Financial resilience is key to associations clearing the inflationary hurdle

After a prolonged period of low to moderate inflation, prices are on the rise again – and fast.

The Consumer Price Index (CPI) has jumped from 0.4% in February 2021 to 6.2% in February 2022, its highest level since the early 1990s. Everything from electricity to eating out, from pasta to pyjamas costs a good deal more than it did a little over a year ago. And the consequences for our wallets are severe.

The Resolution Foundation is forecasting the biggest real-terms fall in household incomes since the mid-1970s, with a typical household’s income falling by £1,000 after adjusting for inflation.

Last week the Chancellor announced what most have called a modest package of measures to cushion the blow. Headline concessions included a year-long five pence per litre cut to fuel duty and a raising of the national insurance threshold. But realistically these will not counteract the steep price rises across a whole spectrum of goods and services. All eyes will be on the chancellor again for the Autumn budget when expectations will be for a more comprehensive set of measures.

What’s become increasingly clear in the build up to the Spring statement is that a single measure of inflation masks individual differences. In reality, we all have our own individual CPIs reflecting our own unique spending profiles.

 Inflation has surged over the past 12 months

Poorer households spending a greater proportion of their income on essentials are facing the most pronounced increases. Forecasters now anticipate inflation could exceed 10% for the poorest families later in the year, pending the extent of energy price hikes in the autumn. The cost-of-living squeeze is not helped by a quirk in the mechanism for uprating benefits, which means most working-age benefits will be uprated by September’s CPI of 3.1% in April, rather than February’s rate of double that. And let’s not forget the benefit cap means many households won’t benefit from any uprating at all.  

 Our outgoings will increase significantly. A rise in inflation is especially unwelcome given the billions the sector is gearing up to spend on building safety and achieving net zero

As part of his package of measures the Chancellor announced a doubling of government’s Household Support Fund to £1bn to provide further support for families with the cost of living from April. And housing associations including Optivo and Southern (more on which below) are doing their utmost to cushion the blow through their social impact work. But this will undoubtedly be a challenging time for many of our residents, which will only ease slightly once benefits are uprated again in April 2023.

Besides deepening the economic challenges faced by many of our residents, the prospect of a prolonged period of above-average inflation causes housing associations multiple challenges. We are major consumers in our own right, purchasing everything from paper to construction services.

Our outgoings will increase significantly. A rise in inflation is especially unwelcome given the billions the sector is gearing up to spend on building safety and achieving net zero. Rising inflation also means the value of Government funding assigned to housing is eroded.

The £11.5bn assigned to the 2021 – 26 Affordable Homes Programme will now cover a smaller than expected proportion of total construction costs. Housing associations and local authorities will likely have to borrow more or generate a greater degree of cross-subsidy to plug the gap.

The same applies to the £5.1bn assigned to the Building Safety Fund and the £4bn the Secretary of State is hoping to extract from residential property developers to fund remediation of buildings 11 to 18m tall. These will likely cover fire safety costs at fewer buildings than originally forecast.

The challenging economic climate, following hot on the heels of the one percent cut to rents, Brexit and Covid, was one of the drivers behind our proposed merger with Southern Housing Group. Merging will boost our financial resilience and better equip us to ride out this and future economic shocks.

Besides increased financial resilience, we see the merger as offering two main benefits. The first is the prospect of delivering better services to residents. Optivo and Southern share almost 40 local authorities. Consolidating our stock will mean we’ll be a bigger, more influential presence in our areas of operation. We’ll be larger but also more local - deepening our local ties by having more colleagues, services and homes in some of our key communities.

Housing associations and local authorities will likely have to borrow more or generate a greater degree of cross-subsidy to plug the gap

We’ll also bring responsive repairs and estate services in-house, creating a better and more reliable service for residents. And we’ll increase investment in digital services and 24/7 customer contact.

The second is the prospect of having more of an influence on policy to support our residents. With 77,000 homes in all we’ll be one of the largest housing associations in the country. More than 30,000 of those homes will be in London making us a major partner of the Greater London Authority. And we’ll be the biggest housing association in Kent and Sussex, owning 90% of the social housing stock in some districts. That means we’re in a much better position to influence key national, regional and local authority partners to support our residents. Plus, it means we’ll have the scale to work alongside the public sector to invest in jobs and have a bigger social impact.

Over the last few years housing associations have successfully weathered all sorts of economic challenges. We’ve overcome the one percent cut to rents, Brexit, and all the operational and financial difficulties posed by Covid. A rise – possibly prolonged – in the rate of inflation would appear to be the next hurdle to overcome. Financial resilience will be key and our merger will deliver that and more.

 Paul Hackett is CEO of Optivo and honorary professor at the UCL Bartlett School of Sustainable Construction