How the Right to Buy undermines estate regeneration

Agent 151 is a senior local authority finance director and S151 officer writing exclusively for Room151. 

My Housing director is busy pulling out his hair.  Faced with the almost impossible residual task of sorting out the worst estates, he has very sensibly decided that the best thing to do is knock them all down and start again. And quite right too!

Through clever, modern design it is possible to build a mixed ownership development that intensifies land use, removes a variety of social problems, and creates what is essentially a nice place to live.  And now that the capital funding arrangements have changed, we can use the headroom in the HRA to fund all of this.  All good so far.  The fly in the ointment is Right to Buy.

Since 1980 over two million people have taken up the offer to purchase their home from the state at a knock-down price.  It has been suggested that the Right to Buy, introduced by Margaret Thatcher’s government in the 1980s, was a policy designed to win votes by playing to the feudal ambition of every British householder to own their own home.   Whether this ambition ever existed before the policy did is a point for debate.  In many countries in Europe and elsewhere in the world there is a completely different model of ownership in which being a tenant is the norm and landlords are regarded as businessmen.   My lovely old Dad, a Londoner, never owned a house in his life and never wanted to.  Whatever the truth of it, one thing that cannot be disputed is that the rational British council tenant responded to the policy with alacrity wherever there was a tempting capital gain to be made.  Indeed, town halls up and down the country were struggling to keep up with the traffic in the 1980s and early 1990s.  Volumes slumped when discounts were reduced and in any case all of the best properties went rather quickly.  Councils have been left with the properties that are so awful they can’t be sold and estates peppered with properties snapped up by buy-to-let landlords.

In the interests of balance, I should say that communities in which owner-occupiers, private tenants and council tenants live cheek-by-jowl are regarded by many as an improvement upon council ‘ghettos’.  The personal wealth generated by the Right to Buy has possibly contributed to driving economic growth in a way that public spending in other forms may not have been able to achieve.   However, disposing of a property on a lease did not relieve councils of their responsibilities as a landlord, and this created an administrative headache and a mountain of debt to collect as service charges and repairs costs were disputed and left unpaid.  Buy-to-let landlords taking on ex-council properties have driven up the benefits bill.  Worse still, and I promise you we are now getting close to my point, the homes lost to the public sector were never replaced, and this has contributed to the present housing crisis.

In April 2012 the government re-invigorated the Right to Buy by introducing new incentives.  Since then tenants have been eligible for up to £75,000 off the value of their property, and this represents a quadrupling of the discount in many areas.  In the recent budget the government decided to increase that figure to £100,000 in London, and to introduce some additional measures to warm things up: a pledge to simplify the Right to Buy application process, lowering the eligibility criteria so tenants can apply to buy their homes after 3 years instead of 5, introducing a £3.5 billion Help to Buy equity loan scheme, and a Help To Buy mortgage guarantee scheme.  Presumably the motivation for this move is both ideological and based on a belief that it will stimulate short term growth, helping to kick-start the economy.  Anyway, the re-invigoration plans have had the desired effect: DCLG has just tweeted that over the past year nearly 6,000 people have taken up the Right to Buy, more than double the previous year.  But the renaissance of Right to Buy is causing some councils a real headache.

So what is my Housing director losing hair over?  Let’s have a look at how the regeneration of council housing estates might work under the new system.   You temporarily re-house your tenants while you knock down the old no-go-area estate.  Put up brand new, modern council housing side by side with other tenure types, including some new private sector homes built for sale or part ownership schemes.  Move your tenants back in.  And then watch these lovely council properties fly out of the door as the Right to Buy applications flood in, scooping your tenant a hefty discount and losing you a lot of your council housing capacity.

So you lose a few homes, but you do get a capital receipt for them, right?  I’m afraid the answer to this is complicated, so pay attention.   Some of the receipt goes to cover the council’s costs.  This consists of an amount to cover the housing debt that would have been supported by the income from the properties sold, an amount for transaction and administration costs, and an amount which compensates councils for giving a bigger discount under the new rules.  Got that?  Then the council must pay the government its share of the money.  This is an amount equal to the capital receipt which the Treasury would have expected from the Right to Buy sales prior to the new scheme.   Once these costs are deducted, the remaining receipt (the ‘net receipt’) is available to fund replacement affordable rented homes.  I told you it was complicated.

There’s more.  If you want to retain the net receipt you need to enter into an agreement with CLG that commits you to use it on providing affordable rented homes.  Fair enough, you may say, but you will also be agreeing that the receipts will not constitute more than 30% of your investment in those homes.  If any of the receipts have not been used after three years they have to be returned to the government with interest.

In practice local authorities will be scuppered by the requirement that receipts cover only 30% of replacement costs and by the lack of availability of other sources of funding as headroom in the HRA erodes.  Not to mention that in some parts of the country housing directors will be left wondering exactly where they might find some land to build replacement homes upon.

So now I have a Housing director who wants to build homes outside of the HRA.  And I don’t blame him!  We are looking at options together while he still has some hair left.