Everyone agrees we need to build more homes for social rent and last year the rules were changed so that both Homes England and the London Mayor can help finance them via capital grant. The problem is that the sheer scale of output required – as many as 90,000 new homes per year – means that grant costs will be very high. Over £6 billion would be needed to support a programme of that size. Is there any other way to pay for it?

CIH has been looking at an option considered several times in the past – creating a new fund to provide revenue support for new build alongside capital grant. Capital grant would still be available, but a further tranche of units on top of the existing programme would be supported via annual revenue payments with no capital grant.  The advantage would be that part of the cost of an increased programme would be spread over 30 years instead of it all hitting central budgets in year one. This might smooth the way for an increase in new build for social rent that would otherwise fall at the first hurdle of requiring a lot more money from the Treasury.

Doubts have existed in the past about the use of revenue support. One way to overcome these is to make it clear that it would be a supplementary programme and capital grant would still be available in the normal way. Other doubts have centred on the uncertainty of any government promises attached to a long-term payment scheme and the possible effects on raising private finance. Fortunately there is now some experience of revenue support which suggests that these doubts can be overcome.

The experience, from Wales, is so far a successful one. A scheme called Housing Finance Grant (HFG) has been run by the Welsh Government for three years and aims is lifting capital investment by £250 million in total. It was set up alongside capital grant funding to give a temporary boost to the Welsh new build programme. Instead of awarding capital grant of £70,000 per unit it makes a revenue payment of about £4,600 per year for 30 years. The notional cost is twice that of capital grant but of course by spreading it over the life of the project this can be justified in terms of ‘net present value’. Phase 2 of the scheme saw 32 associations sign up and start building a mix of social and intermediate rent homes.

A new paper by CIH argues that experience with HFG is sufficiently encouraging that revenue support should be tested in England, too. The paper goes into some of the details that would need resolving if English housing associations are to be comfortable with a similar scheme. It argues that it is less applicable to local authorities for a mix of reasons, but given that grant budgets are tightly constrained a scheme that avoids the upfront costs of conventional grant might be the only way of achieving a step-change in output, especially if it is focussed on social rented properties that require more subsidy.

There are other precedents apart from the Welsh HFG. No one would want to return to the council housing subsidy system that ended in 2012, but in the past there have been other forms of support such as revenue deficit grant for associations and decent homes funding for ALMOs that have been paid annually. Even the now unpopular PFI schemes demonstrate that long-term revenue funding arrangements can be set up and maintained on a contractual basis.

Another advantage of revenue payments is that they show more clearly how part of the cost of building new social rented homes can be met from the savings in housing benefit or the housing element of universal credit if someone is paying social rather than a market rent. Various attempts have been made to show what these savings might be, and a new calculation in the CIH paper shows that they could cover about half of the costs.

For these reasons, CIH is calling for a discussion within the sector about the potential for using revenue support as a supplement to current capital investment programmes. Does it offer the advantage as a possibly short-term boost in new build programmes, especially if it were to be focussed on delivering homes for social rent? What are the snags? And could they be overcome by the sector if there was a real prospect of a step-change in the output of new homes that are genuinely affordable?

Original post: Social Housing