Written evidence submitted by London Councils [FSS 018]

London Councils is the collective of local government in London. Shared ambitions are developed, agreed, championed, and delivered at London Councils by members working together. Through London Councils, boroughs speak as one and collaborate with the government, the Mayor of London, wider public sector, third sector, business community and other key UK and international cities.

Our members are responsible for managing 390,000 homes across London, housing more than 1 in 10 households in the capital, as well as delivering on London’s strategic and operational housing priorities.

We welcome the committee’s investigation into the sustainability of the social housing sector. The London boroughs are strategically important partners for government in bringing forward new affordable housing, with responsibility for delivering 40% of all homes allocated under the 2021/26 Affordable Homes Programme in London, and half of all social rented homes.

This is a timely investigation. London’s housing sector is under an enormous amount of strain given the increasing pressures and requirements on Housing Revenue Account (HRA) operations and the growing need for new affordable housing. The scale of the housing crisis in London is particularly pronounced. By 2020 house price to earnings ratio in London had grown to 12.5 compared to a national average of 7.7, and our private sector tenants are spending almost 40% of their income on rent, compared to 23% in the rest of England. In the one year to Q1 2022 only 8.8% of all properties listed for rent were affordable on LHA. In some parts of central London, it is 0.4%.

These affordability challenges across London put enormous strain on the demand for social housing and leads to extremely high costs across new affordable housing development, rough sleeping services, homelessness services, and temporary accommodation.

We have not responded to every question in order to remain within the word count for submissions but can provide further evidence as is requested.

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

Within Housing Revenue Accounts (HRAs), boroughs are facing significant financial pressures. We must provide good quality repairs and maintenance services, ensure building and fire safety, address challenges within our stock and support implementation of a new Decent Homes Standard, respond to a changing and more intensive regulatory environment, deliver net zero carbon, and sustain our new build programmes. These initiatives are being delivered on top of the range of day-to-day services that local authority housing teams provide.

Local authorities are being expected to deliver these new initiatives on a shrinking budget. The 7% ceiling on social housing rent increases in 2023/24 is expected to have a £598 million impact on London HRA finances over the next five financial years, compared to the CPI+1% formula. It has also compounded the financial impact of the four-year 1% annual rent reduction policy, which left rental income across London HRAs £459 million lower in 2021/22 than it would likely have been had CPI+1% remained in place. Over forty years, the estimated impact of the one year 7% ceiling is £8 billion, twice the value of London’s 2021/26 Affordable Homes Programme (AHP) allocations. Furthermore, the COVID-19 pandemic had an estimated £100 million financial impact across London HRAs, without mitigating financial support from government.

While councils are taking steps to address the housing needs of Londoners, the acute pressures on borough HRAs make this incredibly challenging. Without further financial support, the social housing sector faces significant financial difficulty in maintaining existing services, let alone meeting additional strategic priorities. 

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

The macroeconomic headwinds facing the sector mean that London local authorities are struggling to deliver services in a financially sustainable way. Borough new build programmes in particular face serious viability pressures and some development is being paused, as boroughs find it necessary to review trade-offs with capital and revenue spending requirements.

Key challenges include:

• The cost of construction materials rose by 11% in the year to December 2022 and are up 42% since January 2020.
• Higher mortgage costs and widening dampening of buyer demand for new build homes (including market homes built by councils to cross-subside affordable housing delivery).
• Increases to interest rates and changes to the gilt market have resulted in higher Public Works Loan Board (PWLB) borrowing rates, currently around 4.5-5%. Despite the government announcement to introduce a new 40 basis point discounted rate for Local Authority HRAs, this is only expected to be in place for one year.

A labour shortage and soaring construction costs have proven challenging for councils developing new homes. One London borough experienced an increase in build costs of 30-35% across their development programme. Alongside an increase in assumed interest costs from 3.8% to 4.5-5% (or an increase in borrowing costs of 24%), their entire development programme is now in deficit by over £26 million, doubling the subsidy needed from the Council to maintain viability. Existing restrictions on raising rent and on combining RtB receipts with other forms of grant mean that their options for revenue raising to fund this deficit are limited.

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

While the social housing sector has historically been able to support economic stimulus during a wider economic downturn, further central government funding is needed for boroughs to act in a counter cyclical manner given the rising costs of development and deepening financial pressures on the finances of social housing providers. With growing homelessness and wider housing market pressures in London, the local authority role in delivering affordable housing is growing in importance.

Does the cross-subsidy model, by which market housing helps pay for social and affordable housing, have any continuing viability?

The cross-subsidy model is becoming increasingly unviable in the face of market conditions and rising construction costs. Worries about a decline in consumer demand, particularly in the face of rising mortgage costs, adds uncertainty and increases the exposure of development schemes that rely on open market sales. The challenging viability of housing renewal and regeneration is a particular concern.

