Monday, 4 March 2013

The potential to use council housing self-financing to raise £7 billion to build 60,000 new homes



Dear Mr Jones

Given your interest in housing policy, you will be aware that a debate will be held in the Commons on Tuesday on the financing of new housing supply. As the body representing Arms-Length Management Organisations which manage almost half of all council housing in England, the National Federation of ALMOs (NFA) is calling for the removal of the cap imposed on local authority’s ability to borrowing for much needed new housing.

The NFA, in association with the Chartered Institute of Housing, the Local Government Association, the Association of Retained Council Housing and the Councils with ALMOs Group, have prepared a report which demonstrates the potential to use council housing self-financing to raise £7 billion to build 60,000 new homes.

The report, a summary of which can be found in the attached short briefing, argues that there is now a significant opportunity to help meet the shortage of affordable homes, create jobs, increase revenue for the Treasury and add 0.6% to Britain’s GDP.


For this to happen requires action to address the Government-imposed debt ceiling on councils which currently prevents them from capitalising on the borrowing potential linked to their housing stock. The report outlines the reaction to the proposal from the markets with experts indicating that plans to borrow up to £7 billion over five years to invest in new housing would be “insignificant in the scheme of things” and is a sum that falls well below the amount allowed for standard statistical errors in public borrowing figures.

At present, councils and ALMOs are prevented from investing to their full potential despite having low levels of current debt (just over £17,000 per house) compared with the average, outstanding mortgage debt held by private households of £111,793.

We also present the case that borrowing for financing council and ALMO housing investment should be taken out of the borrowing figures as they are in other most other European and many other countries as it is a trading activity with rental income paying down the debt.

If you would like any further information, please contact Chloe Fletcher on 07515 050207 or email chloe.fletcher@hqnetwork.co.uk.

Yours sincerely
Sue Roberts MBE
Chair

GETTING THE COUNTRY BUILDING

The National Federation of ALMOs is leading calls for councils to be able to capitalise on the opportunities presented by self-financing to access the finance needed to build much needed new homes. Research led by the NFA indicates that capital markets would deem the removal of the cap on the ability of local authorities to borrow for new homes “insignificant” and there is a good case for copying all other EU countries and removing housing investment from borrowing altogether as it is a trading activity.

Removing the Cap on Borrowing for New Homes

The National Federation of ALMOs (NFA) in association with the Chartered Institute of Housing, the Local Government Association, the Association of Retained Council Housing and the Councils with ALMOs Group have prepared a report which demonstrates the potential to use council housing self-financing to raise £7 billion to build 60,000 new homes.

For this to happen requires action to address the Government imposed debt ceiling on councils which currently prevents them from capitalising on the borrowing potential linked to their housing stock.

Council housing has been “self- financing” since 1st April 2012, but councils and ALMOs are prevented from investing to their full potential despite having low levels of current debt (just over £17,000 per house). In comparison, Credit Action, the national money education charity, report that in August last year average outstanding mortgage debt held by each private household was £111,793.

Debt levels are currently restricted by government imposed borrowing caps which are much lower than the levels at which local authorities could borrow sustainably. Currently councils have headroom to borrow an additional £2.8 billion to invest in new housing.

The report, led by the NFA, notes that without the caps, local authorities would be able to make plans to invest a further £4.2 billion in new homes. If encouraged to invest, their maximum potential might be £7 billion over five years, which could see the delivery of up to 12,000 extra homes a year.

The report outlines the results of reaction to the proposal from the markets, with experts at Capital Economics indicating that plans to borrow up to £7 billion over five years to invest in new housing would be “insignificant in the scheme of things” and is a sum that falls well below the amount allowed for standard statistical errors in public borrowing figures.

Borrowing to finance this investment would be well within the levels sustainable from projected incomes from rents. Local authorities adhere to the Chartered Institute for Public Finance and Accountancy’s (CIPFA) “Prudential Code for Capital Finance” which have enabled them to develop a record of responsible borrowing with virtually no defaults.

In calling on the Government to remove the HRA borrowing caps, it recommends that Ministers should instead rely on the prudential borrowing rules, as called for also by CIPFA, to ensure investment is sustainable.

There is a safeguard for the Government in that the Local Government Act 2003 enables the Secretary of State to; "for national economic reasons by regulations set limits in relation to the borrowing of money by local authorities" as well as "by direction set limits in relation to the borrowing of money by a particular local authority for the purpose of ensuring that the authority does not borrow more than it can afford."

New Housing Boosts Growth and Tax Receipts

Building homes is a significant driver of economic growth, providing the best and easiest stimulus for the hard pressed construction industry as many projects are “shovel ready”. The UK Contractors Group has showed that for every £1 spent on building, 92p stays within the UK, whilst each £1 spent on construction generates a total of £2.84 in extra economic activity. For every £1 spent by the public sector, 56p is returned to the Treasury, of which 36p is direct savings in tax and benefits.

Official figures indicate that constructing 60,000 new homes would add 0.6% to overall GDP.

Exempt Social Housing Investment from Borrowing Totals

The report also urges the Government to adopt internationally recognised rules to measure government borrowing which would acknowledge that extra investment for council housing, as a trading activity, would not count as adding to government borrowing levels. Such a rule change would bring the UK into line with international regulations which are already used by markets and bodies such as the IMF to assess sovereign debt. The UK is the only EU nation not to use these rules.

ALMO and Council Reactions

If accepted by the Government, councils and ALMOs would be able to:
  • - Use their land and assets effectively to drive local economic growth.
  • - Exploit the potential within the self-financing system to bring forward new homes in a managed and planned way.
  • - Collaboratively develop and support voluntary standards led by the sector to maintain effective financial governance of housing accounts.
The Implications for Government

Increasing the volume of affordable and social rented housing would help to reduce the housing benefit bill over time as it would increase the availability of cheaper properties to rent. There would also be a significant saving if tenants on housing benefit moved from more expensive private lettings or out of temporary accommodation for the homeless.

Many authorities would fund their increased building programme from additional borrowing, although a number of councils would also require limited access to grant funding to ensure viable developments.