By John Perry
16 July 2009
Labour’s emphasis on councils building homes looks to be a return to its roots. But, as John Perry argues, it is changes to the housing finance system that signal significant reform
Does Prime Minister Gordon Brown’s new Building Britain’s Future programme mark the government’s recognition that encouraging ever higher levels of home ownership is no longer sustainable?
Perhaps it does. Because while there are still people who are worried about entry-level house prices and getting a foot on the property ladder, many would now opt for affordable rented accommodation if they could get it. The fact that approaching 2 million households are now on council waiting lists is evidence that some are thinking twice about the benefits of home ownership, at least for the time being.
A Conservative government faced with the same evidence of the effects of recession would, if anything, have favoured giving more money to housing associations to build homes. The peak of building by associations was in the mid-1990s when they completed more than 30,000 homes per year. Building both by associations and by local councils declined rapidly after 1995, and through the first six years of Labour governments. By 2003, output was at its lowest for several decades. While this was in part because Labour invested so much in repairing the existing stock, it also surely reflected its belief that new households should be encouraged to buy, and that the frontiers of home ownership could be pushed ever wider.
But given New Labour’s freedom from the old ideological hang-ups of the 1980s, why does it now appear to favour council housing rather than housing associations? After all, housing association finance is still outside the public sector, so only the part of their costs covered by grant is counted as public borrowing.
There are several factors at play. First, while recent pronouncements have been mainly about council housing, the government still quietly expects the major output of new social housing to come from associations. However, it also understands that associations’ private borrowing is both more expensive and more difficult to find than it was 18 months ago. So having a council house building programme is, in part, an insurance policy: local authorities can borrow more cheaply and more easily than associations.
Some councils also have access to land in places where it would be difficult for associations to develop. Some have even retained their in-house capacity to carry out new build programmes. Other councils have good partnerships with associations, through which new homes could be built, with the councils providing the land and the funding.
However, a bigger clue about Labour’s change of heart comes from elsewhere in Building Britain’s Future. There is much talk of ‘perceptions’ about ‘unfair rules’ for allocating housing, giving ‘more priority to local people’ and clamping down on ‘fraud’. But when rows have broken out over housing allocations, such as that in Barking and Dagenham a couple of years ago, they have been about migrants being rehoused, not fraud by ‘locals’. And even though housing associations provide almost half of new social lettings, the concerns have mainly been about council housing.
So in addition to what was said in the published document, we have the spin. Many journalists were clear what message the government wanted to get across. For example, the BBC said the policy shift partly responded to the growth of British National Party support in traditional Labour areas. Their political editor Nick Robinson specifically said that council housing allocation would now favour ‘local people’ instead of ‘new immigrants’.
There has never been any truth in these myths. As the Equality and Human Rights Commission pointed out in a report this month, only 2% of those living in social housing moved to this country in the past five years and nine out of ten residents were born in the UK. The proportions have hardly moved despite the recent influxes of migrants from new European Union states (who themselves make up a tiny percentage of allocations). The government, regrettably, allows the myths to fester rather than challenging them directly.
While the new priority for council housing is therefore probably pragmatic rather than representing any return to Labour roots, it should still be warmly welcomed. The government has said the changes will produce 3,000 new council homes over the next two years, and this is probably realistic. Recent output has averaged only a paltry 200 units annually. The last year in which councils built more than 10,000 houses was 1990, although of course in the early 1950s their output was well over 200,000 and was still almost 100,000 when Margaret Thatcher became prime minister in 1979.
However, in some ways, setting building targets is the least important part of the policy shift. The biggest change is that many councils will now be able to say they are responding to shortages by actually building houses, rather than by wringing their hands about lack of funds.
In the longer term though, by far the most important policy change is what new housing minister John Healey called the ‘dismantling’ of the council housing finance system, following the recently concluded review by the Treasury and the Department for Communities & Local Government. Since the then housing secretary Anthony Crosland called housing finance a ‘dog’s breakfast’ 30 years ago, no other minister had recognised how disastrous the system is. Finally we have one who seems ready to lead real reform.
