Moody’s has changed the outlooks to negative from stable and affirmed the ratings for 40 housing associations (HAs) and 38 special purpose vehicles (SPVs).

The change in outlook to negative from stable reflects the sector’s high exposure to weakening economic conditions including high inflation, the risk of a housing market downturn and rising interest rates.

A potential ceiling on social rent increases in England and Wales combined with high cost inflation, especially for repairs and maintenance, will result in lower operating margins and interest coverage ratios. Affordability for tenants will be constrained which may lead to higher arrears and bad debts, which led the risk category score for demographic and societal trends to move from 3 to 4 for all HAs.

With a likely housing market downturn over the next two years, HAs with high exposure to market sales are unlikely to achieve forecasted income, leading to lower surpluses.

HAs have substantial and ongoing capital spending needs due to required investment in existing stock – for quality standards, fire and building safety and decarbonization – and construction of new homes.

Although they receive capital grants, the majority of capital spending is funded through debt, which will be more expensive given sharply rising interest rates and tightening financing conditions, further weighing on interest coverage ratios.

The potential ceiling on social rent increases in England and Wales is negative for the sector because it will result in cost growth outpacing social rent growth. The policy volatility indicates a weaker operating environment for English HAs, whose credit quality had benefitted from a five-year agreement for inflation-linked social rent increases.

Rating upgrades are unlikely given the negative outlooks. The negative outlooks could be stabilised if the HAs are able to maintain relatively stable financial metrics over the medium term. This could be driven by operating performance improving more than presently anticipated, including the ability to contain cost pressures, and reductions in development plans leading to lower debt levels than previously anticipated.

The ratings could be downgraded as a result of one or a combination of  a significant sustained weakening in operating margins and interest coverage ratios, material increases in debt levels beyond that currently anticipated, significant deterioration in liquidity, significant scaling up in market sales exposure beyond what is planned; or any weakening of the regulatory framework or dilution of the overall level of support from the UK government.

A downgrade of the UK sovereign rating would also place downward pressure on the ratings.