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The end of council borrowing caps?

In her speech to the Conservative party conference, the Prime Minister announced a plan to finally scrap the English council borrowing cap. The cap was an arbitrary limit on council borrowing specifically for council housing (it did not apply to other seemingly higher-risk financing projects for e.g. commercial property). Recent governments have flirted with easing back on the council housing borrowing cap or providing some complex form of competitive bidding system. Only now are they, apparently, willing to countenance ending the thing altogether (though there may still be inter-departmental battles to come).

The cap restricted the ability of councils in England to borrow in order to fund new council housing. Removing the constraint of the borrowing cap is a necessary condition for new investment in council housing but it is not a sufficient one. We argue that there are other factors to be taken into consideration, though of course we would not in any sense be opposed to removing the cap which, like many housing policies, is well past its ideological sell by date and makes little if any sense.

The first point to note is that in Scotland, where council house building has returned at a level of numerical significance in recent years was, as recently as the early 2000s, producing virtually zero council homes (all the while within the prudential borrowing regime). The return of new council housing in Scotland over the last two parliaments was premised on three key planks: no borrowing cap, no Right to Buy (RTB) on new homes (now no RTB on any homes) and, after 2010, grant-aided investment from central government. Like Scottish councils, their English counterparts will need to have prudential borrowing capacity or headroom (more on this below), they need to be undeterred by the threat of the RTB (removing it has been critical in Scotland to housebuilding by councils for social rent) and they also receive upfront capital grants. Note also that the removal of the RTB would have had a significant positive impact on income projections for all 26 councils that retained council housing stock.

In arguing against the cap in England, the Chartered Institute of Housing has also repeatedly made the case to end the RTB, ensure that capital receipts can be fully reinvested and that councils can set rents themselves. This is further reason why ending the borrowing cap is important but needs to be set in the context of these wider changes to have the most impact.

Second, the experience in Scotland suggests that removing the borrowing cap does not guarantee that it can or will be used for new council housing investment at scale. This is for two reasons. First of all, ending the right to buy was essential (the English ending of the borrowing cap with the RTB still in place may promote building of exempt properties such as those for specific needs but that is no house building revolution in terms of unit numbers).

A second constraint is that the prudential capacity of the HRA is the over-riding requirement for borrowing – what kinds of surpluses are being generated? Recent Scottish Government figures suggested a Scottish gross surplus of £220m or around 20% for 2016-17. How does this compare with England, especially given the debt redistribution process that took place across English councils after self-financing in 2012 (will the resulting evening out of housing debt now benefit those councils who were winners in this process who can make more of the ending of the cap, and is that where need is highest)?

As we discuss below, many English councils have also set up local housing companies, often generating considerably more income per unit and escaping the RTB, but also at the same time increasing debt considerably. The local appetite for risk by individual councils is also important – how far are they willing to tolerate in their business planning assumptions higher levels of debt per unit compared to the average or sector level benchmarks of debt? Evidence in Scotland suggests considerable variation in the kinds of expected levels of debt per unit Scottish councils are willing to accommodate (incorporating a range getting on for three-fold differences between the conservative prudential as compared to more risk-taking councils).

A third general point that should be made is about innovation. It is often noted in Scotland that the currently well-funded social housing model based on grants, low rents and loan repayments, does not particularly encourage innovation in finance and models to deliver new social and affordable housing (although Scotland was first out the block with affordable housing supported by contingent guarantees). Contrast that with the recent post 2012 experience in England where more than 150 councils have set up local housing companies which provide locally tailored investment solutions in the form of commercial renting, affordable projects and in some cases providing alternatives to the PRS delivering temporary accommodation, generating income for the council and addressing aspects of local need in a creative way. Might, paradoxically, the loosening of these caps reduce the incentive to innovate (perhaps not, given the earlier point about the need to subsidise and protect councils from the RTB). Innovation also brings with it risk, and for council housing the income stream is both constrained and politically determined. There are also important inter-generational questions of fairness i.e. the extent to which it is reasonable for existing tenants, through rent increases, to help fund the home of new tenants (the classic dilemma associated with rent pooling recently exemplified in the Affordable Homes Programme which significantly increased re-let rents on existing properties to help finance new build).

This all suggests that despite the importance of removing such an arbitrary and unhelpful constraint, and bearing in mind the appetite of local councillors to approve new build programmes, the impact on council house investment in England may be less dramatic than its strongest advocates would suggest. We also would temper the understandable sentiment to build with the need to provide good business planning and to ensure affordable fundability.

In the absence of other policy reforms that might facilitate new council building, especially the future of the RTB, perhaps it is now time for all governments in the UK to revisit the public accounting treatment of HRA housing as part of general government debt, to both recognise its longstanding self-financing character (supported by a homologated and secure income stream) and, as a result, remove it from public expenditure borrowing classifications and rules? This, like the borrowing cap, is a political decision set down by Treasury that differs from common international practice. Is it now time to call it in as an anachronism, too? This could even be an opportunity for politicians to do the right thing as Brexit creates spaces to consider radical or even non-radical reforms that were hitherto off the table.

Professor Kenneth Gibb is Director of the UK Collaborative Centre for Housing Evidence and Tony Cain is Policy Manager for the Association of Local Authority Chief Housing Officers.

 
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Date: October 4, 2018 4:10 pm

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