Despite these risks, shifting the tenure mix of a development programme is one of the few tools that local authorities currently have in maintaining overall viability for new housebuilding schemes.

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?

London local authorities face significant challenges in maintaining sufficient levels of decency across their housing stock, and we know that property conditions are worse in the capital due to a combination of factors, including an older stock profile, higher-density development, and higher level of overcrowding. For example, a 2021 report by the Housing Ombudsman found that 57% of all damp and mould maladministration cases were reported in London, compared to 19% of the housing stock. While councils are taking important steps to address non-decency within their housing stock, the acute pressures on borough HRAs make this a significant challenge, and analysis of overall tenant satisfaction shows a decline in recent years. Further, significant long-term stable investment is needed for the decarbonisation of the housing stock and for fire and building safety. In 2021, analysis for London Councils estimated that retrofitting all homes in London to an average EPC B rating would cost £49bn, or almost £98bn if we are to hit Net Zero. These figures will now be an underestimate. Furthermore, the LGA estimates that £8.1bn is needed for all stock-owning local authorities to meet the highest building safety standards, including the installation of sprinklers and compartmentation. Combining these pressures, GLA analysis shows that around 43% of London’s social housing – approximately 343,000 homes – needed improvements to meet the current Decent Homes Standard and reach energy efficiency compliance (Band C EPC).

Our response to question 1.1 set out key financial pressures on HRAs. In total (taking account of the four-year rent reduction policy and 7% rent ceiling), the government has enforced below inflation rent policies on councils in five of the eleven financial years since HRA self-financing was introduced in 2012/13, impacting on councils’ ability to sustainably manage the HRA and running counter to the localist principle that underpinned self-financing.

Due to these pressures, many local authorities are reporting that the investment needs of their housing stock exceed the financial resources available to fund it.

Case study

• One large stock holding borough in London has estimated that around £75m is needed just for additional building safety works each year over the next five years.
• This is on top of other capital investment requirements, and the council has been able to provide a £70m annual contribution to the capital budget within the HRA.
• The impact of £75m in additional building safety works means that the investment needs of the stock exceed the financial resources available to fund it. This is despite the borough raising an additional £140m over the last 10 years through rent increases and efficiency savings.
• Based on the current profile and impact of rent capping, general inflation, building and construction inflation, new building safety regulations and the introduction of the inspection regime, it is estimated that the HRA has a shortfall of over £100m over the next five years and the borough will be unable to balance its budget.
• This is despite pausing the uncommitted stages of its new homes delivery programme to help relieve the burden of debt financing.

How do social housing providers choose whether to undertake new development or to focus on maintenance and upkeep of existing stock? Is it currently possible to achieve both objectives? Where social housing providers are undertaking new developments, what consideration has been given to the types of homes they are building? For example, houses versus flats?

Currently, undertaking new development or delivering maintenance and refurbishment on existing stock involves difficult trade-offs for social housing providers. Many boroughs use site regeneration as a means of achieving both aims, with regeneration adding to the total number of homes while raising standards. Decisions on regeneration are based on a range of factors, including stock condition, potential for additionality, and the views of tenants via mandatory regeneration ballots.

In some cases, however, boroughs are constrained in their ability to regenerate. It is not uncommon for older stock to require very high investment to address structural, decency and building safety issues. Combined with high ongoing maintenance requirements, it is sometimes financially unviable to bring homes up to a suitable standard for the household. However, full regeneration is often also unviable given current restrictions on use of AHP grant for regeneration and renewal – specifically in cases where site constraints mean regeneration would not bring housing additionality. Additional flexibility around the use of AHP grant funding to support the development of replacement homes would help councils bring forward new development and raise standards within the housing stock.

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

Self-financing, lifting the borrowing cap and the availability of AHP grant funding has enabled councils to become strategically important deliverers of affordable housing in London. Councils have ambitions to deliver more affordable housing, driven by the needs of our residents for new homes and the financial impacts of homelessness on councils’ budgets.

In total, 25 London local authorities (76% of authorities) received funding from the 2021/26 Affordable Homes Programme to deliver new affordable housing, accounting for 40% of all allocations made by the Mayor of London and 50% of all allocations for social rented housing. Councils in London are also delivering new homes without government grant funding, for example through the use of Right to Buy (RtB) receipts to subsidise new development. However, repeated Government intervention in the self-financing settlement, including setting below inflation rent policies in 5 of the 11 years since, has significantly hampered the ability of Local Authorities to financially plan and deliver the high standards that residents deserve.

What contribution have council owned housing companies made to increasing social 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?

Wholly owned housing companies have been developed in a wide range of forms across London local government, from developing new homes to purchasing and leasing temporary accommodation. Council owned companies therefore support a variety of roles and should be judged on a case-by-case basis. Most companies were initially established as a response to previous restrictions on HRAs to enable delivery of new housing or to support acquisitions programmes to address temporary accommodation pressures.

