Local authorities and arms length management organisations (Almos) are quietly gearing up to build about 3,000 homes a year over the next five years – their biggest sustained spell of new housebuilding since 1990 – as councils begin to use the financial freedoms they gained on 1 April after the housing revenue account was reformed.
The modest but sustained new-build programme will help councils reduce their waiting lists as well as assist the moves forced on tenants by the ‘bedroom tax’ and other welfare benefit changes.
But a new report, Lets Get Building, just published by the National Federation of Almos (NFA) argues that councils and Almos have the potential to build as many as 60,000 extra homes, many without the need for government grants. However, they are restricted by the limits on their borrowing – even when it would be covered by the rental income for those new homes.
Back in 1990, councils completed 14,000 new houses for rent, but for the majority of the last 20 years have struggled to build more than 200 a year. The last government belatedly recognised the need to build more homes and both Almos and councils began building more than 4,000 in two years. The projects showed that the potential to get building quickly was there, but also that costs could be kept low, with only low levels of government grant.
The news about councils’ plans is welcome, but it could be even better. At a time when all political parties want more housebuilding and the economy desperately needs the boost that construction can bring, councils and Almos want to get building more but can’t. So what’s stopping them? The answer lies in the rules that the government imposed on councils when it allowed them to become “self-financing” in April.
The potential to build 60,000 new homes
Five national bodies collaborated to produce the NFA report, which shows the potential for building 60,000 new homes in the next five years.
Councils now have two big advantages in managing their finances that could bring them closer to the independence enjoyed by housing associations. One is that they now keep all their rental income and the other that they are no longer tied into an unpredictable national subsidy system. Their long-term business plans can be much more reliable, and within these they should generate surpluses they can reinvest.
But despite self-financing, the Treasury also imposed strict limits, which means only about 3,000 homes are built by councils each year.
Because of borrowing caps on each council, they have the headroom to only invest an extra £2.7bn. Their average debt is only £17,000 per house and their income could enable them to borrow as much as £20bn for new investment, at low interest rates, financed with rents. Without the caps, councils could do much more.
The reason for the caps is that, unlike housing associations, councils’ borrowing adds to public sector debt, even if they borrow from the same banks, to build the same houses, as associations do. The report puts forward two arguments for tackling this obstacle.
The first is that while councils would need to borrow an extra £7bn to build around 60,000 homes, not only is this well within their capacity but it would produce a £20bn boost to the wider economy, and result in significant savings in welfare benefits as building workers get jobs and tenants have access to lower-rent accommodation. It is an excellent move in its own right and existing rules would ensure that borrowing stayed within prudential limits.
The second is that under international rules, there is no reason why borrowing to build council houses should count as government debt at all. This is because the rules recognise that housing largely pays for itself from rents. A rule change would simply bring Britain into line with the rest of Europe and bodies such as the International Monetary Fund.
The report’s testing of market opinion suggests that such a change would be accepted if handled carefully and transparently. All that’s needed is government willingness to take one more step towards localism, following the reforms it started in April.
Let’s Get Building: The Case for Local Authority Investment in Rented Homes
The NFA’s report recommends councils and Almos make a commitment to government – if allowed – to:
- Use their land and assets effectively to drive local growth.
- Exploit and use to best effect the potential within the self-financing system to bring forward new homes in a managed and planned way.
- Collaboratively develop and support voluntary standards led by the sector to maintain effective financial governance of housing accounts.
In turn, it recommends that the government:
- Unlocks the potential to invest in housing by removing the borrowing caps on councils and relies instead on prudential borrowing rules to ensure that investment is sustainable.
- Considers the longer-term case for a planned and transparent move to adopt internationally recognised rules to measure government borrowing, which would bring Britain in line with our competitors.
Original post and comments: Guardian Housing Network