Cost floors and cash ceilings

The Prime Minister last week said that the right to buy, which led to 1.4 million homes - a quarter of the total public housing stock - being sold has been one of this government's most successful policies. So successful, he feels, that it should be extended to more housing association tenants.

But the proposal is causing divisions within the housing association movement, between mortgage lenders and, it is suggested, inside the Cabinet. Private funders are calling on the Government to delay finalising its plans to allow consultation. This would frustrate Mr Major's wish to include the proposal in the housing White Paper, due to be published in July.

At present, the only housing association tenants who can benefit from the right to buy are those who rent from non-charitable associations on secured tenancies, which pre-date 1988. All housing association tenants other than those in sheltered housing and hostels might soon be offered the right to buy.

Rumours circulating last week, though, suggested the Department of the Environment was blocking the Prime Minister's wish to extend the scheme. The DoE and Prime Minister's Office have denied the story.

The latter body said: "The Government is committed to extending home ownership to more local government and housing association tenants." A DoE spokesman added: "We are committed to diversifying the forms of ownership in the inner cities."

Mortgage lenders and housing associations have become extremely nervous about the plans, particularly if heavy discounts are made available. Where the right to buy currently applies, for council or qualifying housing association properties, a discount of 32 per cent is available on a house, plus 1 per cent for each year of tenancy. The figure is 44 per cent, plus 2 per cent a year, for flats. Each sale is subject to a cash ceiling to the discount of £50,000.

Concern is being expressed that associations will be forced to sell off homes at a loss, making them unable to service their commercial loans. James Tickell, assistant chief executive of the National Federation of Housing Associations, said: "Private investors will be disturbed to hear that their equity is at risk of being sold off, and as government social housing investment is now at a 20-year low, our members are more than ever reliant on private finance to build for people in need."

This view was echoed by Derek Gordon, assistant director and head of housing at Hambros Bank, which has arranged for loans to housing associations of £500m in the past five years. "This government is very interested in attracting private finance into previously publicly funded sectors," said Mr Gordon. "Private finance has been successfully introduced into the housing association sector. Consultation with funders is essential."

A more strident opinion was voiced by Mike Lazenby, head of housing at the Nationwide Building Society, which has been unhappy for some time with the Government's reduction in Housing Association Grant. "If associations have borrowed money against that property, and the price is less than that borrowed, then the association will sell at a loss.

"We would be saying in principle it is OK, providing the housing association can plug the gap. If not, then we would have to call in our debts. There would be inadequate security. We have a covenant [in loans contracts] that links debt to security. If the amount of security drops, it would breach the covenant, and the association would be breaching the covenant."

Other lenders are more positive, provided that the discount levels are not too great, or else are paid for by government. Douglas Smallwood, head of housing at the Halifax, welcomed the opportunity to lend to more home-owners, and raise the social conditions on estates. "Provided the rules are OK, we think it's a good idea," he said.

But the Halifax feels it is vital that a cost floor is maintained, ensuring properties are not sold at less than they cost to build. Even then, says the Newcastle-based Home Housing Association, one of the country's biggest, associations could face serious financial difficulties. Selling at cost floor price would lead to a disruption in rental income and a possible reduction in income against that projected. The association predicts it would then bid for fewer schemes in the future.

The Council of Mortgage Lenders has been consulted, informally, about possible new arrangements. It expects there would not be a discount to tenants, but instead a cash incentive financed by government. This might be similar to the Tenants' Incentive Scheme, which pays tenants to move out of housing association properties into suitable homes on the open market.

The aim of the Tenants' Incentive Scheme is to free up properties so associations can take on priority cases from the housing waiting list. A new scheme might also recognise the advantages of encouraging better- off tenants not to move, preventing the creation of new "sink estates" predicted in a recent study by the Rowntree Foundation.

Until the proposals are firmed up - and they may not be included in the White Paper - many details are unclear. It is even uncertain whether the scheme will have statutory force, or whether, as one rumour suggests, it will be up to housing associations to opt in, as with the Tenants' Incentive Scheme.

It has been estimated that as many as 400,000 households could benefit from the right to buy extension, though at least 60 per cent of these will be unable to afford to do so because they are on housing benefit. Which underlines the fact that what inner-city residents need more than anything is well-paid jobs.