Written evidence submitted by the Labour Campaign for Council Housing [FSS 011]

How would you assess the financial resilience of the social housing sector currently? Are increasing pressures and requirements putting financial viability at risk?

The Secretary of State has specified that more resources need to be directed towards maintaining and improving the existing stock. How feasible is this for social housing providers?

Under-funding of housing revenue accounts

Council Housing Revenue Accounts are historically under-funded as a result of the 'debt settlement' of 2012 and subsequent government policies. When the new financial system, 'self-financing', was introduced, councils were told that the funding that the settlement provided was sufficient for all of them to maintain and renew their properties to the Decent Homes Standard over 30 years. This wasn't true. The New Labour government, which had devised the new system, which was implemented by the coalition government, had previously asked the Building Research Establishment to examine the funding that councils received for maintenance and renewal of their existing housing stock. They found that in 2001-02 Management & Maintenance Allowance should have been £5.5 billion (to measure up to the needs of the work required) but it was only £3 billion. In 2004, in answer to a Parliamentary Question, the government admitted that “the 2004-5 level of allowance would have to increase by about 67% in real terms to reach the estimated level of need”. However, the Major Repairs Allowance was only increased by 24% and the Management and Maintenance Allowance by 5%. So housing revenue accounts were under-funded from the start of the self-financing system. The coalition government made matters worse by increasing the so-called debt by around £5 billion more than the New Labour government intended to set.

   Subsequent government policies had a negative impact, undermining the 30 year business plans that councils had had to draw up for 'self-financing'. The 4 year rent cut had a cumulative impact on revenue lost. The enhanced Right to Buy led to a four-fold increase in sales thus decreasing the revenue which had been built into the business plans. The amount of 'debt' which was given to HRAs in 2012 was based on a much lower level of sales pre-dating the enhanced RTB. So the amount of rent lost has been much higher than planned for in 2012.

   Research recently carried out for the LGA, ARCH and National Association of ALMOs by Savills underlines this[1]. They say that if the level of debt imposed on councils had taken account of the 4 year rent cut, the debt would have been more than £10 billion lower than it was set at. To accommodate costs of additional building safety (resulting from changes following Grenfell) and decarbonisation of existing stock would require a reduction of £5+ billion. And to mitigate against the impact of the rent ceiling of 7% for 2023-25 would have meant a £10.49 billion reduction because of a 5% real terms cost pressures.

   Together such changes would effectively wipe out the debt. In the run up to the introduction of 'self-financing' in 2012 the LGA , Defend Council Housing and other organisations were proposing precisely that – cancellation or writing off of the debt which was not real debt resulting from historic borrowing to build homes, but a financial manipulation by the Treasury. Space allowed for in this consultation does not allow more detail here but we have written The case for cancelling council housing debt which can be read here: https://thelabourcampaignforcouncilhousing.files.wordpress.com/2021/02/caseforcancellingchdebt.pdf

   Collectively HRAs now have around £26.5 billion 'debt' with an average interest payment of 3.99%. So the interest alone which they pay to the Public Works Loans Board is just over £1 billion a year. They are currently believed to be paying off principal at around £200 million a year.[2] This is from an income of £8.445 billion[3]. 'Debt charges' for 2021-22 were £1.332 billion or nearly 16% of income. 'Interest payable and other charges' were £777 million, so the two combined eat up 25% of income.

   Expenditure for capital purposes (renewal of key housing components such as bathrooms, kitchens, roofs, central heating, and expenditure on new build of acquisitions) was £801 million comprising only 9.30% of expenditure. Repairs and maintenance was just over 22% at £1.877 billion. (244)

   Councils have insufficient resources to increase maintenance and renewal of existing stock to any significant degree. As you can see from the Local Authority Statistics below (Table 1) nearly 93% of HRA income comes from rent and service charges (Heating and other services). Nearly 25% is taken up with debt charges, interest payable and other charges. Only 31% of expenditure is repairs and maintenance and expenditure for capital purposes. The latter includes renewal of key housing components but also new build. Suspension or cancellation of debt payments would provide more than £1 billion extra income which would have a material impact on what they are able to do. Under the 2011 Localism Act the government has the power to reopen the debt settlement if councils have suffered a significant loss of income or increase in expenditure. That clearly is the case as a result of the impact of government policies since then and future extra costs to address the issue probable improvements of the Decent Homes Standard (see below) and decarbonisation.

