When the majority of councils shouldered £13 billion of extra debt in April 2012 as the price for leaving the old council housing subsidy system, they were promised a settlement ‘intended to endure for the long term’. But the settlement has been undermined by policy changes since then and for many councils it threatens to no longer be sustainable. This is because, although the government kept its word on the amount of debt councils were expected to take on, their ability to pay the costs of that debt has been eroded. A new study by CIH and CIPFA shows what has caused the damage and what is needed to put it right.

In the run-up to April 2012 the main concern was either that government would try to saddle councils with too much debt, or that it would cap their borrowing too tightly and stop them making the investment they could then afford from their expected rental income. As it turned out, the extra debt taken on looked sustainable and although councils only had £2.8 billion of spare capacity to borrow (or ‘headroom’) many immediately began planning to build at double their previous output of new homes. CIH and others, in their report Let’s Get Building, made a persuasive case to go further and allow much higher levels of investment.

In practice, the government shifted its ground only slightly, by offering £300 million of extra borrowing capacity in return for various local policy changes. Not many councils took up this offer, but by then attitudes towards investment had begun to change for a variety of reasons: government had reinvigorated the right to buy, leading to much higher sales levels; it went ahead with a range of welfare reforms that reduced tenants’ incomes and affected councils’ ability to collect all their rents; and in the meantime it cut councils’ revenue grants, with councils responding by charging more costs to their housing revenue accounts. Above all, the government started to erode councils’ rental income. After a series of such changes, the latest and most drastic is the 1% cut in rents that took place in April and will have to be repeated each April for three more years.

Modelling for the CIH-CIPFA study by CIH Consultancy showed that these changes are having a drastic effect on output. The original settlement suggested that, if councils had devoted all their resources to house building, they might have geared up to construct 18,000 new homes per year. Recalculating the settlement to reflect known changes suggests that this capacity drops to around 1,500 new units, which is about what local authorities are contributing at the moment anyway. Surveys of individual councils, carried out by CIPFA, confirm the story told by the national modelling.

What is to be done? CIH and CIPFA are arguing that, if the government wants to meet its target to build one million homes in five years, it needs local authorities to play a full part alongside private developers and housing associations. Especially since the referendum result, with reports of falling commitments in the construction industry, it’s vital to galvanise local authorities’ contribution, not only to deliver new rented homes but also take up spare capacity and make a potentially valuable injection into the economy.

But to do this councils need to restore at least part of their projected rental income when they agreed what they thought was a long-term deal in 2012. Ideally, the remaining three years of rent reductions would be suspended, and policies such as high-value sales and ‘pay to stay’ for better-off tenants would be reoriented towards maintaining councils’ incomes. Above all, councils need a promise of stability, so they can more confidently make long-term investment plans.

In the post-referendum climate, in which private house builders might hold back on new schemes, one way forward could be individual deals by government with local authorities, in which they would be allowed to continue to collect their current rents rather than make further cuts. There might be other ingredients too (like keeping the extra income from pay to stay). In return, councils would make fresh investment commitments and promise to make best use of local resources such as council-owned land.

This is the first study since the settlement to look at the effects of these recent policy changes. It’s now apparent that they have crowded out councils’ potential to build. This not only threatens the government’s overall target, but cuts off a very important source of new affordable homes to rent. It’s vital that government takes on the lessons from the work of the sector’s two leading professional bodies and acts to restore the investment potential it unleashed in 2012.

Original blog: Chartered Institute of Housing