Chris Buss: ‘Broken faith’ and the HRA

“Trust not him that have once broken faith” – Shakespeare – Henry VI Part 3

You might wonder what Shakespeare has to do with council housing finance. To be honest very little at first glance. But in terms of local authorities’ relationship with central government he speaks and tells a better story in one line than I can in a few hundred words.

Going back to 2012, the government agreed/imposed a lasting, well at least a 10-year, settlement with the 171 authorities that still retained their housing stock at that time.

As part of the deal there was an undertaking that in exchange for increasing payments of negative subsidy this would be replaced by debt and, in order to underpin business plans, rents would be allowed to be increased by 0.5% above RPI each year.

The purpose behind this was, and I quote: “To give Councils the resources, incentives and flexibility they need to manage their own housing stock for the long term and to improve quality and efficiency.”

The net effect of this on our own HRA was that for this enforced, and at the time welcomed, ability to self finance over a 30-year business plan, we had to pay the government just under £434m in a one off payment. This was financed by a mixture of cash reserves, external debt and internal borrowing.

The assumed certainty of rent levels was a key determinate in deciding the length and type of loan with us eventually settling on borrowing from the PWLB for 13 years an initial £224m of the £434m.

For a debt averse authority, we previously had less than £10m of debt, this was a significant decision. We should have perhaps twigged that all was not as it seemed when the index linking mechanism moved from RPI + 0.5% to CPI +1%.  In the great scheme of things that was not a significant change but historically the difference between the two indices has on average been higher than 0.5%.

A further factor that had to be built into the plan was the council’s ambitious programme of estate regeneration that would not only increase the quality of the stock in the areas under consideration but also increase the actual volume of council managed HRA stock with a key principle being that some of the stock would be for low income working families, something I will return to later.

To assist in funding this we had built headroom in the business plan for £100m of borrowing. All seemed to be set well with the “SS HRA Business Plan” sailing serenely in quiet waters until this Summer’s budget.

Torpedoes

The budget effectively fired four torpedoes at the good ship HRA, one of which was the 1% reduction in rents each year over the next four years.

This has taken out the engine room for growth by removing over 30 years some £800m of balances and actually putting the plan, without any changes, into an illegal deficit in the 2020s.

To bail out the potentially sinking ship and to maintain the ability to undertake our regeneration plans, we have had to restructure debt. Fortunately with the internal debt that was easy, with the external debt it would have been much more expensive and was thus avoided.

We have also had to utilise some £40m of commuted lump sums from private developers in the borough to pay for the additional housing units.

I realise we are extremely fortunate to have the ability to do this and others with lower levels of debt will have no option but to cut services.

This reorganising of debt and use of commuted lump sums has enabled the ship to remain on course, but there is the issue of how the remaining three torpedoes which have been launched but have not yet exploded can be dealt with.

The first of these torpedoes is not a housing only issue but one which will affect all parts of local government and that is the introduction of the National Living Wage.

This is very much a slow burner, adding costs each year at the same time as income comes down. To counter this, services will need to be reviewed to ensure that compensating adjustments are made to meet these increased costs.

This is the relatively easy torpedo to deal with as you can see where the hit is and deal with the damage. The next two are much more unpredictable, and potentially much more lethal, as they are powered by the stealth of ministerial regulation rather than full statute.

Pay to stay

The first of these may and probably will be the least harmful financially, but could well be the most complex to administer and the most harmful in terms of ensuring that large social housing estates have a mixed community.  This is “pay to stay “.

On the face of it the principle might seem attractive and that is to charge those who can afford to pay more a rent closer to the market, and a voluntary scheme currently exists.

However, when looked at in detail the administration of this will be a nightmare, making the current complex benefits arrangements using real-time information detail a piece of cake.

The issues involved, and I’ll try not to go into detail, are as follows: Firstly, are the £30,000 /£40,000 per annum earning limits actually the right level?

Personally, I think the answer is no. They are too low, in particular when you look at them relative to the National Living Wage.

As an example by 2020 a couple both earning the NLW and working 42.5 hours a week will breach not only the £30,000 cap but will be over the £40,000 – clearly something is wrong here.

Secondly, on what basis will details of tenants’ income be provided by HMRC?  On the same basis as RTI for benefits or annually – the method will impact how on how the higher rent is calculated.

Thirdly, how is market value to be calculated? Easy, some might think, just look at the local buy-to-let market on ex-Right to Buy properties.

But the issue here is that these market values will allow for service charges levied by the freeholder, some of which are included in the council rent (e.g. insurance), whereas others are currently outside the rent. I could go on with other issues but I’ll save them for the consultation response.

The final torpedo is, perhaps, the most deadly in that it is unknown in both size and longevity.  The selling of high value vacant properties is at first sight an apparently sensible idea, if used to reinvest in social housing stock rather than as payment for value lost by a Registered Social Landlord for Right to Buy sales.

The sale of vacant properties on a case by case basis has long been an established practise in Wandsworth but the money raised has been used to either fund major works to other parts of the stock or purchase of cheaper properties, and this policy has a reasoned business case behind it.

The sale – or worse still, the effective requisitioning of cash balances – implied in the Housing Bill to fund an unknown number of RTBs places a very large unknown figure into the business plan, a figure that is likely to vary from year to year depending upon the “success” of Right to Buy in the housing association sector.

The RTB issue also raises, in my mind, fundamental issues as to whether, in future, business plans will become totally unviable if RTBs take off, let alone the fairness to tenants in properties in high-value parts of the country effectively having services reduced to fund the private purchase of an RSL property elsewhere.

Promises

It seems that promise made in 2012 under the spirit of the Localism Act to “give councils the resources, incentives and flexibility they need to manage their own housing stock for the long term and to improve quality and efficiency” has been quietly forgotten, sacrificed at the altar of home ownership.

I could go on again about the RTB and the consequential impact it could have on ability to meet statutory homelessness duties, or its impact on estate regeneration, but that would hopefully only be scaremongering or at worst a self-fulfilling prophecy .

It is unfortunate that the brave new world of HRA self financing has effectively been cut short before it really had the chance to show that councils could be trusted to run their housing more effectively and efficiently than RSLs and now we have the privilege of our own finances being raided to keep them whole.

If the government now, or in the future, promises to fix this issue, will you believe them?  Personally, I would prefer to take the words of Shakespeare as being more true to life.

Chris Buss is the director of finance and deputy chief executive at the London Borough of Wandsworth.

NB. This article expresses the personal views of Chris Buss  and may not reflect those of his employer.