Matt Leach

Facing up to an uncertain future

Description: Matt Leach provides an overview of some of the macro economic and social pressures likely to be experienced by Housing Associations over the next decade and beyond. The paper differs from other contributions in that it doesn’t suggest one, or more, changes for HAs to implement. Rather it should be read as a primer ahead of other contributions to Rental Matters.

Matt Leach’s contribution to Rental Matters

Housing providers face an unprecedented range of challenges as they enter the second half of the current decade. Much attention has been paid to the recent election, its immediate aftermath, and impact on housing providers of the range of emerging policy initiatives around welfare, right to buy and housing supply. But they are arguably less significant than the broader risks that are appearing on the horizon, and that would have arisen regardless of the outcome of the vote in May.

The bigger challenges they will face arise from macro-forces in the economy and society rather than short term adjustments to government policy. The combination of low growth, greater demands arising from an aging population, and longer term risks to the economy make it likely that pressure on public spending – outside of core “protected” areas like health and education – will last until the end of the decade and probably significantly beyond.

The resulting transformation in the role and capacity of the state is likely to lead to significant and ongoing pressures on housing businesses and the communities in which they work, at a time when they will already be struggling in the face of major challenges arising from wider economic, demographic and technology-driven change.

The extent of these challenges has not yet been fully internalised by housing providers. And whilst the basis of housing provider stress testing organisations has broadened significantly in the last twelve months, it is not clear that housing provider boards are yet considering how they prepare themselves to respond to what will be an extremely challenging operating environment.

This paper highlights just a few of the emerging issues that housing providers may wish to consider as they start to orientate their businesses towards 2020 and beyond.

The abolition of social and economic mobility and the hollowing out of the middle class

For the last 10 years, housing providers have understandably sought to distance themselves from the perception that they are the landlords of last resort for the otherwise hopeless unemployed and poor.

This has manifested itself in three ways:

  • the broadening of their housing offer beyond the workless poor, to include accessible home ownership, market rent and sometimes straightforward market sale. Where successful, this has had the added advantage of providing a degree of cross-subsidy to support continued social provision
  • the provision of work-focused training and support to residents, which may also help to derisk housing provider cash-flows, to the extent that this is successful in reducing the overall reliance of the tenant base on welfare payments
  • (to a limited extent) action to encourage residents to move on to alternative tenures, where they have successfully benefited from the “springboard” provided to them by their initial social tenancy.

Whilst this has made rhetorical sense, it has occurred at a time in which – whilst the notion of aspiration and economic progression has not yet disappeared from our broader societal narrative – the labour market has been fragmenting and polarising. For many in the workforce with a low education and skills base, aspirational job opportunities have largely disappeared over the last ten years.

Matt Leach fig 1

Source: Resolution Foundation using ONS data

This polarisation is likely to increase as technology driven change in the workplace becomes a real rather than a theoretical issue for both employers and employees.

Matt Leach fig 2

Source: Deloitte (graph relates to London, risks outside of London are higher than presented)

The implication of these fundamental shifts in employment markets suggests that housing provider business strategies based around a move towards market rent and sale are likely to be sustainable only in the short to medium term, and that issues around low pay and labour market exclusion are likely to grow over the next 10-15 years, irrespective of housing provider investment in supporting the economic participation of small numbers of individuals selected from amongst their tenant group.

Whether or not government chooses to resume sustainable levels of investment in or subsidy for social housing providers, the demand from and dependence of individuals, families and communities on socially-provided housing in its widest sense is likely to increase significantly rather than reduce over the next 10 years. Housing providers may wish to consider how they provide for this as an eventuality.

An ageing population, uncared-for, under-funded and alone

Whilst current Government policy has sought to prioritise the needs of older people, and in particular pensioners, over those of other recipients of funding, the cost of maintaining both high levels of state guaranteed pension provision and meeting the increased health costs of an ageing population seem unlikely to be sustainable beyond the middle of the next decade.

We have already seen significant moves over several governments towards the prioritisation of care towards only the very dependent and vulnerable and the expectation that individuals rather than the state pick up the risks associated with paying for care, and this direction of travel seems unlikely to change over the medium term.

