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As the chancellor George Osborne stood up in the House of Commons last week to unveil the biggest peacetime cuts to public spending for 70 years, Countryside Properties was pitching to a council for an estate regeneration scheme.

As details of Osborne鈥檚 speech emerged, Countryside rapidly rethought its proposal. Michael Hill, one of the housebuilder鈥檚 directors, says its pitch was rewritten to exclude any money for affordable housing. 鈥淲e had to work out how we could eliminate grant from the scheme. It meant restructuring and reprofiling it, and some community benefits couldn鈥檛 be afforded,鈥� he says.

And no wonder. Because for housing at least, there鈥檚 no money left. What was trailed to journalists as a 50% reduction in spending actually turned out (as 好色先生TV predicted on Tuesday) to be a 75% cut in capital spending by the communities department.

It seems the chancellor鈥檚 decisions represent the end of social housing procurement as we have known it. Developments under way will be completed, but all new ones will be based on a low-grant model. And forget about the use of public money to support private schemes for sale - those days are over.

These huge cuts come as the housing market is stumbling again: consumer confidence is low and mortgage approvals have slipped back to where they were in March 2009. These factors led Bellway Homes, Britain鈥檚 fourth biggest housebuilder, to reduce its sales forecast last week, despite the fact that 128,000 units were completed in the past year - the lowest total ever recorded.

Osborne鈥檚 gamble is that the shortfall in public funding will be offset by the tenants: housing associations will be allowed to put up rents to 80% of market rates to raise more money for development. The chancellor estimates this will fund 150,000 social housing units over the next four years. The question is: will it?

What does a pound buy these days?
The flexibility to raise rents as a way of generating development capital is something housing associations had been quietly campaigning for. Labour was ferociously opposed, and brought in regulations to force associations to set rents at the same level as councils. According to a report by the London & Quadrant housing association and Pricewaterhouse Coopers, raising social tenants鈥� rent by one pound a week generates 拢432m over a year. What鈥檚 more, assuming banks would like a yield of 6% on loans, this extra cash enables associations and councils to borrow up to 拢4bn a year on top of that.

With social housing rents in London standing at less than half the market rate, there is clearly the potential to raise a lot of money. Brendan Sarsfield, chief executive
of London-based association Family Mosaic, says: 鈥淲e鈥檝e got to be positive. As a developer it鈥檚 a great solution - it turns a capital subsidy problem into a revenue one.鈥�

A number of associations have been talking to the government and London mayor Boris Johnson for some time about what are called 鈥渋ntermediate rental鈥� products funded with low or zero grant. This is housing minister Grant Shapps鈥� justification for the move. 鈥淚f you want to build a million homes to take the waiting list down, at traditional grant rates that costs 拢50bn. Clearly that money isn鈥檛 there. There has to be another way,鈥� he says.

Problems, problems
But it鈥檚 not that simple. This model depends on associations or developers being willing and able to borrow more. Sarsfield says: 鈥淭here are risks for lenders. While the reduction in security of tenure [under the new 鈥渁ffordable rents鈥� model] might improve things a little, higher gearing for associations increases their risk.鈥� Nothing on this scale has been tried before. A Homes and Communities Agency source described the 150,000 target as 鈥減retty heroic鈥�.

Countryside鈥檚 Hill says quick calculations suggest it may be achievable, but it is a step into the unknown. 鈥淚 don鈥檛 think people are taking the number particularly seriously. It鈥檚 the cuts they鈥檙e taking seriously,鈥� he says.

The problems multiply outside the South-east. In many parts of England, private renters do not pay much more than social tenants, so charging 80% of market rates will not yield much, yet these organisations still face a huge reduction in their subsidy. Derek Long, northern chair of the National Housing Federation, says: 鈥淚n some places, sticking up rents won鈥檛 work. Poorer places will be left in stasis. They just can鈥檛 build without a big slug of grant.鈥�

The issue is exacerbated by other measures in the spending review. In the past two years, subsidies for new-build private housing, such as HomeBuy Direct and Kickstart, have propped up activity in marginal markets. These programmes, which would have financed 20,000 sales if they had run until 2012, have been axed. And a series of funding streams for regeneration, worth more than 拢7bn over the past three years, have been cut to just under 拢1bn for the next four years.

This makes the housing market outside the capital even tougher. Tony Pidgley, the Berkeley chairman who is planning to build rental homes in London and the South-east under the new model, says: 鈥淭here鈥檚 going to be a growing North-South divide. It鈥檚 the first time in my career I鈥檝e had people offering me land for nothing.鈥�

Another concern is estate redevelopment, which has been a large part of the workload of builders such as Berkeley and Countryside, and the big housing associations. These schemes often require demolition. Tenants are allowed a veto, and are likely to exercise it rather than take on a much more expensive tenancy agreement.

Hill says: 鈥淚f tenants aren鈥檛 treated as special cases [under estate redevelopment] it will stop schemes going forward. You鈥檇 be asking turkeys to vote for Christmas.鈥�

The NHBC says the spending review represents a 鈥渟ignificant threat鈥� to any housebuilding recovery. And that鈥檚 without tackling whether social housing tenants can afford big rent rises. For the industry it鈥檚 a huge gamble. As Osborne says: 鈥淭here is no plan B.鈥�

It could have been worse 鈥�

A 75% cut in the capital budget of the communities department sounds like bad news, but 好色先生TV understands that the original proposals were even harsher. Separate sources have told us that two weeks before the spending review, the plan was to cut the affordable housing budget entirely. Only money for legally contracted commitments would have been found. To fight back, the communities department offered senior government figures a deal: give us a little money and we鈥檒l push through a fundamental reform of social housing. The reforms were inspired by a report, Hard Times, produced by housing association London & Quadrant with Pricewaterhouse Coopers, which described how a new model might work. Only in the final days before the review was the deal agreed.

That 鈥�50%鈥� cut explained

George Osborne called the settlement a 50% cut in social housing funding - from 拢8.4bn to 拢4.4bn. However, the detail of the spending review showed that total capital spend will fall by 74% over the next four years. This disparity comes from Osborne only considering narrow 鈥渟ocial鈥� housing funding in his top line. But the chancellor has also cancelled private housing subsidy schemes and cut regeneration funding. A host of programmes worth 拢7bn between 2008 and 2011 have gone. Instead eco-towns, Thames Gateway regeneration, housing market renewal, growth areas, regional development agencies will now have to struggle for a 拢900m slice of the new regional growth fund. That鈥檚 an 87% drop. Regeneration, which was such a buzzword under Labour, was not mentioned once in the 105 pages of the spending review.