The major challenges and how they will be addressed are already clear, although we have to await a consultation paper later this month for the details. The prime objective is to make council housing finance transparent to councillors and accountable to tenants. This is something that current housing revenue accounts, with their multitude of obscure rules and allowances, conspicuously fail to do. The new system should also provide more certainty about resource levels so that councils can draw up realistic business plans.
A major requirement is sustainability, so that the sector doesn’t return to the hand-to-mouth existence of the 1980s, when houses fell further and further into disrepair.
Fortunately – and entirely by coincidence – the review is being concluded at a turning point for council housing finances. For the first time for many years, the system is in balance and even generates a surplus for the Treasury. The surplus is forecast to grow, which provided a useful imperative for ministers to act – because otherwise they could have been accused of imposing a new tax on working tenants through their rents. An important test of the details will be whether they promise to reinvest all these surpluses in the housing stock.
All those who fed in to the review were aware that the outcome must address the issue of council housing’s £17bn historic debt, but there have been different views on how to do it. Both the Local Government Association and the lobby group Defend Council Housing argued that debt should be ‘cancelled’ – which would effectively mean the Treasury paying for it. This solution might have been workable if the Treasury could retain the income needed to pay for the debt.
Yet these and the other major cont-ributors to the review also argued that councils should keep all their rent income locally. This would create a double bind for the Treasury – it would have to service the debt from general taxation, while councils would simultaneously be free to finance more prudential borrowing, adding to total public sector debt. The prize, according to some of the councils that would benefit, is that as many as 139,000 extra homes could be built in a decade.
The government correctly realised that councils having command over the income they get from rents was the more important of the competing demands. Nothing annoys councillors or tenants more than paying perhaps a third of this income to Whitehall in negative subsidy, which many councils do. To achieve this and still pay for the debt, the only solution is to redistribute the debt so that councils who get more income also take on a share of the £17bn.
In one of the last submissions to the review, five housing advisers – including myself – gave a highly controversial verdict. We argued that debt redistribution is perfectly feasible and is a price worth paying for an end to the complex national system. We also called for a national debt ‘settlement’ based on a limited round of negotiations with councils. This would be similar to the way that regulators in other sectors hold periodic negotiations over costs and charges, but then make a final determination that is binding on all parties. The process would decide local shares of housing debt and prevent a few authorities from holding up a national settlement.
This approach could pave the way for councils to become ‘self-financing’ and for the national subsidy system to be wound up. There was near unanimity among the lobbying organisations that self-financing is the desired outcome. Only the DCH dissented, fearing the risks that ‘opting out’ might pose for tenants and the danger of further ‘privatisation’.
As an apparent indication of the seriousness of Healey’s intention to ‘dismantle’ the system, the minister has also said he wants to allow councils to keep all their capital receipts from right to buy sales. While the details of how this will work also await the consultation paper, he announced immediate changes for newly built council houses. From now on, councils will be able to depend on getting all the receipts should new houses have to be sold. They will also keep all the rental income from any new homes.
Of course, there are many difficult issues still to be resolved. For example, a policy is needed that keeps rents in both parts of the sector at affordable levels, but with a margin to raise extra finance to invest in the stock. Councils will be looking to ensure that the levels of finance being assumed in the new system, allowing for future rent increases, will be sufficient both to maintain the stock at the decent homes standard and to provide for much needed work to improve estates.
Finally, the government should recognise that having local control of income and expenditure is only part of a desirable solution. Unless councils can undertake reasonable levels of prudential borrowing, the government’s ambition that they start building significant numbers of new homes will remain a pipe dream. As a minimum, they should be able to develop business plans based on using at least part of their surpluses for new building.
Ideally, council housing would be regarded as a trading activity outside the main measure of public sector debt, bringing councils in line with housing associations. This could finally end a false and totally unproductive distinction between the two main players in the social housing sector.
