A Whitehall-backed housing review has suggested councils could borrow from general funds if they have reached their Housing Revenue Account borrowing cap. But would such an approach make sense?
When Natalie Elphicke and Keith House launched their new report on local authorities’ role in house building last week, they called on councils that have reached the borrowing limits on their housing accounts to borrow from their general funds instead. Is this a good idea?
The Elphicke-House Review was specifically restricted by its terms of reference from looking at options that would breach the government’s fiscal rules or require accounting changes. So although much of the evidence to the review stressed the need to reconsider the borrowing caps that apply to council’s Housing Revenue Accounts (HRAs), Elphicke and House weren’t able to do this. Instead, in the report and more especially when it was launched, the authors questioned why councils were so concerned with the restrictions when, outside their HRAs, they could borrow freely (only needing to stay within prudential rules)?
Some councils are already doing this. There are three main reasons why they do. First, some 159 local authorities no longer have council houses, so if they decide to build they’re unlikely to want to recreate their cumbersome Housing Revenue Account. Second, houses built outside the HRA can be let at higher rents and aren’t subject to the Right to Buy. And third, councils can borrow to reinvest the money in housing provided by an arm’s length management organisation, or indeed a housing association. So what’s not to like about doing this?
First, there is obviously a reason for the caps on HRA borrowing – that the HRA is a very effective basis on which to borrow, because it has a large, secure revenue stream and asset base, and many local authorities have unused borrowing capacity which is artificially held back by the borrowing caps (that take no account of ability to borrow). The Treasury was well aware that self-financed HRAs would have plenty of borrowing potential – and acted to ensure it was kept within very tight limits.
Second, to borrow outside the HRA councils need an income stream to support the borrowing costs. Obviously they could put in free land to reduce the cost of a scheme, but even so they are going to have to build for market rents or near-market rents, or a combination of sale and near-market rents, to pay the loan costs. Where there is a very good market for such property these schemes may work – but they do little or nothing to produce housing at genuinely affordable rents.
Third, like the earlier Lyons report, the Elphicke-House Review makes much of the idea of setting up local housing companies, owned or part-owned by the council, financed by borrowing outside the HRA. There are already examples of these: Ashford council has its own company and both Sheffield and Gateshead councils have set up joint venture companies for house building. But obviously there are risks involved, these bodies are not easy to create and manage effectively, and councils have to be sure they'll deliver the product they want and are financially robust. If the council is going to give them free or low-cost land, this has an opportunity cost as the land is no longer available for council housing.
Fourth, Elphicke-House makes little mention of affordability, yet this is bound to be a major consideration for local authorities that want to build – if possible – at social rents. Only within the HRA can they do this, using the revenue stream from existing properties to support the borrowing. If Elphicke-House had wanted a case study of councils doing this, they could have looked to Scotland, where councils are building proportionately ten times as many new council houses as are being built by English councils. They are doing it with little reliance on grant, using the strength of their HRAs. Why not repeat in England the same rules that apply in Scotland and get genuinely affordable new homes?
The odd thing is that borrowing outside the HRA has exactly the same impact on government borrowing (under the UK’s present rules) as HRA borrowing does. The reason it isn’t restricted in the same way is obviously that the Treasury doesn’t expect it to be a very attractive option for councils. But if the government is less worried about borrowing levels than we suppose, and sincerely wants to encourage councils to build more homes, why require them to do it outside the HRA when it would be much more secure if it could rely on the HRA’s income from rents?
The conclusion must be that local housing companies outside the HRA, or direct non-HRA borrowing, can both play a role for some local authorities, where there is such a housing shortage that the borrowing stacks up on the back of the scheme itself. But these circumstances are not widespread and new joint ventures can be risky. Councils are bound to question whether they represent good ways of using council land, against the alternative of trying to build within the HRA and deliver housing at social rents. Many are going to conclude that their best option is to do the latter, even with the continuing restrictions on HRA borrowing.
