Innovation in council housebuilding: chapter four

As there are frequent national policy announcements, for the sake of clarification, this chapter covers developments up to and including July 2018.

Although the optimism of the self-funding regime in 2012/13 was quickly replaced by the reality of financial pressures on councils, there is now a growing groundswell of opinion that the prospects for council housebuilding are slowly improving. Nevertheless, the difficulties are interrelated and complex. For example, in broad terms at the local level, they include land assembly, bringing together different funding sources and having the appropriate expertise and skills. However, a series of Government announcements starting in autumn 2017 suggest that it is now an opportune time to reconsider the prospects for council housebuilding as a means of delivering new affordable rented homes.   

In summary, the risks and opportunities are summarised in the table below.

Table two: summary of the risks and opportunities for council housebuilding

Risks      

There are two categories of risks – local and national. In relation to the former, they centre on prioritisation of HRA funds in a period of financial pressure for councils. In relation to the latter, the focus is on the impact of national government policies.  

They have a major influence on policy making, with nearly half of councils in our online survey commenting that they are having to fundamentally review their 30-year HRA business plans every year. As one of the officers in a case study noted, this creates “the opposite of what the self-financing system was intended to achieve, which was a stable long-term environment”. The consequence of this is that council housebuilding programmes have frequently been modified in a downwards direction.

Local dimension

Prioritisation involves decisions on the use of HRA funds. The survey for this project, together with earlier studies (such as the Chartered Institute of Public Finance and Accountancy and the Chartered Institute of Housing, 2016, and the Association of Retained Council Housing, 2013), confirm that the first call on resources is maintaining and improving the existing stock. Between 50-80 per cent of councils in sample surveys in reports since 2012 identify this as the top priority. For this project, over half of respondents to the online survey had stock improvement as the first priority. The impact of the Grenfell Tower tragedy is likely to reinforce this priority, particularly for those local authorities with high rise housing (and was mentioned by some of our case study councils).

The second call is new council housebuilding followed by the third priority of estate regeneration. In reports since 2012, the former was the number one priority for 10-20 per cent of councils and the number two priority for 25-50 per cent of councils, while the latter was the number one priority for 5-10 per cent of councils and the number two priority for 15-25 per cent of councils. Nearly a fifth of councils in our online survey had council housebuilding as the first priority and one in 10 had estate regeneration as the first priority. Although the evidence is limited, it appears that estate regeneration is becoming more significant compared to new housebuilding.  

These two aims are, however, linked. Each estate redevelopment scheme is unique, but it is likely to involve some demolition and rebuilding. It could also include, firstly, higher density solutions and secondly, the more effective use of vacant and under-used sites such as former garage courts. Part of the solution can be council housebuilding in conjunction with other delivery methods (for example provision by LHCs, housing associations and housebuilders) to achieve a mixed tenure estate. Although in some cases there may be a net reduction in the number of council houses, the new units will be of a higher quality and standard.

It is also important to note that the Government’s policy and guidance on estate renewal includes reference to HRA borrowing as one of many funding streams. The case study of Camden and its community investment programme (CIP) illustrates these points, through in this case the pledge is for no net loss of council homes.     

The development process for council housebuilding involves a number of individual challenging issues, but it is the interplay between them which makes it complex and difficult to manage. The individual factors, which are interlinked, include:

• Site identification: as the case studies show, these are often small neglected or vacant sites held in the HRA account (such as in Birmingham). Although there may be many such sites, they may have issues that affect the viability of development (for example clearance and decontamination costs, size and shape) that affects numbers and design of new units and provision of infrastructure, especially road access.
• Funding: as is pointed out in later chapters, the challenge is bringing together different funding sources with different rules in a changing policy environment that may include HRA borrowing (assuming there is headroom within the HRA borrowing cap), receipts from right-to-buy sales, Homes England grants for affordable housing provision and so on.  
• Planning: obtaining planning permission may not be straightforward, especially if there are objections from adjacent residents and landowners (for example in Sutton).
• Commissioning and procuring construction: these sites may not be attractive to builders unless the local authority has taken action to clarify and resolve the issues identified above. It is also often policy to support small and medium enterprises (SMEs) for such projects (for example in Birmingham), but this will require a special commissioning process so that there are a number of previously approved companies on a procurement list.
• Large-scale regeneration: this will require careful consultation and working with existing communities. Where older residents, in particular, must be moved to facilitate rebuilding, care and time are required to achieve acceptable temporary and long-term solutions. 
• Construction costs: these are rising and it may not be possible to receive satisfactory tender quotations from builders. 

The online survey for this project identified land and site availability as the most common local issue, with nearly three-quarters of respondents highlighting this factor. This was followed by the lack of in-house skills (by two-thirds of respondents) and the inadequate capacity of the construction industry (by over half of respondents). Over 55 per cent identified land as the highest priority issue.

Skills and expertise are required to tackle each of these issues. These take time to build up, as councils in recent decades have not been involved directly in major developments.

National dimension

As has already been pointed out in the previous chapter, the local management of the housing rent account following the self-financing settlement has been undermined by changes in Government policies. The four core topics of rent setting, the borrowing cap and headroom, impact of right to buy and welfare changes have negatively impacted on the 30-year business plans in complex and overlapping ways. Furthermore, as one interviewee commented, “it is the uncertainty that kills you” of frequent and sudden changes in national policy.  