John Perry is policy adviser to the Chartered Institute of Housing
16 July 2009
Labour’s emphasis on councils building homes looks to be a return to its roots. But, as John Perry argues, it is changes to the housing finance system that signal significant reform
Does Prime Minister Gordon Brown’s new Building Britain’s Future programme mark the government’s recognition that encouraging ever higher levels of home ownership is no longer sustainable?
Perhaps it does. Because while there are still people who are worried about entry-level house prices and getting a foot on the property ladder, many would now opt for affordable rented accommodation if they could get it. The fact that approaching 2 million households are now on council waiting lists is evidence that some are thinking twice about the benefits of home ownership, at least for the time being.
A Conservative government faced with the same evidence of the effects of recession would, if anything, have favoured giving more money to housing associations to build homes. The peak of building by associations was in the mid-1990s when they completed more than 30,000 homes per year. Building both by associations and by local councils declined rapidly after 1995, and through the first six years of Labour governments. By 2003, output was at its lowest for several decades. While this was in part because Labour invested so much in repairing the existing stock, it also surely reflected its belief that new households should be encouraged to buy, and that the frontiers of home ownership could be pushed ever wider.
But given New Labour’s freedom from the old ideological hang-ups of the 1980s, why does it now appear to favour council housing rather than housing associations? After all, housing association finance is still outside the public sector, so only the part of their costs covered by grant is counted as public borrowing.
There are several factors at play. First, while recent pronouncements have been mainly about council housing, the government still quietly expects the major output of new social housing to come from associations. However, it also understands that associations’ private borrowing is both more expensive and more difficult to find than it was 18 months ago. So having a council house building programme is, in part, an insurance policy: local authorities can borrow more cheaply and more easily than associations.
Some councils also have access to land in places where it would be difficult for associations to develop. Some have even retained their in-house capacity to carry out new build programmes. Other councils have good partnerships with associations, through which new homes could be built, with the councils providing the land and the funding.
However, a bigger clue about Labour’s change of heart comes from elsewhere in Building Britain’s Future. There is much talk of ‘perceptions’ about ‘unfair rules’ for allocating housing, giving ‘more priority to local people’ and clamping down on ‘fraud’. But when rows have broken out over housing allocations, such as that in Barking and Dagenham a couple of years ago, they have been about migrants being rehoused, not fraud by ‘locals’. And even though housing associations provide almost half of new social lettings, the concerns have mainly been about council housing.
So in addition to what was said in the published document, we have the spin. Many journalists were clear what message the government wanted to get across. For example, the BBC said the policy shift partly responded to the growth of British National Party support in traditional Labour areas. Their political editor Nick Robinson specifically said that council housing allocation would now favour ‘local people’ instead of ‘new immigrants’.
There has never been any truth in these myths. As the Equality and Human Rights Commission pointed out in a report this month, only 2% of those living in social housing moved to this country in the past five years and nine out of ten residents were born in the UK. The proportions have hardly moved despite the recent influxes of migrants from new European Union states (who themselves make up a tiny percentage of allocations). The government, regrettably, allows the myths to fester rather than challenging them directly.
While the new priority for council housing is therefore probably pragmatic rather than representing any return to Labour roots, it should still be warmly welcomed. The government has said the changes will produce 3,000 new council homes over the next two years, and this is probably realistic. Recent output has averaged only a paltry 200 units annually. The last year in which councils built more than 10,000 houses was 1990, although of course in the early 1950s their output was well over 200,000 and was still almost 100,000 when Margaret Thatcher became prime minister in 1979.
However, in some ways, setting building targets is the least important part of the policy shift. The biggest change is that many councils will now be able to say they are responding to shortages by actually building houses, rather than by wringing their hands about lack of funds.
In the longer term though, by far the most important policy change is what new housing minister John Healey called the ‘dismantling’ of the council housing finance system, following the recently concluded review by the Treasury and the Department for Communities & Local Government. Since the then housing secretary Anthony Crosland called housing finance a ‘dog’s breakfast’ 30 years ago, no other minister had recognised how disastrous the system is. Finally we have one who seems ready to lead real reform.
