Written evidence submitted by the Local Government Association [FSS 030]

Thank you for the opportunity to submit written evidence to inform your current inquiry on social housing finances and sustainability of the social housing sector. This is very timely as we have recently published a series of research reports which looks at various aspects of the policy, financial and technical operation related to council Housing Revenue Accounts (HRAs). This was produced by Savills and commissioned by the LGA, the National Federation of ALMOs (NFA) and the Association of Retained Council Housing (ARCH).

I have also attached a copy of the reports with this letter as part of our overall evidence submission. For simplicity I have summarised the key issues and proposed solutions below.

Summary

Councils proudly own and manage almost 1.6 million homes across the country, carry out millions of repairs each year and invest billions in housing services. Councils also want to increase the numbers of council homes that are available to those most in need, with research in 2021 showing that 80 per cent of councils are directly engaged in the provision of housing, including through wholly owned or joint venture local housing companies. However, there is rising concern that the council housing system is the scene of a perfect storm of pressure resulting from national, global and local pressures - this is increasingly impacting on councils’ ability to deliver their responsibilities as local housing authorities, as well as their housing delivery ambitions.

In short, trade-offs will need to be made between a wide set of competing priorities for social housing stock in the current financial climate. That means that councils will need additional government investment and/or increased flexibilities to raise additional income if they are to deliver everything that is required of them.

There is not a ‘one size fits all’ financial picture for all councils who own housing stock, as written evidence submissions to the Committee from individual councils will highlight. There is also huge variation in the volume and type of stock (including age) that councils own. This results in varying financial pressures both now and in the longer-term. But broadly speaking the pressures can be summarised into the following themes: income; expenditure and Right to Buy. These are explored in further detail below.

In short, a long-term sustainable funding framework for social housing is vital to ensure that councils have the ability to invest in and regenerate their housing stock, and to fulfil local and national ambitions of ensuring that everyone has access to a safe, secure and high-quality home.

The self-financing settlement

The self-financing settlement in 2012 distributed debt to stock-holding local authorities on the assumption that anticipated rent income would be sufficient to fund works to raise all homes to the Decent Homes Standard (DHS) and maintain them there, and to pay off debt over a 30-year period. The settlement is now ten years old, and its underlying income and expenditure assumptions have both been superseded.

Income within the HRA is not only now lower than that provided for in the self-financing settlement, but this income is now expected to cover both higher costs and higher standards of stock and service delivery (see page 29 and 30 of the ‘Income and Rents’ report for further detail).

Income

The first of our commissioned reports focuses on income and rents relating to HRAs. Firstly, on income, which predominantly comes from tenants rents, councils are duty-bound by the government’s Rent Standard, meaning that since 2020 they can only increase rents by CPI +1per cent. For 2023-24 they are further restricted by a rent cap of 7 per cent. Whilst it is recognised that this measure will support tenants in the short-term, our commissioned research has estimated that this will amount to a cumulative deficit to council HRAs of £664 million after two years (see page 18 of the ‘Income and Rents’ report). This comes on the back of 1 per cent annual rent reductions in the social rented sector for four years from April 2016, which resulted in an estimated 12 per cent reduction in average rents by 2020-21.

Our response to the government’s consultation on social housing rents included a number of examples from individual local authorities of how the impact of the rent cap will be felt differently in different places (see section ‘Impact of rent decisions on individual local authorities housing management services and stock investment’).

One council told us that the impact of a rent cap would see: planned maintenance programmes lengthened, and major works delayed; new build and acquisitions programmes falling; a sharp decline in reserves and a need to undertake additional borrowing. This is mirrored in many other stock-holding councils across the country with varying degrees of severity.

Our research identified a number of areas for consideration from a policy perspective to mitigate the impacts of lower increases in income compared to increases in costs.

