Restrictions on councils borrowing to build new homes led to a flowering of new companies and joint ventures to get around them. Now the cap has been lifted, what does the future hold?
Ever since the public spending crackdown of the 1980s, restrictions on borrowing to build council houses has been one of the shibboleths of public finance.
That all changed last autumn when Theresa May announced at the Conservative party conference the scrapping of borrowing restrictions on local authorities’ housing revenue accounts.
The government reckons the relaxation will deliver £15-£20bn of additional borrowing capacity and around 100,000 new homes.
Now the shackles have been lifted from the HRA, will councils go it alone and are joint ventures a thing of the past?
The existence of borrowing restrictions has stimulated a flowering of different vehicles for building and maintaining housing, as councils have looked for ways to invest in their stock.
The biggest challenge is how local authorities will raise the capacity to spend the money
Steve Partridge, Savills Housing Consultancy
Some councils, most notoriously in the case of Haringey LBC’s recently cancelled partnership with developer Lendlease, have entered into joint ventures with the private sector to bring forward new housing. More common were partnerships with housing associations, which although not-for-profit bodies have not been subject to the same borrowing constraints as local authorities.
The last Labour government saw the emergence of a new breed of arm’s-length management organisations, which were principally set up to upgrade council housing stock but have been used by some authorities to deliver new housing. And recent years have seen the proliferation of council-owned local housing companies, which can use prudential borrowing powers to build homes outside of the HRA, such as for renting privately or shared ownership.
Going down the DIY route will be attractive for those councils that have bridled at the local authority housing borrowing restrictions ever since they were introduced. Local government’s relations with housing associations in particular have soured since the two sectors fell out over the government’s controversial extension of right-to-buy in 2015.
“Some on the Labour side, now they have the debt cap off, will find any which way to do it themselves either through the HRA or in an almo,” says an arm’s-length management organisation source.
A recent survey by the Local Government Association found 94% of the 63 housing stock-owning councils who responded said they would use the new powers to accelerate or increase their housebuilding programmes. However, 102 stock-owning councils did not respond to the survey, suggesting many may not yet have taken a decision.
“You can take advantage of rent pooling and use rent surpluses in the rest of the stock to subsidise new build,” says John Perry, policy adviser to the Chartered Institute of Housing.
Haringey has announced plans to use the freed up HRA borrowing restrictions to carry out its local manifesto pledge to build 1,000 new council homes. It will be pressing ahead with plans to establish a housing company but this will be used to bring forward other tenures.
A plus point for some councils is that they have largely paid off the debt on their stock because it was built so long ago.
Scottish councils, which have not had the same cap on their housing borrowing, have been able to generate “quite a lot of income” to cross-subsidise new homes despite generally setting lower rents than their English counterparts, says Mr Perry.
The level of future rents is a worry for councils when weighing up whether to launch HRA development programmes.
Local authorities were rocked four years ago by the Conservative government’s move in 2015 to impose a rolling 1% rent cut across the social housing sector.
Last month it was confirmed that this rent curb is coming to an end with all social landlords allowed to set rents at inﬂation plus 1% for the ﬁve years from 2020.
But the squeeze on rents has damaged stock-owning local authorities’ ability to borrow, says Chloe Fletcher, policy director at the National Federation of ALMOs.
Using rent cross-subsidies will be less of a problem if local authorities have limited new-build ambitions.
Many almos have carried out small scale construction jobs, like infill projects on leftover pieces of land on council estates.
It will continue to make sense to use these almos if councils possess them, says Mr Perry: “If you have that expertise you might as well use it.”
However, substantial development ambitions will be a bigger headache, partly because any housing developed through the HRA must be let on a social rent basis. This entails higher levels of subsidies than other types of low-cost housing, such as shared ownership or aff ordable rent.
Grants from the government’s housing quango Homes England will be in short supply, at least in the short term, says Mr Perry: “Given that Homes England’s current programme is largely committed, there isn’t a big pot for councils to bid for.”
Matthew Warburton, policy adviser for ARCH (Association of Retained Council Housing), argues that a “fundamental spending review” is required to deliver more grants for new council housing.
In the meantime, councils could still ﬁnd themselves pushed into seeking other forms of cross-subsidy, says Mr Perry: “If you are having to fund a scheme not wholly from grant or without any grant you will have to build market properties even though you will have extra borrowing available through the HRA.”
Another constraining factor on local government’s housing ambitions is availability of land.
While government press releases imply the public sector has limitless supplies of land, many councils have already built on their leftover HRA sites or surrendered them to a joint venture.
“A lot of local authorities report that they are running out of land,” says Steve Partridge, a director at Savills Housing Consultancy and long-standing expert on HRA reform.
As a result, he says, councils are reallocating sites from the general fund, like car parks and depots, for housing. Mr Partridge is even seeing some councils using their borrowing freedoms to buy sites for housing on the open market.
But an even bigger headache is councils’ capacity to deliver new housing, he says: “We see the biggest challenge is how local authorities will raise the capacity to spend the money.”
Councils have only recently begun building homes again and their completion levels remain well below those of housing associations and volume house-builders. These more seasoned and larger operators have qualiﬁed staff, like quantity surveyors and project managers, in-house or in their supply chains.
Plugging this expertise gap is where associations and private developers can most fruitfully seek partnerships with local government, says Mr Partridge, pointing as an example to the joint venture recently concluded between Havering LBC in east London and contractor Wates.
Another example is the partnership between housing association Hyde Group and Brighton & Hove City Council to build around 1,000 affordable homes on a former Ministry of Defence barracks. Despite political ructions, Hyde chief executive Elaine Bailey says the joint venture is progressing well with the ﬁrst homes due to start on site this summer.
Councils may even choose to plough their new HRA borrowing capacity into building the social housing element in such joint ventures, says Mr Perry: “Where partnerships are working well there’s no reason why the HRA money can’t be used in that context.”
The relaxation of the HRA borrowing restrictions will also “probably not” mean the end of local housing companies, says Mr Warburton, pointing out that much of their activity isn’t the provision of traditional council housing but different tenures such as shared ownership and private rent.
Often the housing provided by these companies is designed, at least partly, to create a future revenue stream to support services.
The other, often unspoken reason local housing companies are likely to survive is that the homes developed through such vehicles are protected from being sold off via right to buy, unlike those in the HRA.
“Some authorities won’t build [in the HRA] simply for that reason,” says Mr Perry.
A senior London council housing source agrees: “You don’t want to put all your eggs in the HRA if it’s going to be sold out from under you.”
Just one London local authority has so far expressed an interest in fully taking advantage of the relaxation announced by Ms May last autumn by maximising its HRA borrowing capacity, LGC understands. However, several others are considering following Haringey’s lead by increasing their borrowing capacity.
Many councils which submitted bids for an earlier £1bn round of extra HRA borrowing freedoms for high housing demand areas that was announced in 2017 have now put previous plans on hold in order to assess the greater opportun-ties offered by the complete relaxation, says Mr Warburton.
However, council housing looks set to remain a mixed economy.