Financing the future - housing finance reform

Just weeks before the general election, the government finally set out firm proposals for dismantling the widely-discredited housing finance system. Neil Merrick investigates prospects for the review of the housing revenue account.

Nobody could accuse Labour of rushing things. Housing finance reform had been on the government’s ‘to do’ list for the best part of 10 years and, by the time John Healey made his much-heralded ‘offer’ to councils in late March, the then housing minister knew that his party’s days in office were probably numbered.

So where do we go from here? The new coalition government says it is committed to reviewing the housing revenue account (HRA) subsidy system - under which money raised in rents is recycled among councils.

But as consultations on ‘self-financing’ close on July 6th, local authorities and others responding to the Department for Communities and Local Government could have been forgiven for wondering whether the offer made in March is still on the table.

In his exclusive interview last month with 24housing, housing minister Grant Shapps said: “Effectively we’re going to review the review and draw our own conclusions.” But he was more upbeat in a later statement issued by the DCLG, urging organisations to respond to the consultations and stating the government is “committed to genuine action to overhaul the system”.

The HRA is blamed for many of housing’s shortcomings, from the poor quality of council properties to the inability of local authorities to build new homes. Meanwhile, debt-free councils, or those with relatively little historic debt, object to seeing their rent income being handed over to other authorities.

Worse still, not all of the money remains in housing. For the past few years, the HRA has generated a healthy surplus nationally and provided a welcome source of extra cash for the Treasury.

During the long-running debate over the HRA system, the amount of debt owed by councils for homes built in the last century was variously estimated to be between £15 billion and £20 billion.

But ‘Council housing: a real future’, the consultation document launched in March, put the figure significantly higher at £25.1 billion. This includes £21.5 billion of existing debt, along with a further £3.6 billion that would be transferred from central to local government, so allowing councils to buy themselves out of the current system and keep all their rent income and capital receipts.

While each of the 177 councils that form part of the HRA are affected differently by the reallocation of debt, most observers see the offer as a reasonably good deal. Steve Partridge, director of financial policy at the Chartered Institute of Housing (CIH), says it is “on the upside of expectations” although some councils that take on extra debt may initially struggle to find money for repairs and other capital works.

“There are a few local authorities for which it’s going to be difficult with restraints on borrowing and the position on capital,” he says. “It won’t stack up [for them] in the early years. They have to decide whether to play with this in an imperfect world, or hang on for a better deal farther down the line.”

According to the consultation paper, councils with stock, including authorities with arm’s length management organisations (ALMOs), need to spend a further £3.2 billion to bring their homes up to the decent homes standard. Other estimates, including a Pricewaterhousecooper study published to coincide with the consultations suggest the repairs backlog could be as high as £6 billion.

Local authorities must also ensure that homes already meeting the standard do not become ‘non-decent’, but the government claims to have covered this by promising a 10% increase in management and maintenance allowances.

An analysis by Housing Quality Network (HQN) shows that the debts of councils with ALMOs would fall by £5.4 billion, or 34%, to £10.6 billion, while the debts of other local authorities increase by £9 billion (164%) to £14.5 billion.

Gwyneth Taylor, policy director at the National Federation of ALMOs, says councils managing their stock directly already fund those with ALMOs through the HRA. “They pay for them but they don’t have any control over rents or receipts,” she says.

Councils must bear in mind the deal being proposed is meant to last 30 years. “Local authorities have a chance now they didn’t have in the past,” adds Gwyneth Taylor. “For many it’s difficult for five to seven years, but in the end it’s fantastic.”

But Catherine Hand, a partner at lawyers Trowers and Hamlin, is concerned whether councils will manage the extra debt they take on while they have limited control over rent levels and their capacity to borrow.

As part of its proposals for self-financing, the government said rent restructuring must be completed by 2015. This means that the amount by which council rents increase annually will continue to be determined by a formula, so bringing local authority rents into line with those of housing associations.

At the same time, councils will be required to draw up 30 year business plans without the same freedom as housing associations to borrow against their assets. “The self-financing offer didn’t include freedom to borrow,” says Catherine Hand. “The way that councils have managed housing in the past doesn’t give them the flexibility to cope with this extra debt.”

In the consultation paper John Healey suggested that, under self-financing, councils should be able to build 10,000 homes per year by the end of the next Parliament. But Grant Shapps is clearly more sceptical.

In his statement in early June, Shapps said he wanted to hear from councils whether the offer made by his predecessor would give them the freedom to make long-term decisions. “In these tough economic times I need to be convinced this approach offers the best possible value for money,” he added.

No decision is likely to be made until the comprehensive spending review (CSR), due this autumn. But that would also be the case if Labour was still in power, says Ruth Lucas, a senior policy consultant at the Local Government Association. “The figures were always subject to the CSR,” she says. “That’s nothing new.”

Much will depend upon the enthusiasm shown by councils. Robin Tebbutt, executive director for finance at HQN, says Mr Shapps will find it hard to reject a proposal that has near unanimous support. While he expects a few Conservative-run councils with no debt to turn it down, other Conservative councils will probably say yes. “It’s going to be a tightrope for him politically whatever he does,” says Mr Tebbutt.

John Bibby, secretary of the Association of Retained Council Housing (ARCH) and director of housing at Lincoln is optimistic. “The idea of self-financing sits well with most local authorities,” he says. “The rub is how each authority is affected by the buy-out from the HRA subsidy system. The work we’ve done suggests that the proposal is sustainable in the long run for virtually all local authorities.”

And Steve Partridge of the CIH believes reform is almost inevitable. “The idea that it’s all going to be off is unlikely,” he says. “There is a head of steam built up over the past few years that is cross-party. It’s more of a technical challenge than a political one.”

Case study

Lincoln Council

With historic debts of £38 million, Lincoln Council presently loses about £1 million through the housing revenue account (HRA) subsidy system each year.

If nothing changes, the council calculates this figure will steadily rise so that, over the next six years, it will handover £15 million of the money it raises in rents from its 8,000 tenants.

Under the offer made to councils in March, Lincoln’s ‘debt’ will increase to £52 million - partly to cover the debts of other authorities and also to give it greater flexibility to build homes.

But what on the face of it might not appear a good deal is not being dismissed out of hand by the council. According to John Bibby, Lincoln’s director of housing, it opens up new options that should leave the council better off.

“We feel that, with these figures, the proposal stacks up for us a stock-retaining local authority,” he explains. “It would enable us to draw up a 30-year business plan, put significant additional investment into stock and utilise the additional headroom to look at building new stock.”

At present, Lincoln raises £21 million per year in rents, which compares favourably with borrowing a sum of £52 million, he adds. “If you took out a mortgage at just over twice your income level, then it wouldn’t bother you,” says Mr Bibby.

Timeline

The long road to housing finance reform

2002    Government appeal for ‘blue skies’ debate on housing finance is generally ignored by the sector.

2004    Review of arm’s length management organisations highlights failings of housing revenue account (HRA) subsidy system.

2005    Audit Commission warns that HRA system is ‘unsustainable’.

2006    Government sets up in-depth study of self-financing with six councils.

2008    Review of housing finance system launched.           

2009    Government confirms that HRA will be dismantled, providing councils can agree on reallocation of debt.

2010    Firm proposals set out by housing minister John Healey shortly before Labour loses general election.