A clear future for debt

Conservative Party leader David Cameron recently told The Times: ‘A hung parliament is instability, uncertainty, potentially higher interest rates, potentially Britain losing its credit rating.’ So, should housing associations be worried?

Certainly a rise in interest rates would eat into the sector’s ability to borrow money. If we assume a third of the housing association sector debt is not fixed (£15 billion) then a 2 per cent rise in borrowing costs (£300 million) would wipe out around £5 billion of debt capacity at a stroke - roughly 60 per cent of the national affordable housing programme for 2008/11.

While politicians tend to view interest rate changes in terms of their short term impact, such as jobs and mortgage costs, there are other economic indicators which provide a better idea of where interest rates will go in the long term. It is these factors that matter to housing associations because they have loans and bonds typically lasting 30 years.

For example, following record levels of public sector debt issuance required to stave off recession, interest rates payable to investors by issuers of 30-year government bonds have risen from 4.0 per cent to 4.6 per cent in the past six months. However, short term interest rates have not risen as quickly as forecast. The government’s management of the economy as the election approaches has helped to keep a lid on interest rates for now, but economic fundamentals will eventually force them to move.

Inflation, hardly mentioned by politicians in the election campaign, hit 4.4 per cent in March according to the retail price index and 3.4 per cent according to the consumer price index, which is well ahead of the government’s target. All these factors indicate an increase in borrowing costs in the future - regardless of the make-up of the government.

David Levenson is group director of finance for the Network Housing group

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