First cut not the deepest - adapting for austerity in 2015 and beyond

  • The Government wants to further cut the welfare bill into the next Parliament
  • Housing associations need to adapt their financial planning and risk management now
  • Diversification offers an increasingly attractive new source of revenue

The last few years have been far from easy for anyone depending on state benefits – and rather than get easier, the pressure is set to increase. The message from the 2014 Political Party Conferences was loud and clear – the welfare bill must come down.

According to the Institute of Fiscal Studies, more than half of the spending cuts are yet to bite, and a Labour victory in May 2015 is unlikely to bring about a significant change in policy – the party is under pressure to match Tory savings and the country is still a long way from balancing its books.

The impact of this on housing associations has already been huge, as they race to adapt to changing conditions for their tenants and prepare for future stresses.

One major challenge is simply that so many social tenants rely on welfare payments to survive, and the general tightening up of social security is magnifying existing financial problems and residents’ ability to pay rent regularly and on time.

One in 11 people in Britain now worry that they will not be able to pay their rent or mortgage, and 70% of rent or mortgage payers with children are currently struggling or falling behind with their payments, according to research [2014] from Shelter.

Reforms such as the housing benefit size criteria – the so-called ‘bedroom tax’ – along with changes to council tax charges and general benefit freezes, are putting pressure on tenants, and in doing so changing their relationship with social landlords.

Two-thirds of households in England affected by the bedroom tax have fallen into rent arrears since the policy was introduced in April 2013, while one in seven families have received eviction risk letters, according to [2014] research by The National Housing Federation (NHF).

Rise in evictions

In some cases the cuts in social housing funding have forced rent rises – to up to 80% of market values – leading to a rise in evictions. In addition, tenants are reporting more sanctions, exclusions and payment suspensions.

There are also future developments that need to be considered now. Plans for a ‘universal credit’ are already causing real worries, with widespread concern about its implementation, whether it will have a positive impact or not, and how recipients will cope with the transfer to monthly budgeting.

As a result of all this, social landlords have had to increase the resources they devote to tenant training advice, and invest more in face-to-face contact and financial support. This increasing focus on existing tenants has taken resources away from building new homes and offering new tenancies.

But the pressure isn’t only coming directly from central government welfare cuts.

All local authorities are engaged in a relentless drive to find savings, and many have pushed more responsibilities on to housing associations as a means of streamlining their own operations. In the past, some housing associations would ‘top up’ council funds if they fell short, but this is becoming increasingly hard as the shortfall grows.

More broadly, general cuts to council services and infrastructure is, in some cases, leaving service gaps, with tenants turning to social landlords to fill this.

Increasing demands, shrinking budgets

The end result is that housing associations are struggling to manage these increasing demands, as their incomes become more uncertain and their budgets shrink.

But, challenging as these mounting pressures are becoming, the response has to shift from an emergency reaction to a more proactive and sustainable approach to meeting key goals.

There’s simply no choice. The financial and political environment will not improve in the foreseeable future, and as a result there is an intense, evolutionary pressure on housing associations to find ways to mutate and survive in a difficult landscape.

This will require cultural toughness and resilience. But it will also require a sophisticated appreciation of risk, and the ability to plan for future challenges – not least of which is the pension shortfall that many housing associations need to address.

Budget cuts are a key risk in the housing sector and housing associations need to find ways to deliver their annual financial plans, without impacting too heavily on stock refurbishment and maintenance programmes, and without losing sight of long-term goals.

Doing this successfully depends on taking the right attitude to risk. For example, paring back ‘non-essential’ maintenance can seem a quick way of cutting costs; inspecting plumbing networks or roofing can seem an unaffordable luxury when every spending decision is under scrutiny.

But failing to maintain an on-going monitoring programme can lead to an increase in costs when pipes burst or flat roofs collapse.

Sub-contracting out such services may offer alternative opportunity for a neat saving. But unless such contracts are carefully risk managed there is the potential for a third party failure to impact services and costs.

New income

On the other hand, selling on your own capacity to other organisations may offer the chance of valuable new income.

According to research by published by Social Housing, diversified activities now provide £2.3bn of housing association turnover, with 34 social landlords already generating a fifth of their turnover from non-core income, and this is expected to increase as cuts bite further in the next Parliament.

But this new strategy comes with its own risks. Do you have the right skills for new commercial operations? Are they sustainable? Do your plans risk coming into conflict with your core values? Is this going to damage your reputation?

Managing the short-term is tough, but housing associations also have to prepare for the future.

It is a complex situation that requires a sophisticated response, and in these difficult times there can be no compromise on good governance. Right now it’s about striking the right balance between risk and opportunity in the years ahead.