Bonds can beat inflation

Piers Williamson, chief executive of the Housing Finance Corporation, and Mark Washer, group finance director of Affinity Sutton, predicted that 2010 would be a record year for housing association borrowing in the capital markets. Indeed, the year has got off to a strong start with bond issues by Genesis and now London & Quadrant.

With a headline rent reduction of -0.9 per cent next year, this makes the real cost of long-term fixed debt at circa 5.5 per cent seem expensive in today’s terms. Of course, in a couple of years’ time it may sound cheap, but two years is a long time to be tightening belts without exhaling breath. December retail price index inflation has raced ahead to 2.4 per cent, so those housing association bond raiders should be feeling smug right now. Volatile inflation rates are here to stay.

Alistair Darling told us to expect the big squeeze, which was interpreted in the media as power politics inside the Labour cabinet. But suppose Mr Darling really was telling us what he thinks is likely to happen, rather than what we should be hearing. Perhaps rumours of a sterling crisis around the corner are real working scenarios in the minds of Treasury officials. What price, then, for a housing association bond issue after the general election?

The chancellor left himself scope for electioneering by saying that massive debt and deficit reductions would only kick in when the recession is technically over. In that case, there may be a small window of opportunity before quantitative easing is turned off and long-term borrowing costs start to rise.

Right now, Messrs Williamson and Washer look as though they have called it correctly, but perhaps what they really meant was ‘buy now while stocks last’.

David Levenson is group finance director at Network Housing Group

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