New report claims Bank of England policy is suppressing social homes delivery

PIC believes this is why housing associations are borrowing less and for shorter periods of time.

As an alternative to borrowing from banks, landlords can issue bonds on capital markets. In June 2023, Inside Housing reported how high interest rates in the capital markets sharply limited housing associations’ bond market activity throughout the year.

A number of sector professionals said housing associations were biding their time when it came to securing new long-term funding, but would soon be required to return to the market for longer-term funding. Also, as the sector is spending more on retrofitting for fire safety and energy efficiency, even less money is available to build new affordable housing.

The Regulator of Social Housing released a Sector Risk Profile report which found that, in 2023-24, the housing sector’s debt servicing cost exceeded its earnings for the first time since 2009.

PIC highlighted that even if interest rates declined, this higher risk profile would still deter potential investors, especially considering that the historically tight credit spread on bonds is increasing lending costs.

This point was made by a number of sector professionals, who suggested that landlords waiting for gilt rates to fall could find themselves in competition with each other because of reduced investor appetite.

However, the BoE believes the impact on gilt markets from QT is less significant than PIC presents, and set out how its QT process is guided by three principles.

It explained that its Monetary Policy Committee (MPC) intended to use bank rate as its active policy tool when adjusting the stance on monetary policy, and that sales of gilts were being conducted so as not to disrupt the functioning of financial markets, and only in appropriate market conditions. Sales are being conducted in a relatively gradual and predictable manner over a period of time.

A BoE spokesperson said: “When conducted according to these principles, the MPC expects QT to have modest impacts on financial market yields and the real economy. While difficult to precisely estimate, the evidence thus far suggests QT has had modest impacts on gilt market yields of around 10-20 basis points.

“This translates into commensurately small real-economy effects on GDP and inflation. The MPC continues to actively monitor developments in the impact of QT and conducts an annual review of the pace of QT, which will next occur in September.”

PIC referenced recent research from property firm JLL which found that for the target of building 1.5 million homes to be reached, an additional £100bn in private finance would be needed on top of the £39bn from the Affordable Homes Programme (AHP).

In a joint statement, Richard Petty, head of residential valuation, and Marcus Dixon, director of UK residential research, both at JLL, said: “PIC’s report has identified an interesting new aspect of the many financial challenges currently facing the housing sector. They’re probably right that QT is pushing up the cost of long-term bond finance.”

They described QT as not “the biggest villain on the stage”.

However, they added: “The pressure on housing associations’ operating margins, and therefore their collective ability to meet interest costs on existing debt of all types, as well as the viability of developing new homes, are far bigger causes of the current malaise.

“But it’s not a supply-side problem of investors being reluctant to back housing associations, and certainly not because they see the sector as too risky. Rather, it’s a demand-side problem made up of [registered providers’] ability, willingness and need to borrow.

“It’s good to see PIC referencing our own recent research, that identified the need for up to £100bn of private finance to turn the new AHP into homes. The government’s recent commitments on grant and rents are a big step in the right direction that should start to redress the balance and to close the viability gap.”