Thursday, 19 February 2009

Housing Finance: Holding it Together With String..

"Housing associations are set to start trading complex financial instruments with each other to sidestep spiralling bank fees", says the trade press. Golly, that sounds impressive!

I wonder why the bank fees for doing this have gone up so much? Oh yes, I remember - it's because the trade in 'complex financial instruments' proved not to reliably offset risk after all, just to accumulate it in 'difficult-to-unravel' bundles which exploded in their faces.

In reality this is a sign that the basic logic of the capital funding system for social housing is under pressure. Since the late 1980s associations have been unable to access 100% public funding for new developments. Instead they have to bid for a level of public subsidy and top this up with private loans or finance from other sources. All other things being equal, the lower the public subsidy you asked for the more likely you were to get it - and thus the more private finance you needed. This came in many varied and splendid forms with many different kinds of strings attached - and different repayment dates and interest rates. Hence the need to 'smooth' out the terms by trading with the banks. Now the banks will only do this at painfully high rates, so the associations are trying to do it amongst themselves.

It's a pretty desperate move. It may buy some time - a year? two years? who knows? - but there is no way on earth the housing association movement can replicate this function of the banking system on a permanent basis. So associations' ability to bid for low levels of public subsidy may well begin to decline, even if the regulator doesn't get the heebeejeebees about being expected to take on FSAesque type functions. So if the demand for public subsidy begins to rise the government will be facing a choice between paying more per new social housing unit created - or just building less of them...

& let's hope these 'complex financial instruments' don't go belly up the way their equivalents in the City and Wall St have done. Rescuing a single housing association is something this government knows how to do -basically it gets another association to take it over - but rescuing a chain of them linked through impenetrable and complex financial instruments is really uncharted territory...

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