Thinking cap – What does the scrapping of the HRA cap mean for finance directors?
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Birmingham, Balaam Wood
Following the government’s scrapping of the housing revenue account cap, council finance directors will face a dilemma about how to balance new homes between the HRA and their housing companies, says Jonathan Bunt.
Twelve months ago, in this blog, after her speech at the 2017 Conservative conference, I described Theresa May’s housing policy as ‘positive and underwhelming’.
Those were almost exactly my thoughts in the wake of the publication of the social housing green paper in August.
On each occasion, the glaring omission for a government which claimed to be serious about fixing the broken housing market was the maintenance of the housing revenue account (HRA) debt cap on local authorities.
It has long been illogical that councils effectively have no limit on borrowing to buy commercial properties, often out of their borough, but, due to the HRA cap, could not do so to invest in much lower risk social housing locally.
Well, now it’s going and the prime minister’s announcement has, correctly, been hugely welcomed by the sector.
There is unsurprisingly, and again correctly, a degree of caution on wanting to see the detail behind the lifting of the cap as well as the timing of it.
The indications on timing suggest that the lifting of the cap will be more medium term than immediate.
The Westminster rumour mill propounds the view that the Treasury are not happy about the policy change and, whilst it may feature in the autumn budget, the full detail is unlikely to be in place.
For momentum to be achieved, it will be important that it is considered before next year’s spending review, although with Brexit dominating the agenda that is perhaps unlikely.
The warning note, therefore, is that the country and economy could be in a different place post-Brexit and there aren’t too many who would bet heavily on Teresa May remaining prime minister far beyond that point.
There are, of course, those in her party who do not believe in social rent housing and Boris Johnson used his speech earlier in the week to advocate home ownership as the priority.
Cumulative effect
Overall, however, there should be genuine reason for optimism as the quiet dropping in the summer of several policies such as the forced sale of higher value stock, scrapping the end of lifetime tenancies and the local housing authority cap on social benefit.
When viewed alongside the earlier reverses on the housing benefit cap on under-21s, “pay-to-stay” and starter homes, it is clear that there is a continuing move towards social and affordable housing as an important political tool.
Things could be even better if the government could keep a housing minister in place for a reasonable period of time.
One of the key things the prime minister’s announcement has done is to pass some of the burden of expectation to local authorities, much as she did with housing associations at the recent National Housing Federation conference.
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Councils collectively have campaigned for the opportunity to build more social homes and now will they be expected to step up and deliver their share.
That expectation would be likely to be even higher in the event of a Labour government.
As a result, HRA business plans will need reconsidering and the risk appetite to develop will need to match those delivery expectations of the government.
What I would not want to see is an exaggerated shift to social rent homes at the significant expense of other options.
In almost every area, yes, we need more social rent homes – but there is also a need for alternative tenures.
Local housing policy would be far too narrow if it only considered social rent, private rent and private ownership as the available choices.
There remains a role, in both policy and investment terms, for a much broader offer including, amongst others, intermediate rent, shared ownership and rent to buy as part of the pathway towards home ownership.
Creating a broad mix of offers, as I wrote in the summer, also accelerates the build out of large developments, due to the different absorption rates, than is currently achieved in many cases, thus having a greater impact on the overall supply of additional homes.
Elephant in the room
The ending of the cap, combined with the use of council owned development companies and housing companies (which are different entities in both culture and purpose in my view), would enable local authorities to singlehandedly develop sites with the full range of tenures offered.
The development company could build all homes across the site funded by properties sold privately, the HRA for the social rent homes and one or more housing companies which would hold the affordable, shared ownership, private rented and other units.
Rather than signalling the end of housing and development companies, the announcement could result in a renewed focus and purpose on the role of each in increasing housing supply.
The government must therefore be urged not to intervene on such companies, especially as both add resource capacity to a sector which has always struggled for it and has seen it stripped back through the process of austerity.
The other issue finance directors will be considering is how to balance new homes under the potential borrowing freedom between the HRA and the housing company, where the return on investment typically flows back to the general fund.
In most councils, there has been a much greater pressure on general fund budgets and therefore there will remain a desire for income to flow there.
Whilst building more HRA homes will relieve the pressure on homelessness costs, developing homes via a housing company often achieves the same saving whilst offering an additional return to stem the much larger pressures in social care.
The most significant sticking now remains land.
For many local authorities, there simply isn’t the available land, or at least land in their ownership, to develop the number of homes they would want to.
A next step would therefore be to give councils the powers to assemble sites and for the government to take a much stronger position in requiring all public bodies to work collaboratively to develop land holdings.
Another of my regular comments is the great potential but thus far relatively limited impact of the One Public Estate programme, as it doesn’t have sufficient authority to push through its agenda.
The elephant in the room, in a number of different ways, remains Right to Buy (RTB).
One reason some councils have, at least subconsciously, been hesitant to build new council homes is the fear of rapidly losing their investment under the RTB legislation.
The latest Chartered Institute of Housing (CIH) analysis shows that the RTB policy is costing councils approximately £300m annually and in the region of 230,000 socially rented homes will be lost by 2020 based on the current trajectory.
As a result, the CIH have called upon the government to suspend RTB, and others have proposed a significant reduction in the level of discounts available, to protect both investment and stock levels.
The Right to Buy consultation paper launched in the summer offered some hope to councils in seeking views on increasing the period in which councils must use receipts to five years and the proportion that can fund development costs from 30% to 50%.
Both could, of course, be welcomed in adding freedoms to develop more homes when combined with the removal of the debt cap.
Overall, therefore, there are plenty of reasons to be optimistic and, for once in recent times when considering government policy on housing, not underwhelmed.
Jonathan Bunt is director at JB Financing
