Brave new world

Guess what the total value of government financial instruments to support new homes will be by 2021.

The answer that leapt off the page at me in a report on the department’s performance published by the National Audit Office (NAO) last week is a cool £24 billion. And that is just the direct support that comes under the DCLG and its agencies.

Perhaps the figure should not come as a surprise. After all, ever since the financial crisis we’ve grown used to the government adopting new ways of financing things that do not rely on conventional spending or borrowing.

The three programmes that make up the £24 billion are £10 billion for financial guarantees to housing associations and the private rented sector to help build new homes, £9.7 billion for the Help to Buy equity loan scheme (HTB1) and £4.2 billion for other loans and investments such as Build to Rent and the large sites scheme.

It’s still relatively early days for many of these schemes (HTB1 was only extended to 2019/20 in the 2014 Budget) but they are already hugely significant. The NAO notes in its report that:

‘The [Homes and Communities] Agency has already moved to a point where the March 2014 valuation of its available for sale financial investments (£1,554 million) exceeded its payment of grants during 2013-14 (£1,052 million).’

All of these schemes will be familiar to readers of Inside Housing. But it’s only when you put them together that you realise the scale of the shift from old-style grant funding for housing to new-fangled financial instruments. To put that £24 billion into perspective, the total value of construction output on new housing is currently running at £25 billion a year.

Consider too what’s happening elsewhere in housing that does not come under the DCLG. Add the direct impact of another £12 billion for Help to Buy mortgage guarantees (HTB2) and the indirect effect of hundreds of billions of pounds worth of Funding for Lending and quantitative easing on mortgage payments and house prices. Look at the novel forms of equity investment that are being developed within local government – and schemes devised by governments in other parts of the UK.

And the total value of financial instruments seems set to grow even further in the rest of this decade. All of the main parties are committed to deficit reduction plans with little scope for more conventional public investment and borrowing. As I blogged last week, for example, Labour’s Lyons Review included proposals for Help to Build loan guarantees for small builders, more loan guarantees for housing associations, equity loans for private landlords and equity investments of public land. The Independent reported on Sunday that shadow ministers are already holding talks with the banks on how Help to Build would work.

The scale of the shift to financial instruments is obvious when you stop to think about it. What’s more surprising (to me at least) is how the shift has happened with relatively little public debate about its advantages and disadvantages. True, the merits or otherwise of HTB2 came under very close scrutiny but that is just part (and so far a small part) of what we’re talking about.

The upsides for the government are not hard to see. Financial instruments like guarantees do not count as public spending and borrowing. Some of them could result in healthy profits for the taxpayer: the Financial Times calculated in May that the government could make a £4.5 billion profit on Help to Buy equity loans. Commercial fees are charged for many of the guarantees and loans. And is it conceivable that ‘available for sale financial investments’ could actually be sold by a future government?

The obvious downside is that the taxpayer could suffer losses if house prices fall or a housing market crash leads to large-scale defaults against loans or developers going bust and guarantees being called in. Relying on guarantees and loans increases risks for housing associations and others. The existence of the instruments could drive policy elsewhere (for example by giving the government even more of a stake in ever-rising house prices). How much of the activity being guaranteed would have happened anyway? How much of the benefits will disappear into the pockets of shareholders in the major housebuilders? And might there be better ways of using the public sector balance sheet to support new housing?

The NAO’s job is to scrutinise the financial performance of central government. Its report on HTB1 in March highighted the potential impact on borrowing by low-income households but also noted that it was a ‘long-term commitment with uncertain returns’ and the objectives did not include any value for money criteria. Last week’s report also analyses the risks and notes that the DCLG and HCA have responded to its concerns by recruiting more staff with the skills to administer HTB1 and its other financial instruments.

Closer to home, the HCA’s regulation committee is well aware of the risks too, hence the new regulatory regime covered by Carl Brown this week’s Inside Housing. As Julian Ashby put it in April:

‘With less grant and a greater emphasis on support through financial instruments, development of new housing will require substantial levels of debt at a time when some associations are coming closer to covenant boundaries. This leads to diversification into commercial activities and to a desire to circumvent constraints in a variety of innovative (but potentially risky) ways.’

Further away from home, the same thing is happening across Whitehall, from the £40 billion in infrastructure guarantees being issued by the Treasury to the financing of Hinckley C nuclear power station to the shift from direct funding to student loans in higher education. It’s a brave new world that deserves much more scrutiny that it is getting.

-> Originally posted on Inside Edge, my blog for Inside Housing