In response to my last blog, The Reinvestment Imperative, I received an interesting comment via email. The writer noted that housing associations have to run high levels of reserves to cover short-term liabilities and/or deal with unforeseen difficulties. This, in essence, justifies the banking of large surpluses.
This blog explores that issue further, looking at the assets of big housing associations, particularly those assets that can be accessed quickly to meet short-term problems. This is not about elegant financial analysis. It is about using some basic financial information to pose what are essentially moral and political questions. To ask whether housing associations are striking the right balance between their financial health and their social purpose.
When we look at an organisation’s current assets (e.g. money in the bank, loans etc) against their current liabilities (repayments, tax liabilities etc), we get a picture of their ability to pay short term obligations. Dividing the former figure by the latter, we get what is called the organisation’s ‘current ratio’. This is an accepted measure of how efficiently that organisation is using its resources. A ratio of between 1.0 and 2.0 is considered healthy. A low ratio suggests not being able to meet short-term liabilities, and a high ratio suggests the organisation is not using its resources efficiently.
The five largest housing associations in the UK have an average current ratio of about 1.7, with some variation between 0.7 and 3.5. What this means is that most of them are able to meet pressing obligations, and could arguably use some of their current assets to develop more houses. Of course, each organisation will have its individual circumstances and future concerns. For instance, I’m sure all social landlords are concerned about how the welfare reforms will affect their revenue. However, as surpluses and current assets increase year-on-year, and our lack of affordable housing becomes more and more acute, it is not unreasonable to suggest a more progressive approach to using these resources could be applied.
Perhaps, as I argued in the last blog, this is down to the corporatisation of big housing associations that focus too heavily on the balance sheet. It would be interesting to consider the role of the regulator in this. Perhaps the regulator’s focus, and the response of social landlords, is producing and reproducing processes which preference the hoarding of assets, rather than reinvestment of those assets for social good.