• Temporary revenue support – these could be one off grants paid to HRAs to cover spikes in inflation. This could work in a similar way to Covid grants that were paid to councils to support increases in costs of loss of income.
• Capital grant support – pressures on financing additional fire/building safety costs should be considered in the context of additional capital grant. This is because revenue pressures are more likely to be delivered via savings/cuts in budgets as opposed to reduced levels of borrowing in extensive borrowing programmes.
• Reduced Public Works Loan Board (PWLB) rates – we welcomed the government’s announcement at Spring Budget 2023 that it would bring forward a new discounted Public Works Loan Board policy margin to support local authorities borrowing for Housing Revenue Accounts and the delivery of social housing. However, we have been clear that this will only go a small way to mitigate the impact of the 7 per cent rent cap.
• Convergence or ‘catch-up’ to formula rents over a set period, for example 10 years.

Looking ahead, from April 2025 onwards, a new rent standard will be in place which will determine how future social housing rents are set. This is a key opportunity to ensure that future rents deliver investment in existing social homes and associated services, as well as deliver long term certainty to allow landlords to plan long term. The LGA will be engaging with its members later this year on how 2025 rent policy should be designed to deliver on these ambitions – this will look at a range of options from tweaks to the existing Rent Standard to full devolution of rent-setting to councils.

Expenditure

The second of our commissioned reports focuses on a review of expenditure pressures affecting services provided to council housing within the HRA including: landlord services and housing management; building safety; net zero carbon and other pressures.

In addition to projected expenditure requirements in HRA business plans, there are a number of new and additional expenditure needs that have arisen since the self-financing settlement in 2012, including:

• Works and continuing management expenditure to ensure fire and building safety required by the Fire Safety and Building Safety Acts. Our estimate of the sector-wide requirement to achieve building safety standards for tall buildings and buildings housing vulnerable residents is £7.7 billion, based on c3,300 tall buildings with approximately 228,000 units affected, and up to 290,000 homes housing vulnerable residents (see page 8 of the ‘Expenditure’ report). Of this £7.7 billion, an estimated £1.8billion relates to re-cladding, some of which is covered by Government support. Other costs include compartmentation, fire door replacement, sprinklers and ongoing building safety case costs.
• Works to raise all local authority homes to at least EPC Band C by 2030, paving the way to decarbonisation. Our research estimates that the additional costs to deliver net zero, compared to what is currently provided for in HRA business plans across the country, is £23 billion over 30 years (see page 23 of the ‘Expenditure’ report). No HRA business plan is able to sustain decarbonisation of the stock and additional streams of income will be required to be identified. Whilst the Social Housing Decarbonisation Fund (SHDF) has been welcomed, the costs to deliver Wave 2 pilot schemes are increasing not reducing, and in the case of heat pumps, inflation has been significant. This is leading to a higher requirement for matched funding than initially envisaged in the programme – with some councils saying that they are not able to meet this increased requirement. Consideration could be given to the ability for councils to charge an enhanced rent for those properties which are decarbonised, in order to capture a proportion of the savings that tenants will receive from reduced energy bills, which can be reinvested into further decarbonisation of the stock.
• An updated Decent Homes Standard (yet to be determine) will also bring additional expenditure costs but these were not estimated in our research.

New build and development

One of the other areas of enquiry within the expenditure research focused on the extent to which local authority new build programmes introduced and/or boosted since the abolition of the HRA debt cap in 2018 may be affected by inflation and other delivery pressures in the construction industry. Additionally, we heard from participating authorities that increases (or at least uncertainties around increases) in interest rates might also affect appetite and headroom for new development going forward. Detailed information can be found in section 3.7 of the ‘Expenditure’ report.

Inflation in construction costs is running at 10 per cent which implies a national average increase in grant rates of c£25k/unit is needed, which if not applied could mean a reduction of around 8 per cent in delivery totals if additional subsidy were unable to be obtained or applied. Inflation in construction costs at 18 per cent imply a national average increase in grant rates of c£45k/unit is needed, which if not applied could mean a reduction of around 14 per cent in delivery totals if additional subsidy were unable to be obtained or applied.