The stability and certainty that was emphasised by the Government during the self-funding settlement debates no longer exists. An interviewee highlighted the “helter-skelter” of rent setting policy as a daunting factor for the HRA business planning process in general and especially for council housebuilding, given the long lead-in times associated with housing development process:

• before 2016, the Government allowed for social rent increases above the rate of inflation, so HRA business plans built this into their initial 30-year strategies
• from 2016 to 2020, policy changed to a reduction of one per cent each year
• in October 2017, the Government announced that it will limit social rent rises per annum at the consumer price index (CPI) plus one per cent from the end of the existing policy for five years
• there is no policy clarity post-2025 on rent levels.

There is a fuller discussion of this issue in a report by Capital Economics (2018).

The borrowing cap and headroom continues to be a frequent topic of discussion. It is part of a wider debate on HRA finance – see, for instance, Association of Retained Council Housing and the National Federation of ALMOs (2017).

There have been repeated calls for greater flexibility over the use of borrowing powers, raising aggregate and individual caps and the abolition of the borrowing cap on the basis that local authority capital borrowing is covered by council prudential borrowing requirements. The Government, however, argues that local authorities are not using their collective unused borrowing capacity. This has been contradicted by research for the Association of Retained Council Housing and the National Federation of ALMOs that shows over 80 per cent of councils are operating their HRA business plans within 20 per cent of the debt cap. This is a level at which housing associations would normally be expected by financial institutions to seek extended funding facilities. This argument resurfaced in July 2018 when the new housing minister criticised councils over unused borrowing capacity. ‘Inside Housing’ magazine subsequently published an article that robustly explained why councils do not use all of their existing borrowing ability.  

National policy changes have been limited. For example, the then Government announced in 2014 a scheme to allow £300 million of extra HRA borrowing for 2015/16 and 2016/17 through a competitive bidding process. However, this was not fully taken up for a number of reasons, including lack of council expertise in development, the limited amount of money available, the impact of other policy changes (for example welfare) and especially the detailed rules governing successful bids, including the tight timetable for its use. The outcome was that only £220 million was allocated to deliver 3,000 units, compared with a target of 10,000 units.

Right to buy (RTB) continues to be a major plank of national housing policy with its continued promotion and changes in rules and regulation to encourage take-up. A report by the LGA and Savills in April 2018 provides a useful and comprehensive overview of the subject. Although right-to-buy sales significantly declined to less than 3,000 per year after the global financial crisis and a policy of reducing discounts, the Government reinvigorated the scheme at the same time as the self-funding HRA settlement took effect in 2012/13. Sales quickly rose to over 12,000 per year. However, this was not factored in to HRA business plans.

Furthermore, RTB affects business plans in other ways. Although sales provide useful capital in the form of partially usable receipts, those amounts retained for reuse have to be returned to the Treasury if not used within three years. The LGA continues to lobby the government on this issue and it is has also been covered in more detail in the earlier report by the Chartered Institute of Public Finance and Accountancy and the Chartered Institute of Housing (2016).

New policy developments are in the pipeline, including voluntary RTB for housing association tenants, with a Midlands one-year pilot starting in 2018. If and when there is a national roll-out, the Government has the powers under the Housing and Planning Act 2016 to require councils to contribute to the funding of the scheme through a levy on the expected sales of vacant high-value property. It is welcome that that Government announced a rethink of this policy in August 2018.

The National Federation of ALMOs (arms-length management organisations) annual survey for 2017 indicated that RTB (including the impact of the levy) is making it difficult for ALMOs to “reach their potential to deliver the new homes that the country needs”.  

In relation to welfare changes, it is the cumulative effect of a series of policies that affects the HRA. These include the ‘bedroom tax’, the benefits cap, direct payment of benefits to claimants, the roll-out of universal credit and the freezing of benefit rates for four years from 2016/17. A report by the National Federation of ALMOs and the Association of Retained Council Housing in July 2018, ‘Carrying the debt’, pointed out that the roll-out of universal credit is putting a strain on HRAs and “this will become increasingly unsustainable as more households transition to this system over the coming years”. Although the Government announced in autumn 2017 that its proposals for applying local housing allowance rates to social housing would not be adopted, a repeated message from the interviews for the case studies was that councils are experiencing higher rent arrears and this is now part of the assumptions that are being used in refreshing business plans.

Overall, national policy is presenting complex challenges to the HRA system. Between 2015 and 2017 this resulted in a rethink by many councils on the possibilities and prospects for council housebuilding. All of the case studies had, to a greater or lesser extent, modified existing council housebuilding programmes. In some cases this resulted in, for instance, a shift in emphasis to local housing companies (Oxford and Sutton) and/or a fundamental review of priorities (Northumberland, along with other factors).  

Opportunities

Nevertheless, the case study councils are now generally optimistic about the prospects for council housebuilding. There are both internal and external considerations. The former include corporate and political commitments on delivering affordable rented homes and the enthusiasm for innovation. The latter include the more favourable policy climate post-autumn 2017.

• Local considerations
• National considerations