However, this happens at a time when – for many – the comparative safety provided by final salary pension schemes will be disappearing other than for a small class of the very old.

Matt leach fig 3


Matt Leach fig 4

This is likely to be a particular problem for the viability of already economically marginal communities in those areas which have a disproportionate number of older people – with areas of the North East and North West particularly affected. Large scale abandonment of some communities (with knock on impacts arising from landlord failure in those communities, as well as increased demand in those areas that have been less significantly affected) is likely to become a real issue over the coming decade.

But it will also have an impact on an individual level, and in ways that impact in particular on housing providers. With a tenant-base that by definition is unlikely to have significant realisable assets to pay for non-state provided care, housing providers are likely to find themselves the custodians of large numbers of older people surviving on bare minimum incomes, and without any provision for the levels of low level care they might need to sustain an acceptable standard of living. As a result of household breakdown and the broader atomisation of society that has taken place over the last half century, many of these are likely to be alone and/or unable to rely on family based help to sustain themselves.

As they consider their priorities for the coming decade and beyond, housing providers will wish to consider the extent of their obligations to the older people they house, and the extent to which they may feel there is a need to make provision (either now or in the future) help meet gaps in their care where there is no-one else there to fund or provide it.

The likelihood of further, fundamental welfare reform – including the emergence of a “basic income”

The impact of changing population demographics with income and wealth polarisation and the disruptive influence of technological change on labour markets risks our next major crisis being one of demand. Employees fulfil dual roles in any functional economy – as producers of value, but also as consumers. The relentless squeeze on household incomes, the hollowing out of the middle class and the wholesale displacement of workers from some occupations (likely for example in driving/transport/logistics over the next ten years) may in the short term boost corporate profitability, but in the longer term threatens the consumer base on which their revenues rely.

Whilst this has not been the subject of significant debate in the UK, where the standard of economic discourse maintained by both media and political classes is historically poor, discussion of radical welfare reform and in particular the possibility of introducing a “basic income” in place of many existing benefits has become almost mainstream in the United States, and is now emerging in continental Europe – most recently in Switzerland and the Netherlands.

Whether or not the United Kingdom engages with this sort of debate, it seems unlikely that what is left of the current welfare settlement will survive the next 4-5 years, and housing providers will need to consider how they start to re-engineer their businesses to survive in an environment in which income levels are significantly below those currently assumed, and levels of need in the economy are significantly greater.

Housing providers need to start to plan for a medium term in which they face both significantly less by way of revenues per property, but significantly higher demand for the products they are providing. Even if they successfully navigate some of the other issues raised in this note, they may wish to consider how this might be delivered successfully.

What does this all mean?

The extent of uncertainty makes it hard to plan for the next 10 years with any confidence or certainty. Most forward looking scenarios for both the UK and the housing sector are gloomy rather than positive. However, a few core challenges would be worth engaging with now:

Some housing providers might consider the opportunities for making provision for supporting their communities through harder times – the Affinity Sutton Charitable Foundation, which has been endowed with a significant proportion of their recent surpluses might provide a model for this.

Most housing associations will need to look hard at the likely long term viability of broader mixed offers around provision of homes to notional middle income earners who are – increasingly – being displaced from the workforce. There is – on the longer term view at least – likely to be a greater demand for very low rent social provision than market rent, near market rent or for sale homes.

A critical question will be one of whether and how – in what will be even tougher times – housing providers can deliver their core business against budgets which are perhaps 30-50% lower per property than they currently assume.   This might suggest significant changes in assumptions about staffing levels, self service, asset management and maintenance which to date they haven’t engaged with. And a return to issues of sector consolidation and rationalisation, including both full scale mergers and new forms of infrastructure sharing.

It seems likely that increasing numbers will take the opportunity to explore business models more closely related to household based utilities (such as water and gas), with minimal engagement beyond the guarantee of basic quality provision or next generation online service models.

The extent to which any or all of these will be compatible with the maintenance of their current social missions will be one of the bigger challenges for Boards and executive teams over the next decade.