The lifting of the housing revenue account borrowing cap has been lauded as one of the most significant developments for the sector in recent times. But experts have warned that this move alone is unlikely to lead to a revolution in housebuilding.
There are 163 stock-holding councils in England, holding a combined £2.8bn in reserves in their housing revenue accounts and the ability to borrow almost 10 times that. As of April 2017, those councils held a total debt limit of £29bn – of which 89% was used – with many councils claiming the cap was limiting their ability to build.
Local Government Association chair Lord Porter (Con) described the lifting of the borrowing cap as the “single biggest piece of news since Thatcher was in charge”, adding that it could deliver 100,000 homes a year over the next parliament.
The Budget red book was a little more muted in its appraisal, however, forecasting that councils could increase housebuilding by “around 10,000 homes per year”.
Matthew Warburton, policy adviser at the Association of Retained Council Housing, agreed with the Treasury’s figures and argued the policy change can realistically be seen as “a bit of a damp squib”.
He said: “The government are quoting 10,000 homes in the Budget papers, which is four times as many as councils are currently building, but it’s still not enough to replace right-to-buy sales - they’re running at around 12,000 a year.”
Council borrowing is governed by the Chartered Institute of Public Finance & Accountancy’s prudential code, which binds authorities to the principle of borrowing within their means.
A Cipfa spokesperson said the code does not give guidance on the upper limit of borrowing as it is “down to local determination” and largely set by housing income.
Mr Warburton pointed out, however, that income has dropped since the housing cap was first introduced, causing a knock-on effect on councils’ ability to build.
“The problem that all authorities now face is that the rent base is 10% lower than it was in 2016 due to four years of rent cuts,” he said.
The Chartered Institute of Housing and Cipfa carried out an analysis in 2016 on the effects of rent cuts to council house-building. The CIH and Cipfa said it was “striking” that they found a dramatically lower capacity to build beyond the short term, as the current house-building model “generates insufficient cash flow” to continue building.
Their conclusion was that self-financing with low income meant there was no additional cash left over for future house-building, once debt repayments had been taken into account.
While John Perry, policy adviser at the Chartered Institute of Housing, said the decision to lift the borrowing cap was “very welcome”, he said councils’ ability to take advantage of it would now depend on the availability of central grant and their past debt repayment policies.
Mr Perry said: “The most important factor is grant aid [and] whether there is sufficient capacity within Homes England and the Greater London Authority to give local authorities the grants where they need them in order to do development.”
Ultimately, the ability for councils to be able to build out is dependent on this issue of grant – which currently averages at £25,000 per unit, Mr Perry said.
According to research published this month by the Key Cities Group, a group of 20 mid-sized English cities, grant funding “disproportionately” benefits the south of the country - potentially leaving poorer areas of the north behind. Greater Manchester mayor Andy Burnham (Lab) said this “skewed distribution” of grant funding for new homes was “demonstrably unfair and unacceptable”.
According to Homes England’s strategic plan, published last month, the organisation intends to invest around £7bn in grant funding through five housing programmes over the next five years. Based on the £25,000 average spend per unit, that equates to around 280,000 homes over that period – or 56,000 a year, illustrating how much of a bigger impact grant funding can have compared to extra HRA borrowing.
According to housing and communities secretary James Brokenshire, bidding for a share of the extra £1bn borrowing headroom announced last year was “over-subscribed”. Almost 1,000 bids were submitted, exceeding £2.8bn in additional borrowing.
This is despite the fact only stock-holding councils from what the Ministry of Housing, Communities & Local Government defined as high affordability areas were allowed to bid.
LGC analysis showed this meant only 57 authorities were eligible with a view to delivering about 20,000 homes between 2019-20 and 2021-22. Mr Brokenshire said in a written parliamentary answer that these numbers demonstrated local government’s “appetite to increase council housebuilding”.
However, Mr Perry argued councils will continue to need grant funding to help get homes off the ground.
“The problem I would point to now is not the ability to borrow, but the ability to repay that borrowing,” he said.