & Architect and Hugh Carr, Director of Finance, Dumfries & Galloway Housing Partnership along with several other commentators who wish to remain anonymous, in helping to produce this article.
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- Building up hope - The Society Guardian’s article asks: The credit crunch could herald the return of council housing after decades in the political wilderness. But will the government lend its support?
- Scotland’s market prepares to do battle with London
- Overview of the financial market in Scotland
- Rental sector needs ’a shake up’ The BBC reports on the latest Law Commission report on the rental sector.
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