13th March 2023
Are housing associations still insulated from the challenges of an economic downturn?

Richard Mussell, Managing Director at Rund discusses the impact of economic adversity on housing associations - as seen on Housing Digital.

Housing associations are expected to once again step up at a time of economic adversity – yet, the echoes of uncertainty continue to ring loud.

Let’s be frank: those of us working in the built environment have been watching storm clouds gather over the property sector for much of the previous year. Despite the small lift in the market that came from turn of the year, experts predict the market will crash in a dramatic fashion, as interest rates continue on an upward trajectory. 

There are rumblings of hesitancy among private developers, with impending delays and cancellations to projects making threats to profits a very real and likely scenario. Historically, housing associations have been protected by the crosswinds of an economic downfall, buoyed by a robust business model and supported by high levels of government grants. However, the circumstances of today cannot be compared to those of yesteryear.

Like many, I remember the perseverance of housing associations in spite of the 2008 financial crash, an event that is frequently being compared to our current economic downturn. When breaking it down and looking at the numbers, in 2010, homes completed by private house builders plummeted from 42,210 in the final quarter of 2007 to a total of 19,520. In contrast, housing associations remained steady, building around 6,800 homes per quarter. 

Whether housing associations will remain strong in the face of this coming downturn is far from certain. Although 80% debt taken on by the sector is fixed, many providers have taken on over 25% of their debt at a variable rate, putting them in an increasingly risky position as costs continue to rise. 

Stacked on top of this mounting pile of additional expenses is the impetus to address the issues with the quality of product in some existing building stock. Public scrutiny is at its highest, with the mounting concerns in the health hazards, including damp and mould, in public sector housing – affecting resident health and welfare.

The necessary review of the Decent Homes Standard will bring forward new laws and policies that housing associations will need to adjust to, in the midst of also implementing the important but costly changes to meet new fire and building safety laws. Energy efficiency, decarbonisation, and retrofitting costs are also perceived as much more urgent than in 2008. As such, finance will naturally become increasingly harder to come by. 

Simply put, the downturn that the sector is facing is of a very different nature to the 2008 crisis, making a one-to-one comparison obsolete. It would be unwise to expect events to unfold the same way twice.

For one, the cost of construction has gone up significantly as a result of material shortages, resulting from the halting of exports from Ukraine following the Russian invasion. Housing associations are not exempt from these additional costs.

Pandemic aftershocks and rising energy costs will also continue to leave their mark, and we’ve seen the cost of labour rise alongside these issues. We expect these labour costs to continue to accelerate due to shortages, which will certainly fuel increases in the Tender Price Index of projects.

Whatever happens, it is looking like a tough time for everyone, and housing associations may not be exempt. So far, the government’s social housing response has been well received. Setting the rent cap at 7% is positive news for the affordable sector, and arguably balances two important duties: protecting social tenants while maintaining the financial viability of new projects in the face of rising construction costs and inflation.

Ultimately, the performance of housing associations over the next year will depend on how long and how deep the UK’s recession will become. Although their stability in 2008 might indicate that housing associations will be better insulated against economic chaos than private developers, social housing remains subject to the same polycrisis of rising material costs, expensive labour, precarious fire safety, and inadequate energy efficiency that is affecting the entire sector.

Sadly, when faced with these manifold issues, social housing is likely to still take a hit.

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