Theresa May’s Conservative conference announcement that government will remove the borrowing cap on councils’ housebuilding is welcome.
Post-war statistics show that the present massive disparity between housing supply and demand, which holds back areas from retaining and attracting talent whilst causing social and intergenerational inequality, can only be narrowed by councils building a lot more homes.
The Treasury’s historic concern that council borrowing to build homes increases the public sector borrowing requirement has probably been overcome by the anticipated need for greater post-Brexit workforce and social mobility.
There are some terrible practices and standards in the private rented sector that have not been addressed through regulation, and materially increasing the supply of social housing would affect market standards too.
Of course, we will need to see the fine print of draft regulations, but there is no doubt that removal of the housing borrowing cap is a big step in the right direction.
Local government’s capital freedoms, through the operation of CIPFA’s Prudential Code, can now finally fully apply to housing too.
It has always struck me as an unfortunate irony that councils can borrow for commercial investment purposes outside their own boundaries, but cannot borrow to build much needed homes within their areas.
This welcome news comes at a time when commercial borrowing is rightly under closer scrutiny since CIPFA strengthened the Code.
The code covers individual decisions and cashflows, and the aggregate of these for the authority, but in CIPFA’s view it is excessive for a public organisation to borrow, say, circa 30 times its turnover for investment in commercial risks.
We worry too that some highly leveraged portfolios are not diversified, and so are overly exposed to particular asset types.
These are clearly issues that CIPFA will now consider in relation to guidance on the revised Code.
The prime minister’s announcement on housing demonstrates the vital importance of maintaining the integrity of the Code as a key local government freedom.
Whilst this is very much in CIPFA’s bailiwick, there are of course some broader policy concerns about the scale of borrowing on commercial investment that we think are likely be considered by policy makers.
Is the involvement of some councils in this market, using cheaper finance than is available to other investors, arguably distorting the market for commercial premises?
And whilst councils as public bodies will invest for service, regeneration and commercial purposes, are some, in substance over form, becoming commercial property investment organisations using public sector freedoms?
These broader policy questions, if not debated by the sector, will almost certainly be debated within Whitehall.
In summary, whilst CIPFA remains in support of nearly all councils’ use of the Prudential Code, we are concerned about some few councils’ excessive borrowing for commercial investment purposes.
The government’s welcome announcement to remove the cap on housing borrowing surely reaffirms that, most of all, council borrowing is for public purpose.
