For nearly 30 years I have worked for UK Housing Associations and for 20 of those years specifically in development. During that time I have witnessed huge change. The Housing Association sector has developed from a cottage industry with its roots in the housing philanthropy of the 19th century into a huge highly professional sector of the housing industry. Housing Associations are one of the most successful elements of the not-for-profit sector of the economy. They have been endlessly innovative, dynamic and successful. They mix public investment with private funding and deliver high quality housing to tackle the desperate shortage of affordable housing in the UK.
Housing Associations perform a vital function. They act as a major force in tackling the scourge of homelessness and poor quality housing which undermines all aspects of a decent life. A lack of a decent home results in poor health, lower educational achievement for children, lower chances of employment and prevents a normal family life.
Housing is becoming in shorter and shorter supply. Recent figures show that house production was 98,000 homes last year, the lowest figure since 1923. Household formation over the same period was running at 232,000. The gap between household formation and housing production has been present for a decade and there is now a shortage of 1 million homes in the UK.
Many households that would have purchased a house 5 years ago are now priced out of the housing market because of high deposits. Although the Government's Help to Buy scheme may go some way to tackling this issue in the short term, many economists and housing commentators are concerned that the initiative is not targeted at new homes or people on lower incomes (the scheme can be used to purchase houses up to 600,000 pounds in value). It will result chiefly in a housing price bubble rather than increased housing supply. If the bubble bursts it will cost the UK Government a great deal in lost equity. This outcome, if it occurs, is not dissimilar to the problems the US Government faced with Fannie Mae and Freddie Mac during the US housing market crash in 2008.
Many households no longer have an aspiration to buy a house because they see Home Ownership as out of reach. A recent report by the Halifax Building Society identified 'Generation Rent'. Of the 8,000 households they interviewed with a head of household between 20 and 45 years of age, only 5 % would consider saving for a deposit. These households will rent in the private sector and face insecurity because of the usual form of tenancy i.e. a 6 month Assured Shorthold Tenancy (AST), variable quality of the accommodation and often poor housing management. The poor offer from the private rented sector is unsurprising because of the sector is overwhelmingly dominated by small private landlords who own one or two properties. The work of Housing Associations as professional corporate landlords that build affordable housing has never been more relevant.
Housing Associations are facing the challenge of developing new homes with low grant rates. They have responded by creating cross subsidy from commercial activities including house sales. As grant is reduced Housing Associations are increasingly reliant on higher levels of loan and bond finance which is secured on their asset base. As a result asset cover is acting as an increasing constraint in Housing Associations delivering affordable housing. The emerging challenge is therefore: How can UK Housing Associations deliver more affordable housing and counter the limitation of asset cover?
The US Low Income Housing Tax Credit system is based on securing private equity investment into low income housing and is worth looking at in detail in the context of this challenge. LIHTC is based on giving tax credits to investors to make their
investment into low income housing viable. It works by tax liabilities
being reduced by $1 for every $1 invested in low income housing. LIHTC
effectively creates a subsidy for equity investment. The equity invested
can be used to lever further debt funding. A UK version of this system
could make a significant contribution to increasing affordable housing
production.
My research into LIHTC, which this blog will follow, is aimed at establishing how well the US Low Income Housing Tax Credit (LIHTC) system works and whether a LIHTC system would work in the UK.
I am very grateful to the Winston Churchill Memorial Trust (www.wWCMT.org.uk) who have granted me a traveling scholarship to visit the US to research the US LIHTC system. This blog will give an account of the visit as it happens.
The Chartered Institute of Housing is supporting this research and will be publishing the final report on their website, hopefully, in January 2014