Will the introduction of the Infrastructure Levy and changes to section 106 significantly affect the capacity to develop affordable housing?

The proposal for an Infrastructure Levy (IL) remains a major concern. We believe it poses the following risks to borough finances.

• The loss of gains being made under the existing section 106 arrangements, in particular the successful delivery of affordable housing, including the supply of new low carbon homes, and the funding of successful employment initiatives (such as apprenticeships, skills development and supporting young people into employment). It will be important to ensure that these benefits are not lost (i.e. maintained at current levels as a minimum) as a result of changes proposed in the Bill.
• The risk of increased financial exposure for boroughs, for example, due to IL payments being made on completion rather than at application stage.
• The risk that the flexibility recently introduced for how IL payments can be used by local authorities, may, as a result of other financial pressures, divert the funding needed to deliver development schemes, with particular concern for the impact on new affordable housing.

Is the current Departmental policy on social housing and affordable homes appropriately focused?

While recent Departmental changes such as improved PWLB rates and increased flexibilities in the use of RtB receipts are welcome, we do not believe that the current range of policy changes will sufficiently achieve the Department’s goals of improving existing standards and expanding supply. In order to deliver on the range of policy initiatives set out above, while maintaining financial solvency, London Councils are requesting the following policy changes.

• Further grant funding is needed for the delivery of new affordable housing. Research commissioned by the GLA has shown that London would require an additional £4.9bn annually to deliver the number of affordable homes that London needs – more than six times the current funding settlement.
• Further capital grant funding should be provided to raise standards across London’s housing stock – this should be through investment in existing homes and reforming AHP grant funding rules to enable more funding for regeneration. Without this funding, it is unlikely that London local authorities can raise conditions to match even current standards across the rest of the country.
• Further flexibilities in the use of RtB receipts is needed if many development programmes are to be financially viable. While allowing boroughs to retain a greater percentage of the receipts from RtB sales supports borough HRAs, the ongoing RtB cap per dwelling is likely to mean that this money will not be best utilised. This cap on the use of receipts per unit (currently capped at 40% of scheme costs) should be significantly raised or removed entirely if boroughs are to maintain development programme viability. Removing restrictions on combining receipts with other forms of grant such as AHP grant is also necessary to provide boroughs the local flexibility needed to plan viable development programmes during this period of significant economic uncertainty. Finally, restrictions on the use of receipts to support acquisitions should be removed entirely. Acquisitions can be used strategically by councils as an efficient and quicker means of expanding the supply of council-owned affordable housing, including replacing lost homes, especially within the context of land constraints in London.
• Further reductions in PWLB borrowing rates, or preferential rates for affordable housing development, should be provided to support long-term financial stability.
• The social housing sector should be enabled to implement a catch-up period following the rent ceiling period so that rents can gradually rise to the position they would have been under CPI+1% position. This would enable housing providers to recover some of the funding needed for investment in essential services and improving standards while protecting tenants from significant short-term annual increases in rent. Assuming a one-year rent ceiling, a catch-up period would reduce the financial impact of the 7% rent ceiling in London from £8 billion over 40-years to £1.3 billion over a five-year catch-up period, or £2.5 billion over ten years.
• Government should provide short-term HRA revenue relief to support local authorities in keeping rents below the CPI+1% formula. If applied to all costs in the context of a one-year rent ceiling at 7%, with catch up to CPI+1% over five years, the temporary revenue subsidy requirement would be an estimated minimum of £455 million.

Is the current range of grant funding available appropriate to address the issues and challenges that the social housing sector faces?

The current range of grant funding is not currently appropriate if the issues and challenges in the social housing sector are to be addressed. Inflation in the construction sector has been running higher than CPI, with some estimates as high as a 35% increase over the year. Such large increases in costs requires a significant reappraisal of the current rate of grant funding for new build. A full range of grant funding asks are set out in our answer to question 3.1.

It is already accepted that the numbers of dwellings likely to be produced under the 2021 Affordable Homes Programme will be less than initially forecast. Will the financial challenges that the sector faces reduce these numbers even further?

London Councils supports changes recently announced for the AHP in London, which we expect will help support the continued delivery of affordable housing, even if at lower levels than initially intended. These changes could help to prevent a sharper drop in short-term delivery compared to what would otherwise be delivered. As noted above, current economic and financial challenges means that boroughs face significant obstacles in maintaining viability in their development programmes. New requirements such as those proposed in the recent consultation on second staircases shows that the policy terrain is still uncertain, and new costs could further push programmes into unviability. Anecdotally, many boroughs are uncertain that they will be able to continue with new affordable housing development except in its most minimal form. If affordable housing delivery is to not collapse, significant more funding is needed quickly and decisively.

May 2023