Ahead of the Autumn Budget on 22 November ARCH and the NFA
(National Federation of ALMOs) have called on the Chancellor of
Exchequer to free up local authority borrowing limits for Housing
Revenue Accounts and remove the barriers to council house building
across England.
Government ministers have continually refused to consider pleas
to raise HRA debt caps citing the borrowing headroom available to
councils as exampled by the reply given by Lord Young in a recent
debate in the House of Lords when he said:
"A number of noble Lords mentioned the borrowing capacity of
local authorities and wanted the ceiling lifted or abolished. There
is still around £3.4 billion of borrowing capacity available to
local housing authorities. Some £300 million of additional
borrowing was made available to councils in England in 2013, but
only £144 million was taken up by councils. There are also
substantial reserves, not just in the housing revenue accounts of
local authorities but in the reserves of those councils that have
transferred their stock over to housing associations.(Hansard 12.10.17 column 339)
Jointly commissioned by ARCH the NFA the report "Raising the roof" investigates the true extent
of unutilised borrowing headroom within Housing Revenue Accounts
(HRA) in England and the reasons for it.
The analysis, undertaken by Savills, sets out how local
authorities could deliver at least 15,000 more homes were they able
to manage their HRA business plans according to the existing local
government Prudential Code. This would replace the current
arrangement where local authority HRAs are bound by a "HRA debt
cap" set by the government in 2012 for each local authority.
The key findings of the research include:
- The overwhelming majority of local authorities (over 80%) are
operating their business plan with 20% of HRA Debt Cap
- 60% of national headroom is shared the majority of local
authorities that are already within 20% of their debt cap.
- Only a very small minority of authorities are what might be
termed significantly 'under-borrowed'.
- Local authority landlords hold significantly less in reserves
against future uncertainties than their housing association
counterparts and cannot rely on revenue reserves to act as a buffer
against future business plan uncertainties to the same degree as
housing associations.
The analysis challenges the suggestion that there is sufficient
unused borrowing headroom to increase the delivery of new council
homes.
The report demonstrates that while local authorities are willing
to invest in new homes, both clarity of national policy and a new
approach to seeing borrowing as investment are crucial to
succeed.
Comparing the council housing sector and the approach to
investment by housing associations, the report highlights the
opportunity for the government to adopt a fresh approach to how it
views council borrowing.
It could be treated as an investment in homes made as part of a
long-term viable housing business plan in which local authorities
are able to extend borrowing facilities prior to embarking on new
development programmes - just as is common practice among housing
associations.
Countering suggestions of under-utilisation of HRA borrowing
headroom, this analysis shows that the overwhelming majority of
local authorities are operating their housing business plan within
20% of HRA borrowing limits. This is a level at which housing
associations might be expected by both funders and the Social
Housing Regulator to seek extended funding facilities.
We argue that the maintenance of some headroom beneath the debt
cap is essential to prudent financial management. The regulator
expects housing associations to maintain a financial buffer and
rates their financial viability accordingly - the same financial
principles should be applied across the housing sector.
The report also found that local authorities report that the
Right to Buy policy is the single biggest reason why they might not
invest via borrowing to build new council housing.
Specifically, councils are concerned at the high level of
discounts and the operation of the rules for the recycling of
receipts as this means in many cases they are unable to replace
homes sold on a one-for-one basis.
The report also highlights some evidence of retrenchment around
council borrowing levels, principally driven by an increase in
Right to Buy sales and uncertainty around the implementation of the
High-Value Asset Levy under the Housing and Planning Act 2016.
Given ongoing uncertainties around the implementation of the
High-Value Asset Levy and the impact of Universal Credit on
councils' rental income streams, it is not surprising we are seeing
councils take a cautious approach to taking on more
borrowing.
ARCH and NFA have also argued strongly against the proposal for
a levy on HRA assets to reimburse housing associations for Right to
Buy discounts under the voluntary agreement struck with the housing
association sector. The statutory Right to Buy for council
tenants was introduced without any form of reimbursement from
central government and councils were expected to absorb and manage
the impact on their HRAs without help.
John Bibby, ARCH Chief Executive comments:
'This research clearly shows that the
overwhelming majority of authorities are managing their HRA
borrowing in the context of prudent housing business planning and
that stock-retained councils will invest, given policy clarity and
the opportunities and the right climate to do so.
'The approach taken by councils to
borrowing is part of long-term housing business planning. This
takes into account future income and revenue & capital spending
needs.
When councils do not spend up to
their debt cap this is entirely sensible and consistent with the
behaviours of any prudent landlord, building in risk buffers and
protections, essentially acting like any self-financing business
would.
'HRA borrowing ceilings are already
accounted for in the national accounts and if the current debt caps
were to be raised, any addition to public debt would only be to the
extent that HRA borrowing began to exceed the existing prevailing
debt caps which have been in place since 2012.
'This research shows that there will
inevitably always be a degree of borrowing headroom between actual
debt and the individual authorities HRA debt caps (at whatever
level they may be fixed) and therefore there is a strong case to
consider the lifting of HRA debt caps - perhaps in the first
instance by a margin of 10-20% - without necessarily increasing the
actual HRA debt beyond the current borrowing ceilings accounted for
by HM Treasury in the current national accounts.'
Commenting on the report on behalf of the NFA, Eamon McGoldrick
Managing Director of the NFA said:
'A review of the 2012 HRA borrowing
rules to enable councils to sensibly invest in the supply of new
homes is long overdue. There is currently significant disparity in
the way local authority borrowing is treated compared to the
housing association sector.
'Councils are being told to maximise
their current lending facility (headroom) to invest in new homes
and yet 89% are already operating within 20% of HRA borrowing
limits. If the Social Housing Regulator was to apply a viability
rating to those authorities within 20% of their maximum funding
facility - similar to that used to rate housing associations -
there is a risk that the viability rating would be unacceptably
low, thus leaving the council subject to regulatory
criticism.
'Changes are essential if councils
are to embark on investment programmes in a manner which can mirror
the operation of business planning in the housing association
sector.'
The analyses set out in this report should not be seen as
advocating the abolition of maximum ceilings on borrowing within
the HRA. However, the differences in the current operation of
housing association and local authorities sectors with regard to
debt suggests that the government should consider the case for
adopting a new approach to the setting of maximum borrowing limits
within HRAs. This would place HRAs firmly within the wider context
of prudent financial management by local authorities.
In her recent speech to the Conservative Party conference, the
Prime Minister promised 'a new generation of council housing' to
help address the need for new housing of all tenures.
As the Chancellor prepares for the Budget, ARCH and the NFA
renew their calls for the government to back local authorities to
build and to lift the HRA Debt Caps and allow individual
authorities to set their own borrowing and financing limits within
the context of a long-term business plan, and in line with the
operation of the Local Government Prudential Code.
This research backs up a range of "asks" submitted to government ahead of
the Autumn Budget in which we also push for early clarity
regarding the implementation of the proposed High Value Asset Levy
and reforms to the use of Right to Buy capital receipts; without
which the confidence required to support long term housing business
planning and investment in new housing would not be possible.
Read the full report: "Raising the roof"