27 February 2009
The government has vowed to remove the barriers preventing councils from building homes, but they might be replaced by others. John Perry considers how ministers can make house building financially viable for local authorities
Prime Minister Gordon Brown seems to have built a reputation for creating hostages to fortune. Many wondered if he had done it again with his speech last month promising to build thousands of new council houses. For a start, he must have been aware that there is a hill to climb. Since Labour took power in 1997, councils have built at the princely rate of about 200 units per year, and 1994 was the last year when the output was close to 1,000 homes.
For at least 15 years, only a few councils have built houses at all, and fewer still have kept their in-house development skills. Yet many councils would certainly like to build new houses, and in a changed market they do have some cards to play – they might be able to provide free land and, if they are able to borrow, they can still do so cheaply.
The prime minister offered no specific incentives, but said that local authorities would have the government’s ‘full backing’ and that it would ‘put aside any of the barriers that stand in the way of this happening’. He then promised further measures over the coming months. So what are the prospects of some of the old barriers being swept away?
Housing minister Margaret Beckett suggested some possibilities a week in advance of Brown’s speech. She said that councils that build new houses will be able to keep the new rents they generate, and also keep the full receipts if they are later sold through the right to buy scheme. This is small beer, though welcome. Based on her figures, the average extra rent income will be about £18 per week per property once management costs have been deducted. This will repay only a minor share of any loan charges on a new development. The right to buy concession will help to repay the loan if the property is sold, but the emphasis should be on ‘help’, not ‘repay’.
And there’s a snag – councils cannot just build new houses and then exclude the rents from their annual financial returns. They will have to apply for exemption in advance, and conditions will be imposed to ensure rents are within guidelines and borrowing is not excessive.
Beckett also promised that councils will be able to receive subsidy in the form of social housing grant. Once the preserve of housing associations, SHG is now open to private developers and to local authority-owned companies. Beckett says she will open it to councils directly and we are still awaiting the details. Welcome though the SHG will be, bidding is competitive. For example, about one-third of arm’s-length management organisations, which manage half of council housing, have qualified to receive the grant in principle, but so far only one has actually received it.
There will be worries about how long it will take for councils to qualify for the grant in their own right, and then receive the funds. Add the need to apply in advance for the exemptions on rents and right to buy, and the process is starting to look like a new barrier in itself.
A real shift in councils’ ability to service loan charges from new schemes would occur if they could keep the rental income from their whole stock, not just the new units. This might yet emerge from the government’s review of council housing finance, which is due to report in April. This, indeed, offers a range of potentially exciting reforms to enable council housing to become self-financing, and for local authorities to declare independence from a national subsidy system that stifles initiatives and is perhaps the biggest barrier of them all.
Again, though, the problem is timing. Self-financing can only come about if the debt burden on local housing authorities is either partially taken over by the Treasury or redistributed between authorities. This is not an easy operation, and certainly not an overnight one. It might start to happen from April 2010, but much will need to fall happily into place.
Looming in the background is another issue: the borrowing that will be needed if councils are to build directly themselves. As is well-known, housing associations have been promoted as the agents of new build for the past 20 years, partly because their borrowing is private and doesn’t affect the public sector balance sheet. Extra council borrowing, even though governed by the prudential code, would still add to the total of public sector debt. One constraint on self-financing of council housing, if it goes ahead, is likely to be a government-approved limit on the extra borrowing that might result from councils gaining full control of rental income.
The obstacles to a significant uplift in council house building are therefore serious. But let’s remind ourselves that the prime minister promised to put aside any barriers. How exactly could he go about removing them?
Let’s make the reasonable assumption that he’s motivated by two things. One is to provide much-needed rented homes, and the other is to use councils to help the building industry keep going in the recession. So ideally he wants a significant amount of work on site by, say, the middle of 2010.
His first action will be to talk to the people he expects to do the job. There are perhaps 30-40 councils that are already actively building, or are involved in public-private partnerships, or have Almos that have new build schemes in the pipeline. How about a working seminar with proactive councils to draw up a list of the main barriers and how to remove them as soon as possible?
The action could be targeted. For example, which schemes already have planning permission and perhaps partnership deals set up, but can’t go ahead because they depend on proceeds from house sales that aren’t now happening? Could some judicious use of SHG kick-start those schemes, reconfigured to provide only rented homes? Or could councils strike new deals with housing associations with schemes held up by market conditions? Are there schemes already approved that could easily be extended to take in more sites and provide more units?
Such reviews in themselves might provide a few hundred starts in the next 12 months that otherwise won’t happen. It would also be in the interests of both sides if councils could partner with housing associations whose development programmes have been disrupted, but who still have the skills and capacity to provide good housing quickly.
Next, Brown could ask Beckett to simplify and bring forward the changes she’s already announced but not yet implemented. There could be a deal: get schemes on site in 12 months and the exemptions that councils would otherwise have to bid for will apply automatically. Councils could be encouraged to make in-principle applications for grant now, with the details resolved later, so they can start planning schemes with some certainty.
Then Brown could urge the Treasury to clear the way for the council housing finance review to reach a successful conclusion before the summer. There could be a commitment to implement it by April 2010. The Treasury could show it was serious by promising to plough back some of the expected surpluses in the housing revenue account subsidy system that will start to build up from this year onwards.
While talking to the Treasury, he could raise two more issues. First, given that council housing is a trading activity and not part of general government under European accounting conventions, why not amend borrowing rules so that council housing isn’t counted in the main measure of public sector debt? Councils would still have to borrow according to prudential rules, but there would no longer need to be any overall limit on their borrowing at national level. If the rest of Europe does it this way, isn’t that an easy barrier to remove?
Finally, he could ask Chancellor Alistair Darling to keep a careful eye on investment spending and be willing to adapt his plans. The Pre-Budget Report and other measures have brought forward at least £300m of investment before April 2010. But what happens after that? Unless the chancellor is careful, he could collaborate in helping councils build more houses, only for the councils to find that, just as they are geared up to do it, the money starts to dry up.