The overwhelming majority of feedback received from participant authorities was that additional costs of construction and higher interest rates were being accommodated within existing programmes and that these challenges were not alone leading to withdrawal or cessation of programmes. The impact is much more likely to be felt on programmes which commence from next year, with the very real potential for programmes to be scaled back significantly should additional grant or one-for-one Right to Buy subsidy not become available.

Regeneration and redevelopment

We have highlighted the nature of increased inflationary drivers on construction costs and these also apply to regeneration and redevelopment. For such schemes, there are also additional challenges around the financing of demolition and re-build, particularly when Affordable Homes Programme grant is only available to cover the additional units delivered as a result of the regeneration.

Every council who participated in our research referenced the need for a fresh look at this issue given the nature of investment requirements into the existing stock for building safety, energy efficiency and net zero carbon. It will not be economically viable to bring many properties up to these standards, and for a significant minority, it will not be possible to meet those standards. The inability to be able to draw Affordable Homes Grant for anything other than “additional” units is seen as a significant barrier to bringing these schemes forward. It is considered that there may be a case for redirecting an amount of what might otherwise be resources required to achieve net zero carbon towards the financing of regeneration and redevelopment where it is either unlikely that existing properties will achieve net zero or where it is uneconomic to do so. Section 3.8 of the ‘Expenditure report’ explores the idea of diverting net zero ‘cost avoided’ to support regeneration ambitions.

Revenue inflationary pressures

Section 4.1 of the ‘Expenditure report’ sets out the main additional revenue pressures arising from our commissioned research. This looks at the impact of inflationary drivers on a number of areas including: pay award; contractors; supplies/materials; utilities costs and construction. These values have been derived from a range of sources and were correct at the time the projections were made.

The additional cost pressures arising from cost inflation for revenue excluding depreciation/major repairs is estimated at c£5.1billion over 5 years from 2023 to 2028.

Right to Buy

The third of our three commissioned reports, looked at the policy, financial and technical operation related to the Right to Buy in Housing Revenue Accounts (HRA).

The report does not seek to challenge the Right to Buy policy itself but researches and explores issues around sales volumes, the operation of discount levels and the recycling of Right to Buy receipts. It also sets out some suggestions for future policy ideas to make the policy more sustainable.

Please note however that the assumptions in the report were made before the government’s recent confirmation that councils would be able to retain 100 per cent of Right to Buy receipts for 2022/23 and 2023/24, so some of the data included may be subject to minor change.

As you know, the Right to Buy scheme was introduced more than 40 years ago by the Housing Act 1980. This allows most council tenants the opportunity to buy their council home at a discount and has helped thousands of families to get on the housing ladder.

However, while Right to Buy can deliver home ownership for many, the current scheme is in desperate need of reform so that councils can replace the properties sold on a one for one basis. The LGA remains concerned that rising discounts alongside other measures that restrict the use of Right to Buy receipts mean that one household’s home ownership is increasingly being prioritised over another’s access to secure, safe, social housing. The Savills report estimates that 100,000 homes are likely to be sold through the RTB scheme by 2030, with only 43,000 replaced (see Page 22 of the ‘Right to Buy’ report).

The failure of the programme to replace sold properties is also striking in the context of the level of discounts that are offered and also in the context of whether this offers value for money for the public purse. Our research suggests that the gross level of discounts offered since 2012 substantially outweigh the rent likely to have been paid by those tenants who purchased their properties in that period, perhaps by up to £2 billion (see Page 14 and 15 of the ‘Right to Buy’ report).

