Budget must let councils ‘take back control’ of housing assets and revenue

ARCH and NFA set out key asks on allowing councils to lift the HRA debt caps for new build purposes.

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Next month’s budget must let Councils ‘take back control’ of their housing assets and revenue by committing to the principles of HRA self-financing for council housing, a new paper says.

Produced by ARCH and the NFA, the paper – issued after the recent Government announcement of a return to the policy of CPI plus 1% for social rents – sets out key asks on allowing councils to lift the HRA debt caps for new build purposes and relying instead on prudential borrowing rules to enable investment in new homes – paid back from rental income.

Where government can’t or won’t commit, the paper offers a get out option – approve a number of bespoke deals as quickly as possible to create a group of “market leaders” who could share experience and good practice with others.

In England, 165 councils own over 1.6 million homes, either managing them directly or through Arm’s Length Management Organisations.

ARCH represents councils that have chosen to retain ownership of council housing and manage it directly.

NFA (National Federation of ALMOs) represents 34 Arm’s Length Management Organisations managing around 470,000 homes in 38 local authorities.

Together, ARCH and NFA represent a million council homes – nearly two thirds of the social housing in England. 

Welcoming a return to the policy of CPI plus 1% for social rents – that both campaigned for – the paper pushes a number of other issues tis say still act as a brake on development plans for many councils.

They are:

  • Continuing uncertainty about the levy on higher value housing assets introduced by the Housing and Planning Act.
  • Problems caused by the current Right to Buy levels and arrangements for 1:1 replacements.
  • . The artificial, and to some extent arbitrary, limits to investment in social housing placed on councils by the HRA debt caps.

ARCH and NFA have never supported the proposal for a levy on HRA assets to pay for RTB discounts for housing associations.

The paper argues that it is “doubly unfair” councils should now be expected to pay for extension of the policy to housing association tenants.

At this time of acute need for affordable housing, especially in high demand, high value areas, the paper makes a case for not selling off existing social rented housing unless a council decides itself it is the best use of that asset and can plough 100% of the receipt back into social rented homes in their local area.

Continuing uncertainty about the amount and timing of future levies is, the paper says, frustrating council business planning and making it prohibitively risky to commit to significant investment plans, whether in improvements to the existing stock, or new building.

The paper calls on government to make an early statement dropping plans for a levy and instead deliver the promise in the Housing White Paper to “back councils to build” by supporting more council housebuilding through the self-financing HRAs.

Research undertaken by the CIH, LGA and NFA in 2015 found that while the in-principle commitment to replace homes sold under the RTB was welcomed by the sector – in practice a lack of flexibility in the system was hindering attempts to replace the homes that have been sold.

Since that time, the paper cites more councils having the same problems and reluctantly paying money back rather than anything changing for the better.

The report also highlighted that under the current system not all homes sold through right to buy will be replaced, damaging council’s desire to build more homes that they are in danger of losing at less than the price they paid to build them and acts as a further brake on investment plans for social housing.

The paper recommends that the current commitment is expanded to ensure that individual local authorities are each able to replace all homes sold under the RTB scheme in their local area.

To achieve this, the paper suggests  that the government allows local authorities more flexibility to make maximum use of the receipts from RTB sales, outlining specific changes such as:

  • Allowing Councils to retain 100% of the revenue raised from sales to be reinvested locally in social rented housing.
  • Giving authorities the freedom to use RTB receipts to meet more than 30% of the cost of building replacement homes, to combine RTB receipts with grant funding, other capital receipts held in the housing revenue account (HRA) or public land and to pass RTB receipts to an arm’s length management organisation (ALMO) or another council owned company -(provided the money is still reinvested in new homes.
  • Extending the cost floor ceiling, which prevents new council homes from being sold at a loss, from 15 to 25 years.
  • Extending the three-year time limit within which RTB receipts must be committed to five years.
  • Allowing local authorities freedoms to reduce RTB discounts locally, where they are able to demonstrate that they will otherwise have insufficient receipts to enable them to replace homes sold and a reduction in the discount would be unlikely to significantly impact on the volume of sales.

