We look at the effect the downturn in the housing market is
having on RPs' accounts
As property sales plummet, what measures can RPs take to
minimise the impact?
The global credit crunch has hit the UK property market hard,
with Nationwide and Halifax stating that house prices have fallen
nearly 11% in the past year. Lack of mortgage availability and a
fall in consumer confidence has led to a downturn in the housing
market, the effects of which could be far worse than those
encountered in the 1990s. The demise of Lehman Brothers, HBOS and
Bradford & Bingley has also added to the misery.
Many larger registered providers (RPs) are increasingly
financially dependent on the sale of property (via outright sale or
shared-ownership) to make their business models work, and until
recently, few RPs had assumed that there would be any downturn in
their anticipated revenue from property sales.
Predicted effect on RP accounts
The sector's reliance on property sales is clearly
illustrated in the global accounts published by the Housing
Corporation, which show an increasing deficit before tax and
property sales for the years 2005 to 2007. In 2007 the surplus
generated from the sale of properties was £542m, compared to
the overall surplus before tax, £270m.
The balance sheet
RPs have been developing to a greater extent over the last few
years and are likely to be holding properties on the balance sheet
that have experienced impairment.
In addition, RPs trying to sell properties, either through
shared-ownership, HomeBuy or outright sale, will be holding
significant amounts of property on the balance sheet as current
assets. These assets are valued in the accounts at the lower of
cost and net realisable value, and RPs may need to make significant
write-downs to these assets to reflect the reduction in the
achievable selling price. Also, contractors are increasingly facing
financial difficulties and taking longer than planned to complete
developments ? making matters worse in a market where
prices are continuing to drop.
The global accounts in 2008 and 2009
The 2008 global accounts are yet to be published, so we have
made some simplistic assumptions to show how the 2008 and 2009
global accounts might appear when taking into account the effects
of the slowdown, impairment of housing stock and increased interest
The assumptions we have used for 2008 are:
an increase in rental income of retail price index (RPI) of
0.5% plus 3% for growth