Why all the debate about housing associations and “public body status”? What does it mean and what are the risks and opportunities?

The prime minister has called them part of the public sector and a think tank says they could be sold off in a similar way to Lloyds Bank. But what are the facts about the status of housing associations and are there real risks that it could change?

Are housing associations ‘public bodies’?

There isn’t a straightforward answer to this question. As legal entities, most associations are industrial and provident societies and registered charities, which means they are owned by their members and controlled by their boards, subject to legal constraints (e.g. charity law). But because they receive public funds and exercise public duties (e.g. accepting nominations from council waiting lists), they were judged to be ‘public bodies’ under human rights legislation in 2009, and earlier under equalities law and under EU procurement rules. However, the effect of such judgments was to extend the law to cover different aspects of their work, not to change their ownership or corporate status.

Why is the Office for National Statistics looking at the issue?

ONS has confirmed that it will re-examine the classification of housing associations in the national accounts, and a decision is likely soon. This followed a warning from the Office for Budget Responsibility that the extended right to buy and planned cut in housing association rents might trigger an ONS review. But in reality housing associations have been at some risk of review for a while, given that they are already public bodies for some legal purposes and that (as Steve Wilcox has pointed out in the UK Housing Review) the government has the power to appoint and dismiss board members. The ONS sets out the questions it asks in deciding how to classify any institution and several of them raise issues about government influence over housing associations, whether this is through legislation or regulation.

What would ‘reclassification’ mean?

Classification determines where each body or type of body sits in the national accounts and in economic statistics. Since 1988, housing associations have been treated as ‘private non-financial corporations’; reclassification could move them into the public sector for accounting purposes, probably still as ‘public non-financial corporations’ like ALMOs (arms length management organisations) and council housing. This would mean their income and expenditure would be part of the public finances. Most importantly, it would add their £63 billion or so of borrowing to the Treasury’s measure of public sector debt.

Would reclassification have wider implications?

This wouldn’t be the first example of such reclassification – when Network Rail was reclassified last year, it brought £34 billion of debt onto the public accounts. But at the time, the transport department insisted that this did ‘not change the industry structure or affect the day-to-day operations of the rail network’. There would therefore be no immediate change in the governance or status of individual housing associations. However, government would be worried about their borrowing, as reclassification would add about four per cent to the total of public sector debt and increase the annual cost of servicing the debt by about seven per cent (adding to the government’s deficit). Any new debt taken on and the costs of servicing it would also count against government borrowing. It might simply accept this, but it’s more likely that there would be some sort of options review, as has been announced recently for Network Rail.

What options might the government consider?

Government could decide to relax its influence on the sector so as to persuade ONS to reverse its decision. Alternatively, it could recognise that this is a long-term change by tightening the regulation of the sector to get more oversight of its debt. A more drastic option suggested by some commentators is that in seeking to exert more control over housing association debt the government might move to ‘nationalise’ the housing association sector so that it could then be ‘privatised’. A final option would be to review the government’s fiscal rules so that the ONS decision stands but it no longer results in higher public sector debt. Let’s look at each of these.

Might the government relax its influence on the housing association sector?

Yes – because this is partly what is behind the deal which the National Housing Federation is consulting its members on over right to buy. If right to buy is volunteered, not imposed, this removes one of the key reasons for the ONS review. ONS might respond by saying it will no longer carry out a review or it might continue because of the new limits on housing association rents and other factors noted above. But there is a reasonable chance that a voluntary deal on right to buy would remove the reclassification threat, although it is clear that the mechanism by which a voluntary deal is enacted and enforced, eg through regulation, is also important.

There is also a precedent for ONS changing a decision: further education colleges were reclassified by ONS in 2010, but the government responded by removing several of its controls over them (e.g. borrowing limits) and ONS duly reclassified them as outside the public sector in 2012.

Or is tighter regulation an option?

If reclassification went ahead anyway, the government would have little to lose by tightening regulation and might do so to ensure that housing association debt doesn’t grow any further. While this might go against government thinking on the size of the state and the need to cut red tape, it’s worth remembering the prime minister’s assertion in PMQs of the need to ‘reform housing associations and make sure that they are more efficient’. It seems unlikely that the government yet has plans in place to do this, but an unfavourable ONS decision (or the sector’s rejection of a deal on right to buy) might trigger an overall review – as with Network Rail – and one option could be tighter control.

Could associations be ‘nationalised’ and ‘privatised’?

Chris Walker of the Policy Exchange talks about a Lloyds Bank-style ‘sell off’ of the sector’s assets. However, although Lloyds Bank was reclassified as a result of the banking crisis, the situation was very different because the government took a controlling share and effectively nationalised it. Housing associations remain a large and diverse group of independent bodies with very different ownership structures from the shareholder model used by banks (see above) and none of them are currently owned by the government. If the government wanted to ‘privatise’ them, it would certainly face wholesale opposition from their boards. Nevertheless, Howard Webb has suggested that it could be done if the Homes and Communities Agency were to pack the boards and force through what inevitably would be very unpopular decisions. This might be an option, but far from an easy or quick one.

Could government change the rules?

Reclassification is only a significant issue because the UK fiscal rules say that housing association borrowing would then count towards public sector debt, as council housing investment already does. Elsewhere in Europe this would not be the case, because the norm is to have a more limited definition that covers only government debt. CIH, the Local Government Association and others have been arguing for a rule change for many years. An adverse decision from the ONS might not lead the government to bring its rules into line with the rest of Europe, but it would certainly make the case for doing so even stronger than it already is.

Finally, will this affect Scotland, Wales or Northern Ireland?

At this stage the ONS investigation only covers England. Some of the issues which have arisen in England, notably right to buy, do not arise in the other administrations. ONS may look separately at associations outside England in future, but at the moment they appear content to leave their classification as it is.

Original post: Chartered Institute of Housing