We should welcome rather than worry about a diversifying housing sector

By Matt Leach - on 21/06/2013

Matt Leach, HACT’s CEO argues that the housing regulator should welcome diversification of the sector, and think again about the proposed ring-fence.

There’s a certain joy to being an ex-regulator.  Mainly in knowing with certainty that however hard your job might seem at any point in time, you can be absolutely sure that somewhere someone has a job that is infinitely harder and more challenging than your own.  Because running a regulatory system is a largely thankless task – if you are successful at the most basic level - overseeing sector growth and averting unnecessary disasters - people rarely give you credit; if something goes wrong, inevitably some of the blame gets shifted from those that caused the problems onto the regulator who should have stopped them.

It’s possible, therefore, to have absolute sympathy with Julian Ashby and Matthew Bailes at the HCA as they struggle to deliver a regulatory system capable of maximising the delivery potential of housing providers at a time when they are needed more than ever, whilst at the same time protecting against recurrences of Cosmopolitan-style failure.  And doing it when suffering from a resource base eroded by successive reorganisation-driven “efficiency savings”.

Over coming months, those challenges will sit at the heart of their work on a revised regulatory framework, the consultation on which concluded earlier this month.  The initial proposals include a new response to the growing diversification of the sector: ring-fencing social housing activities into operating units that would face strict controls on the extent to which they could pursue anything other than their core housing purpose.

If the proposal sticks (and there are encouraging signals the HCA may be at least partially rethinking their plans), this would represent a significant about turn in the approach taken by previous regulators (this is the second privilege of being an ex-regulator: the ability to confidently proclaim “it wouldn’t have happened on my watch”…).  As far back as 2006, the Housing Corporation published its Neighbourhoods and Communities Strategy, which signalled the then Regulator’s intention to consult on revising its policy that 51% of associations’ business should be social housing. 

At that time, the regulators approach was clear.  We wanted to move away from unnecessarily restrictive constraints on housing providers’ businesses, encourage housing providers to diversify their activities where that made sense for them and their communities, and move towards a more informed risk-based assessment of the financial and operational stability of housing provider businesses on a case-by-case basis.

The rationale for this had four key elements:

    -      the acceptance of the argument that had underpinned “Housing Plus” concepts since the mid-90s – that if communities declined (particularly in areas where housing markets were already fragile), asset values would come under pressure

     -     a recognition that - in some areas - housing providers were starting to explore a wider role, taking on new functions and activities, that some had the potential to develop into organisations more akin to US-style Community Development Corporations, and that where this was broadly in accordance with the wishes of residents and localities, this was not something that should be unreasonably resisted

     -      an awareness that some of the biggest risks facing housing providers came from their core activities around land acquisition and development, and that the scale of risk posed by broader diversification was as much around management competence as (in comparative terms) the financial impact of that broadened base of activities.

     -      an abandonment of any residual attachment to the historic concept of “grant leakage”, a corrosive principle that permeated housing and regulatory policy through the 80s and early 90s, which effectively defined housing associations as vehicles for the specific delivery of government policy/delivery instructions, and needing to be ruthlessly constrained from doing anything that fell outside of those boundaries.

If those principles applied then, it is arguable that they should be applicable to an even greater extent now.  The increasing inability of the state to meet anywhere near the level of services that we have come to expect of it  is likely – irrespective of party in power – to heap pressure on some our poorest communities.  And housing providers, with an asset base located many of those communities will not be able to avoid engaging with the impact of those changes.  That doesn’t mean that housing providers will able to step in to fill the gap left by state withdrawal; it does mean that for some providers, the focusing of resources on sustaining their communities rather than building more homes will be an increasingly important option that they will want to consider.

If there are financial risks facing the sector – and this is a point made even clearer by events in the wider economy since 2006 - they are driven at least as much by pressure from the HCA and government to stretch balance sheets to maximise outputs for minimal grant input (something addressed by HACT Chair Tom Murtha in a recent blog), and an ongoing welfare reform agenda which places significant pressure on housing provider cashflow – both far more likely to raise the risk profile of the sector in the eyes of lenders than any level of prudential business diversification. 

Finally, at a time when localism, social enterprise, spin-outs and social finance are themes that continue to permeate the public service reform debate, it seems at best counter-intuitive to increase state control and direction over the activities of housing providers, a sector which has over the last thirty-five years showcased the benefits of transferring assets from state control into a confident, well funded independent not-for-profit sector. Indeed, (as I’ve argued previously) a broader approach to the potential of the housing association sector, which acknowledged its potential as a template (or indeed delivery vehicle) for further reform of the public sector is long overdue.  Aster’s emerging interest in the large scale delivery of education services is a good example of this.

So what does that mean for the regulator?  First of all, that a properly resourced, risk-based approach to regulation is preferable to unnecessary rules, inflexibly applied.  This may mean that regulation needs to be charged for, but that is probably the lesser of two unwelcome impositions.  Second, that government as a whole (not just DCLG and the HCA) needs to take a much broader view of the potential of the housing sector as a vehicle for public service reform; and welcome rather than fear diversification.  Third, that the independence of the sector is a good in and of itself – the removal of the Audit Commission has provided some much needed space for innovation across the sector, and a focus on optimising impact as much as narrow process efficiency; increasing direction and regulation risks undermining that progress.  Finally, if government and regulator are genuinely concerned about sector risk, they need to look as closely at the combined impact of funding regimes and welfare reforms as at perceived risks from diversifying business portfolios – applying unnecessary restrictions on the latter will not in any way mitigate risks arising from the former.

HACT and the NHC are holding the first national conference on housing provider business diversification on 19 July, with contributions from Brian Johnston (Metropolitan), Boris Worrall (Orbit), Paul Smith (Aster), Julian Ashby (HCA), Jayne Hilditch (TVHA), Matthew Gardiner (Trafford HT), Tom Murtha (Chair, HACT) and others.  More details at http://hact.org.uk/events/housing-diversification-conference-2013

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