How do we boost the supply of new homes? John Perry, CIH policy adviser, says the options for change in the run-up to the general election have never been greater. Here he sets out why changing the borrowing rules is an option worth considering.

Earlier this month, 50 councils and ALMOs from across the East Midlands came together to talk about boosting housing supply. In his report of the event, Matthew Warburton of ARCH made clear that these local authorities – of diverse types and sizes – all had plans to build more homes. Several were concerned about recent stories in Inside Housing and the Spectator that claimed many councils were not planning to use their spare borrowing “headroom”. Allegedly, “four out of 10 local authorities had no plans to put a single penny to good use”.

Now that council housing is self-financing, the sector has the potential to borrow up to £20billion for new investment within the prudential borrowing rules that apply across local government. When self-financing was originally planned by the previous government, it was intended to allow sufficient capacity for councils to build 10,000 new homes per year. But the eventual settlement, that took effect in April 2012, limited councils’ extra borrowing to only £2.8billion, which means that they should be able to gear up to building just 3,000 homes per year. This is a big improvement on what councils were doing only a few years ago, but is far short of what could potentially be achieved.

To anyone who has seen the chart of how the borrowing headroom is spread across the 169 councils that have housing stock, it’s pretty obvious that there is a strong case for change (see diagram below). Although Inside Housing points out that the picture has changed slightly because some debt has now been repaid, around half of all councils can only borrow up to an extra £10million per year. This sounds a lot, but of course is only sufficient to build 80-90 new homes over the 30-year life of their business plans. Some councils with long waiting lists have no spare borrowing capacity at all; many have just enough for the investment they need to make in their own stock so that it meets the Decent Homes Standard.

Distribution of HRA borrowing headroom between 169 local authorities, April 2012

Two official reviews of housing supply are taking place at present. The government’s Elphicke Review can’t consider changing the borrowing rules but it can consider whether councils are doing all they can and if not, why not. The opposition’s Lyons Review has a broader remit and has received multiple submissions calling for the borrowing rules to be changed.  Needless to say, the CIH has submitted evidence to both, and our chief executive Grainia Long is a member of the Lyons Review team.

The case for change has been brought up-to-date in the latest CIH policy essay Why is it important to change local authority borrowing rules? It not only sets out in more detail how such a change would boost housing output, but has suggestions about how it could be done and how changed rules would fit within a new government fiscal framework. It offers two options for removing the current restrictions, and says that either could pave the way for councils to build around 15,000 homes per year within five years.

The importance of this issue now is obvious. We need to build at least 200,000 homes per year in England and we are going to struggle to reach that target. While housing associations will have the biggest responsibility in the social sector, and need to raise their game to build at least 60,000 per year, councils will have to gear up too. Building levels of around 200,000 per year have only been achieved in the past with a significant input from social landlords, and councils can’t contribute if their borrowing is artificially held down. The rules need to change, and soon.

Original post and comments: Chartered Institute of Housing