In 2012, the Conservative led coalition government introduced a new regime of HRA self-financing under the Localism Act 2011 which was supported at the time by all political parties.

Under this, councils were relieved of any future need to give to or receive from government any payments of housing subsidy. This was in exchange for a one-off debt settlement based on the net present value of its housing stock.

In return, councils won the right to keep rent income in full and invest it.

This reform lead directly to council house building starts in England being at a 23 year high two years ago.

However, the good work started by local authorities in managing their housing stock more efficiently and effectively over the long term is now being reversed as a result of a number of policy changes introduced by the previous government, as well as the artificial limits set at the time of the settlement on each authority’s ability to borrow to invest in new social housing.

Although there have been limited offers by government to allow some flexibility on the debt caps, there were too many restrictions attached to the offer for it to be of use to most councils.

The NFA and ARCH have recently commissioned some analysis of the available HRA headroom to try to find out where the problems lie and initial findings indicate that the majority of headroom is tied up in authorities relatively close to their cap and that the number of authorities operating significantly below cap is very small.

Nearly half of all LAs are within 10% of their debt cap and 139 of 162 LAs are within 20% of their debt cap.

This means that 62% of the headroom is in LAs within 20% of their debt cap.

Councils have been criticised in the past for asking for the debt caps to be raised whilst not fully utilising all of the headroom at their disposal but this needs to be seen in the context of prudent and sensible business planning, something which the Treasury surely would commend.

Comparing Council HRA debt levels with those of Housing Associations can provide some insight into how well councils are managing their business plans.

All Housing Associations negotiate funding agreements and capacity with their funders driven by their business plan.

They are assessed on these agreements by the regulator and given viability ratings from V1 (the best) to V3 & V4 (which are non- compliant with the viability standard and a serious concern).

The paper’s initial results indicates that only a minority (one third) of headroom is in HRAs which would be unequivocal V1.

Three-fifths of headroom is in HRAs which might be classed as V2-V3-V4.

One fifth of headroom is in HRAs which would almost certainly be classed as V4.

This analysis indicates that councils are taking a very pragmatic and prudent approach to their investment plans and are holding an appropriate buffer against known or unknown risks.

Two thirds of HRA headroom is in LAs where, were that capacity to be in housing associations, there would also be a reluctance to invest.

Three-fifths of HRA headroom is in LAs where, were that capacity to be in HAs, not only might HAs not invest, the regulator might criticise them for doing so.

Some of the uncertainties come from Government housing and welfare polices such as the High Value Levy and the impact of RTB sales, as well as the risk of substantial increases in rent arrears and rent recovery costs as a result of the roll out of Universal Credit and the application of LHA rates into the social sector.

Others are for unknown risks such as health and safety issues for which any prudent landlord would hold a reasonable contingency, the need for which is now becoming clear post Grenfell.

The paper cites councils as “just getting to grips”  with the new self-financing regime and starting to invest in new council housing, when previous governments increased the uncertainties and risks for councils by introducing a reinvigorated RTB with substantially higher discounts, imposing a 4-year mandatory rent reduction and signalling the introduction of an as yet unspecified HVA levy thus preventing them from prudently investing any more.

As such, the paper urges the government to re-instate the original self-financing principles and allow councils more control and flexibility to make the best use of their assets and resources locally – given the evidence is that with the right long term, stable framework that is what they were starting to do and will be able to again.

The paper, then, says councils and ALMOs should be empowered to build more homes by:

  • Taking back control of their housing assets and revenue by committing to the principles of HRA self-financing for council housing under the Localism Act 2011 – which has the potential to drive a real revival in public investment in council housing if properly supported.
  • Lifting the HRA debt caps for new build purposes and relying instead on prudential borrowing rules to enable councils to invest in new homes and pay back the money from their rental income.

If Government is still not willing to commit to the above points, the paper argues that approving a number of bespoke deals – which are already being discussed across the country – as soon as possible to create a group of “market leaders” who could share experience and good practice with others.

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