Innovation in council housebuilding: chapter three

The primary aim of this chapter is to briefly chart the recent history of council housebuilding.


A secondary aim is to clarify the relationship between council housebuilding and local housing companies (LHCs). Part of the reason for the current interest in LHCs is because of the constraints faced by local authorities in council housebuilding. 

As was highlighted in the introductory chapter, council housebuilding programmes provide both social rented properties (approximately 50 per cent of market rent) and affordable rent (80 per cent of market rent). However, grant funding from Homes England (formerly the Homes and Communities Agency) was targeted at the latter.

It is also important to appreciate that ‘council housebuilding’ includes the purchase and acquisition of existing stock. This can include new properties acquired from housebuilders through planning agreements.

Recent history of council housebuilding

From the late 1970s until this decade, councils took a back seat in direct delivery through council housebuilding. Government policy effectively stopped or at least curbed local authorities building new council-owned homes. Completions fell from nearly 120,000 per year in 1970 to the low hundreds per year in the 1990s.

A gradual revival of interest from this low base took place in the first decade of this century when discussions started on the reform of the HRA system. In addition, the Labour Government initiated a small funding scheme to encourage council housebuilding (and this was utilised by at least one of our case studies – East Riding of Yorkshire). However, it was not until the new self-financing regime, which took effect in 2012, that there was a degree of optimism on the possibilities of council housebuilding.

In summary, self-financing involved a settlement that adjusted the debt levels of local authorities with HRA stock, with 136 councils taking on new debt and 34 councils receiving government funding to reduce debts. After the settlement, councils were able to retain rental income locally instead of rental income being managed nationally by central government. There was a consensus that this new system was beneficial for councils as it enabled long-term business planning. Local authorities were required to prepare 30-year business plans to help decision making over priorities for investment.

It is, however, essential to appreciate that each council started the new system in 2012 from different positions depending on, firstly, the state of the existing stock and secondly, the ability to borrow. For instance, in relation to the latter, 28 councils had no borrowing headroom while 141 councils had a collective borrowing headroom of £2.8 billion. Hence, each local authority had both different priorities and different resource envelopes in terms of council housebuilding, stock improvement, estate regeneration and so on. The self-financing settlement and its implications is usefully summarised by the Association of Retained Council Housing (2013).

Nevertheless, as the Chartered Institute of Public Finance and Accountancy and the Chartered Institute of Housing (2016) pointed out, there was considerable positivity, with forecasts as high as 550,000 new council homes being built over the next 30 years being quoted. The reality has been rather different, with council housing starts over the last few years running at between 1,450 and 2,200 per annum (see chapter five, table three). Long-term estimates have fallen as low as 45,000 new homes over the next 30 years.

There are three main sets of interrelated reasons for this situation. Firstly, councils had to build up their expertise and skills from a zero base in designing, developing and implementing a programme. In many cases, as illustrated in the case studies, this gap was addressed through small pilot schemes to test the water (for example, Birmingham, North Kesteven and Nuneaton). Thus, it takes a number of years to gear up to a major new delivery strategy.

Secondly, councils under self-financing had to make long-term decisions on priorities. Reinvestment in the existing stock has been the first call on resources for many areas, followed by council housebuilding and then estate regeneration. Thus, in some cases, new build programmes took a back seat, especially when the self-financing scheme was detrimentally affected by changes in national policy.

Thirdly, Government policies have undermined the certainties of the self-financing settlement with local authorities on rent setting, right to buy (RTB) and welfare policies:

  • rent reduction policy of a one per cent per year cut from 2016 to 2020
  • council house sales have accelerated more quickly than anticipated in 2012
  • cumulative effect of welfare changes have made it more difficult to collect rents.

As a number of senior officers and councillors pointed out during interviews for this project, it is not necessarily the changes themselves that are the issue. Instead it is the uncertainty that it creates which is crucial. This leads to a loss of momentum and can lead to a switch in direct delivery from council housebuilding to local housing companies (such as in Oxford).

This uncertainty is a continuing challenge for councils. For example, the Government has powers under the Housing and Planning Act 2016 to enforce the sale of higher-value council homes to fund voluntary RTB if fully implemented after the pilot scheme in the Midlands starting in 2018. The Social Housing Green Paper has resolved this uncertainty by confirming that Government will repeal the legislation on forced sales. On rents, although the Government announced an annual social housing rent policy increase of the consumer price index (CPI) plus one per cent for 2020-2025, there is no decision on a rent settlement post-2025.

Council housebuilding and LHCs

There is considerable interest on initiatives such as local housing companies (LHCs), but these should not be seen as alternatives to council housebuilding. The case studies demonstrate that these two delivery approaches are mutually compatible. For example, the expertise and skills that are required are similar – including bringing together funding from a number of sources, making use of council land assets and project management.    

Many councils with HRAs have either set up LHCs or are considering doing so. A study by the Smith Institute provides a useful overview (Hackett, 2017). It commented that there are likely to be 200 local housing companies by 2020. It also pointed out that they vary enormously in terms of objectives and roles. Firstly, they often fill a gap in the housing market, such as good quality private rented accommodation for key workers. Secondly, they may be used to generate income for a local authority which can then be used for overall general fund requirements or for specific housing purposes. Thirdly, and some of the case studies demonstrate this point, they have been used as a means of maintaining the momentum to directly deliver new affordable rented homes when the option through council housebuilding has been curtailed because of changing government policies (for example in Sutton).

Nevertheless, delivery through local housing companies has so far been small scale with only modest long-term prospects. The Smith Institute forecasts that many will only deliver 50 units per year, while there are significant issues in scaling-up outputs from the estimated current figure of 2,000 per year to 10-15,000 per year by the early part of the next decade.

Furthermore, only between 30-40 per cent of outputs are likely to be in the form of new affordable rented housing. Part of the reason for the slow progress has been the challenges of setting up and establishing a new way of boosting supply. A number of other factors have also contributed to this state of affairs including lack of skills and expertise, shortage of land and the challenges of bringing together different funding sources. These are not dissimilar to the issues that have faced council housebuilding.