Each association has its own board, with a large degree of independence. The board members of most large associations are paid for their services, but in smaller associations their participation is voluntary. The sector is regulated by the Homes and Communities Agency (HCA), but only in respect of governance and viability, not the quality of service provided. Most associations cover small local areas, but increasingly associations are amalgamating to give them a regional, rather than local, coverage. The boards of housing associations now have to make difficult strategic decisions, and different associations are adopting contrasting strategies according to their individual circumstances and risk appetites. Their environment is now much riskier than previously, and all of the available strategies are riskier than the typical association is used to. The choice is broadly between four generic strategies:
1. To concentrate on continuing to provide good quality housing services to existing social housing tenants and their replacements, in a situation where local authority financing is being cut by up to 28 percent and support services are therefore likely to be cut. This policy helps those in need, reduces leverage, and conserves resources that could be used to support a more expansive policy in a better socioeconomic climate.
2. To invest in various social services on the borderline between the private and public sectors with the aim of increasing human or environmental well-being, and in particular regarding employment generation and support.
3. To expand in the affordable rent market, by using a mix of external capital and grants, and by cross-subsidy through progressively transferring existing social-rent housing onto a higher rent level.
4. In areas of high housing demand such as London, to develop high-volume housing for sale or at full market rent, and also to build houses where the tenants pay a rent sufficient to allow them to accumulate a financial interest in the property. An association, in employing this strategy, would typically have a culture similar to that of a commercial developer.
There are a number of issues currently causing concern in the sector; in particular:
• The government currently pays housing welfare benefits to landlords where the tenant qualifies to receive the benefit. This means that the risk of tenant rent arrears is much reduced. In the future, to encourage a culture of self-sufficiency, the government will pay benefits directly to tenants, and expect them to pay their own rents. Only if rent arrears reach a level of two months will the government resort to the payment of a tenant's rent to the landlord.
• Benefit levels are being reduced, and more pressure is being put on recipients to find work.
There is an acute housing shortage in London and the South East of England, which the sector is struggling to meet. In the north of the country the housing market is weak, with some economists being of the opinion that many houses are overvalued. In the event that there is another depression or a reversion within the present one, or a sudden increase in interest rates, then there is a danger of a downward correction in house prices.
Some associations were set up several years ago to take over local authority houses, then in poor condition, and bring them up to the Decent Homes Standard using long-term bank financing specifically tied to this (low-risk) purpose. The Decent Homes Program was successful, with the required standard generally being attained by 2012. However, often the bank financing has covenants that prevent the association from borrowing more money to branch out into riskier activities without the need for refinancing their existing lending at higher interest rates, typically 1.5 percent greater than their existing finance. For these associations, known as large-scale voluntary transfers (LSVTs), a decision is needed as to whether they should stick with their knitting and limit their investment in new houses to what they can generate internally, or bite the bullet and pay the extra margin for new loans to fund an expansion.
In some respects the position of the sector is relatively stable, since the demand for its core product would be expected to increase in adverse economic times. However, the sector's finances are finely balanced, with its borrowing subject to profitability and leverage covenants, so it may be vulnerable to sudden changes in economic conditions, and in particular:
• To an economic downturn if this were to be accompanied by a sudden fall in house prices, since there could then be losses on houses being built for market sale.
• To a sudden hike in interest rates, if this were not accompanied by an equivalent increase in inflation. About two-thirds of the sector's borrowing is at fixed interest rates, thus reducing this risk. Also, the social housing rent levels of a typical association are tied to the United Kingdom's consumer price index (CPI), so if the interest rate rise were accompanied by an increase in inflation, as has commonly been the case in the past, the risk would also be covered. However, there remains a chance that a sudden change in monetary policy could result in interest rate increases without an accompanying increase in inflation rates, possibly accompanied by a sudden fall in house prices.