The major challenges and how they will be addressed are already clear, although we have to await a consultation paper later this month for the details. The prime objective is to make council housing finance transparent to councillors and accountable to tenants. This is something that current housing revenue accounts, with their multitude of obscure rules and allowances, conspicuously fail to do. The new system should also provide more certainty about resource levels so that councils can draw up realistic business plans.
A major requirement is sustainability, so that the sector doesn’t return to the hand-to-mouth existence of the 1980s, when houses fell further and further into disrepair.
Fortunately – and entirely by coincidence – the review is being concluded at a turning point for council housing finances. For the first time for many years, the system is in balance and even generates a surplus for the Treasury. The surplus is forecast to grow, which provided a useful imperative for ministers to act – because otherwise they could have been accused of imposing a new tax on working tenants through their rents. An important test of the details will be whether they promise to reinvest all these surpluses in the housing stock.
All those who fed in to the review were aware that the outcome must address the issue of council housing’s £17bn historic debt, but there have been different views on how to do it. Both the Local Government Association and the lobby group Defend Council Housing argued that debt should be ‘cancelled’ – which would effectively mean the Treasury paying for it. This solution might have been workable if the Treasury could retain the income needed to pay for the debt.
Yet these and the other major cont-ributors to the review also argued that councils should keep all their rent income locally. This would create a double bind for the Treasury – it would have to service the debt from general taxation, while councils would simultaneously be free to finance more prudential borrowing, adding to total public sector debt. The prize, according to some of the councils that would benefit, is that as many as 139,000 extra homes could be built in a decade.
The government correctly realised that councils having command over the income they get from rents was the more important of the competing demands. Nothing annoys councillors or tenants more than paying perhaps a third of this income to Whitehall in negative subsidy, which many councils do. To achieve this and still pay for the debt, the only solution is to redistribute the debt so that councils who get more income also take on a share of the £17bn.
In one of the last submissions to the review, five housing advisers – including myself – gave a highly controversial verdict. We argued that debt redistribution is perfectly feasible and is a price worth paying for an end to the complex national system. We also called for a national debt ‘settlement’ based on a limited round of negotiations with councils. This would be similar to the way that regulators in other sectors hold periodic negotiations over costs and charges, but then make a final determination that is binding on all parties. The process would decide local shares of housing debt and prevent a few authorities from holding up a national settlement.
This approach could pave the way for councils to become ‘self-financing’ and for the national subsidy system to be wound up. There was near unanimity among the lobbying organisations that self-financing is the desired outcome. Only the DCH dissented, fearing the risks that ‘opting out’ might pose for tenants and the danger of further ‘privatisation’.
As an apparent indication of the seriousness of Healey’s intention to ‘dismantle’ the system, the minister has also said he wants to allow councils to keep all their capital receipts from right to buy sales. While the details of how this will work also await the consultation paper, he announced immediate changes for newly built council houses. From now on, councils will be able to depend on getting all the receipts should new houses have to be sold. They will also keep all the rental income from any new homes.
Of course, there are many difficult issues still to be resolved. For example, a policy is needed that keeps rents in both parts of the sector at affordable levels, but with a margin to raise extra finance to invest in the stock. Councils will be looking to ensure that the levels of finance being assumed in the new system, allowing for future rent increases, will be sufficient both to maintain the stock at the decent homes standard and to provide for much needed work to improve estates.
Finally, the government should recognise that having local control of income and expenditure is only part of a desirable solution. Unless councils can undertake reasonable levels of prudential borrowing, the government’s ambition that they start building significant numbers of new homes will remain a pipe dream. As a minimum, they should be able to develop business plans based on using at least part of their surpluses for new building.
Ideally, council housing would be regarded as a trading activity outside the main measure of public sector debt, bringing councils in line with housing associations. This could finally end a false and totally unproductive distinction between the two main players in the social housing sector.
John Perry is policy adviser to the Chartered Institute of Housing
