Brexit and Housing Associations

Published on February 21, 2019

It is generally accepted that there is a housing crisis in Britain. A cross party review has concluded that Britain needs three million more social homes. Housing associations are charged with meeting the need for affordable housing by building new homes. These are funded through government grants, loans that are funded from surpluses and cross-subsidy from activities such as selling houses at market value. Housing associations also need to keep their expenditure within what can be afforded given the rents that they collect.

The European Union has never involved itself in housing policy and there are no European regulations affecting housing in Britain or any other member state. The UK government makes housing policy in England and it is a devolved responsibility in Northern Ireland, Scotland and Wales. However, the impact that Brexit will have on housing associations and their ability to provide affordable homes will be negative and significant in all parts of Britain.

The Regulator of Social Housing (a government body that regulates housing associations in England) is giving advice to housing associations about what they should do about Brexit. Speaking to the Social Housing Annual Conference in January, Simon Dow, the Chair of th Regulator, referred to the Bank of England’s forecasts about the effects of a ‘disorderly Brexit’ on the economy. These include a fall in Gross Domestic Product of 8%, an increase in unemployment to 7.5%, an increase in inflation to 6.5%, a reduction in house values of 30% and an increase in interest rates to 5.5%. These would all have an adverse impact on housing associations. He then advised that:

“Providers must be stress testing for Brexit and ensuring that they have the mitigation strategies in place that they can implement.”

Following this, Paul Hackett, Chief Executive of Optivo Housing Association told the ‘Inside Housing’ magazine that they had stress tested a scenario where property values fell by 35% resulting in a 25% reduction in the number of new homes developed. He concluded that government would have to mitigate this by more than doubling what it was prepared to provide in grants:

“We would need to have a conversation with government about using grant in a counter- cyclical way... On rented homes, we would need around 50% of cost on new builds (in grant) ... This would be higher if shared ownership was taken out of the picture.”

However, Jeanne Harrison of Moody’s (an agency that provides credit ratings for housing associations) told ‘Inside Housing’ that

“Government support for associations (through grants) ... could also decline if the public finances are stretched as the government attempts to mitigate the broader impacts of... Brexit.

Another credit rating agency - Standard & Poor’s - has warned that a no-deal Brexit would lead to the downgrading of the credit ratings of about half the housing associations in Britain with associations that provide market sale housing being downgraded the most. They told ‘Inside Housing’ that:

“We can reasonably expect certain negative shocks to the UK social housing sector... Sharp declines in house prices and the higher average inflation in... 2020/21... would shrink operating margins which, in turn, would reduce earnings before interest, tax, depreciation and amortisation margins. Moreover, we forecast a reduction in social housing lettings while we consider housing associations will increasingly struggle to increase social housing rents in 2020/21.”

Lower credit ratings would make it more difficult for housing associations to raise loans and would increase the interest rates at which they could borrow. Many housing associations are borrowing extensively in advance of Brexit to mitigate the risk of not being able to borrow afterwards.

The construction industry is dependent on imported components and labour. The UK imports £10billion of construction materials a year and the proportion of construction workers from outside the UK is 20% nationally and 56% in London. A falling pound, tariff and other barriers at ports and the ending of Free Movement is likely to result in increased construction prices and shortages of materials and labour.

To assess the possible impact on housing associations I have selected one at random – The Liverpool based Riverside Group – and done some rough calculations of the effects of Brexit based on their accounts for 2017/18 and the forecasts identified above. They include:

  • Increase in inflation to 6.5% - increased management costs £2.8million, increased support costs £4.5million, increased maintenance & major repairs costs £3.8million. Total increase £11million a year.
  • Increase in interest rates to 5.5% - increased capital financing costs of £80million a year.
  • Reduction in property values of 30% - reduction in property values resulting in an impairment charge of £543million in the first year.

In 2017/18, the Riverside Group’s surplus on ordinary activities was £60million. My simple stress test suggests that Brexit Riverside could face a deficit of £574million in 2019/20 and a deficit of £31million in 2020/21 and subsequent years. This would end the association’s ability to build new homes and would call its financial viability into question.

Government controls the rents that housing associations can set. In 2015, it was decided that rents in England would be reduced in cash terms by 1% a year from 2016 to 2019. These reductions were designed to reduce government expenditure on housing benefits but have squeezed housing association finances making it more difficult for them to build new homes. Government has announced that from 2020 housing associations in England will be able to increase rents by inflation plus 1% each year. However, if inflation rates increase to 6.5% as predicted by the Bank of England, that would result in rent increases of 7.5% a year. This would cause a corresponding increase in government expenditure on housing benefits and would make rents less affordable for tenants who are not eligible for housing benefit. In these circumstances it is likely that any government would return to a policy of below inflation rent increases that would put further financial pressure on housing associations.

Even though Britain has not yet left the European Union, these problems are already becoming apparent. London & Quadrant Housing Association, the largest in London, told its staff in an email in January that its financial performance during 2018/19 has been disappointing. The email said that:

“A weaker, more uncertain economy has led to a downturn in the property market... We expect to make a surplus of about £170 million this year, rather than the £342million we based our plan on.”

And a spokesman for the Association told ‘Inside Housing’ that:

“The United Kingdom is in an unprecedented period of political and economic uncertainty... We must look at our short-term priorities, adapt where necessary and act prudently.”

In 2016, many people voted for Brexit because they wanted to protest about poorer communities being marginalised – including not having enough affordable homes. There is widespread agreement that this issue must be addressed. However, Brexit will make it significantly more difficult for housing associations to provide the increased number of affordable homes that are needed. If we really want to address the housing crisis we should remain in the European Union.


Adrian Waite is a member of European Movement and a supporter of the People's Vote campaign. He is also an accountant who works as a housing consultant and former board member at Calico Housing Association in Burnley and former Chair of Impact Housing Association in Cumbria.

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