What pressure has high inflation, increased energy costs and any other additional costs placed on the finances of social housing providers?

  Councils are currently struggling with labour shortages, in large part because wages are not competitive with the private sector. Councils are being forced to increase rates in order to recruit and keep staff. Therefore there is no chance of reducing costs in order to increase funding for maintenance and renewal.

To what extent can social housing providers maintain output levels in housing development to provide a counter cyclical balance in otherwise tightening market conditions?

Over the last five years councils in England have built and bought more than 33,000 homes. Yet as a result of Right to Buy and demolitions there has been an overall loss of more than 28,000 stock. RTB has a detrimental impact on the finances of HRAs; not only the loss of rental income but because half of the stock sold are 3 bed properties and these are properties that are more expensive to replace.

   The restriction on use of RTB receipts whereby only 40% of the cost of a new build can  be covered by RTB receipts obviousy has a negative impact on HRA finances since the rest has to be covered either from existing resources or borrowing.

   Obviously increased interest rates for borrowing from the Public Works Loans Board will have an adverse effect  on new build. On April 4th the maturity loan interest rate for a 30 year loan was 4.78% as compared to 2.66% a year before and only 1.80% in December 2021.

   Councils' ability to build new homes is severely restricted by the amount of grant available for new building; only £57,580, which is less than the average grant available in 2008.

Has the lifting of the cap on the Housing Revenue Account made a difference to supply or improved housing from Local Authorities?

Of English local authorities only 166 have HRAs, 144 not. As you can see from the Table on changes in local authority stock below (Table 2) the raising of the borrowing limit has had a marginal impact on new build. The highest combined total of new builds and acquisitions was in 2021/22; 7,540. Even then, as a result of RTB and demolitions, stock still declined that year by 4,643. (66)

What contribution have council owned companies had in increasing the housing supply?Is the collapse of Brick by Brick – wholly owned by the London Borough of Croydon – a one off or the tip of the iceberg?

There have been a number of councils that have abandoned their private companies such as Liverpool and Merton. As far as we can see the scale of building is tiny compared to need. If councils had more grant for building in the HRA there would be no rationale for these companies as a vehicle for building. Moreover, because of the fact that they have to borrow money commercially, the homes for rent they build tent to be for “affordable rent” rather than social rent. The cross subsidy also means that the council loses land which could be used for building social rent homes if sufficient grant was available.

   Whilst Brick by Brick was undoubtedly badly managed, other companies have been in difficulties. Norwich, for instance, had to bale out its company by a £14 million loan. (135)

Improving the DHS?

A review of the Decent Homes Standard has taken place, with a view to improving it. There was a 'sounding board' set up to discuss the issues. Members of that raised the question of reassessing the debt level and the need to incorporate retro-fitting and decarbonisation in the Standard. The current government’s Decarbonisation Fund has provided only just over £8,000 per property, which is completely inadequate for the actual costs. So far there have been small scale trials in retrofitting homes, but the cost is not cheap. We have seen recent examples such as Leeds council which retrofitted 190 homes for £9 million, that is £47,000 per property. Reading Council has done external wall insulation for £30,000, with a heat-pump £40,000. If done on a larger scale (albeit with the necessary increase in trained workers) then prices might come down. But we can say that it would cost, on average, somewhere between £30,000 and £40,000. So for the 1.569 million council homes in England the overall cost would be £47-£62 billion. There is no way that council housing revenue accounts, which are grossly under-funded, could cover these costs from their own revenue.

Table 1: Housing Revenue Account income and expenditure (Budget 2021/22) £ million

Table 2: Changes in local authority stock, England

May 2023