The maximum discount on properties sold through Right to Buy was increased significantly to £75,000 in 2021 and then to £100,000 in London in 2013. Since the 2012 and 2013 increases, the average discount has risen by 150 per cent to almost £68,000 in 2021/22, leading to a quadrupling in the number of RTB sales. RTB discounts have also increased by a further 10.1 per cent from April this year, in line with September’s rate of inflation, making it even harder for councils to deliver replacements. That means that the maximum discount is now at a record high of £127,940 in London and £96,010 outside London.

While the discounts available are positive for prospective homeowners, councils are simply left with too little to replace the homes sold, shrinking the country’s already stretched social housing stock further. The gross level of discounts offered since 2012 substantially outweigh the rent likely to have been paid by those tenants who purchased their properties in that period, perhaps by up to £2 billion.

Alongside the discounts, councils have also historically had to give the Treasury a proportion of the sales receipt as determined by individual local authority self-financing determinations confirmed in 2012 (although as already mentioned, councils can now keep 100 per cent of sales receipts for 2022/23 and 2023/24, which is welcome news). In addition, receipts can only fund 40 per cent of the build cost of a replacement home, with the remaining 60 per cent needing to be borrowed. This further hampers the ability to replace homes on a one for one basis.

Councils urgently need to be given the ability to set Right to Buy discounts locally to avoid the continued loss of desperately needed social housing stock. Different parts of the country see different house prices, demand for social housing and costs associated with building a replacement home, so a national policy leaves councils with no choice but to hand out significant discounts, which severely impedes their ability to deliver replacement homes. Councils might for example choose to offer a Right to Buy discount on a more proportionate and balanced basis, based on the amount of rent paid by tenants, more akin to a rent to buy model, rather than the current blanket availability of the Right to Buy at high discounts. Starting minimum discounts at a lower rate to reflect the amount of time that a tenant has rented the property (or for newer properties since the property has been built) has the potential to offer improved value for money and is also entirely consistent with the original concept from the 1980s that the discount represents the amount of rent paid by a household in their time in the tenancy.

With the number of Section 21 ‘no fault’ evictions increasing, as well as the cost of living continuing to rise and more Ukrainian arrivals presenting as homeless, councils are facing a national homelessness crisis. These pressures, combined with depleting social housing stock and an unaffordable private rented sector, is like a perfect storm for services trying to prevent homelessness, so addressing the chronic housing shortage, including through reform of Right to Buy, must be a priority.

Latest figures for England show there are a total of 120,710 dependent homeless children living in temporary accommodation, with 2,320 of these in bed and breakfasts. The number of people rough sleeping in London alone has increased by 24 per cent in the last year. Councils have warned us that these numbers are set to rise if government fail to address housing shortages.  

Councils often have very high waiting lists for social housing, and with the private sector becoming more and more unfeasible for some households due to widening gaps between Local Housing Allowance (LHA) rates and market rents, alternative housing options are becoming more and more difficult to source. With more than 1.2 million households on council house waiting lists, the LGA has been clear that potentially losing a further 57,000 homes by the end of the decade through Right to Buy is unacceptable.

Different regions have different needs, and therefore councils need to be given the best tools to address their individual local housing needs. As well as setting discounts locally and allowing councils to retain 100 per cent of sales receipts on a permanent basis, councils also need to be able to combine Right to Buy receipts with government grant funding, such as the Affordable Homes Programme, and transfer funding from sales to Arm’s Length Management Organisations (ALMOs) or local housing companies to give them greater flexibility over how the new council housing is delivered. The Government should also remove the acquisition cap which came into effect from 1 April 2022 and prohibited more than 50 per cent of Right to Buy replacements being delivered as acquisitions. The restriction that only allows 40 per cent of a replacement unit to be funded using Right to Buy receipts must also be removed to give councils maximum flexibility to deliver replacement homes. Finally, given that the existence of the cost floor mechanism is to ensure costs are recovered, and in the case of new build units, to (in theory) enable the further replacement of the sold unit, the cost floor should also be increased by inflation, specifically an index based on construction cost inflation, to ensure that this mechanism still serves its purpose.

May 2023