Theresa May’s announcement that borrowing caps on council housing investment will be removed was a big step in the right direction, and the issuing of draft regulations appears to confirm that the caps will be lifted at the end of this month. With reports of a Treasury fight-back, the concern was that restrictions could have been imposed, as happened when the Autumn Budget announced the now defunct earlier scheme to allow £1 billion of extra borrowing headroom for selected authorities. James Brokenshire’s latest letter to councils aims to set minds at rest.

It was reported that the Treasury believed that councils could soon borrow as much as £1 billion extra each year. The worry is that talk of this level of investment could set councils up to fail. It implies they are able to gear up quickly to produce more than 8,000 new homes annually, but this will take time given that they currently build only a quarter of this number (although there may be some undercounting). And even with the removal of the caps, there are several other obstacles to be overcome.

The first and likely most important is the state of local authority housing revenue accounts (HRAs). Rents have had to be cut by 1% per year since April 2016 and although a new rent settlement will allow increases from 2020 by then many HRAs will be severely depleted. While councils will be able to plan for higher rents for a five-year period thereafter, the first call on resources might be restoring planned maintenance programmes in the existing stock rather than new build.

A second issue is whether councils will need grant and if so will they get it. Councils are most likely to want to build for letting at social rents, and Homes England changed its offer last June to allow such bids. However, both it and the GLA (which will grant-aid similar ‘London Affordable Rents’) have funding programmes which have already been fixed and to a large extent committed. Will they be able to respond to fresh demands from local authorities?

A third issue is the extent to which councils are now putting their efforts into local housing companies, not into development through the HRA. These options aren’t mutually exclusive, but both occupy key resources such as land. LHCs have the advantage that – at least for the time being – they are not subject to right to buy (RTB), with some councils being in a position where enforced sales can rob them of newly built HRA properties, possibly not even covering the costs. Proposed reforms to rules about RTB receipts will help, as does the withdrawal of the threat that councils will have to sell a proportion of the higher value properties in their HRA stock each year. But the government tends to underestimate the disincentive effect of RTB despite growing calls for the scheme to be suspended.

At the same time LHCs (and, where they exist, ALMOs) offer an opportunity. If many of them already have programmes at the planning stage, it may now be possible to switch parts of schemes to HRA finance and offer the resultant homes at social rents and through the waiting list. Of course, no one knows how many councils are in such a position. But one council to quickly announce a switch in funding was Cheltenham, whose ALMO will now incorporate HRA housing in a 500 home scheme that was already on the drawing board.

Despite these obstacles, the Treasury is understandably vigilant about the impact of HRA borrowing  given that, at 88% of GDP, national debt is still at a record level. Nevertheless the government continues to ignore a simple solution: adopt international accounting conventions that would take borrowing for council housing investment out of the main measure of government debt. One of the Treasury’s main arguments against doing this has always been that changing the rules will affect the financial markets. However, given that it has recently made a similar rule change for housing associations (to put them back into the private sector), with no apparent effect on the markets, this objection now looks very thin.

An important reason for such a change is that it would be a further step towards real financial autonomy for council housing. After the self-financing ‘settlement’ in 2012, Treasury ministers seemed intent on undermining it by eroding councils’ incomes via a series of changes to rent policy. The ‘reinvigoration’ of right to buy and the threat of having to sell higher-value stock made matters worse. The removal of the borrowing caps is therefore a very welcome statement that ministers are now willing to trust councils to manage their finances under the prudential borrowing code. If government were also to make a change to the borrowing rules, to bring them into line with other countries, it would relieve them of the worry that council borrowing might add to government debt. It would also be another important signal that the Treasury has, at last, recognised that council housing should have similar financial independence to that enjoyed by housing associations.

Original post: Public Finance