Treasury faces debt hike as PM announces council-house drive

Relaxation of local-authority borrowing rules projected to add billions to official figures

Theresa May speaks at the Conservative Party conference in Birmingham Credit: PA

By Jim.Dunton

04 Oct 2018

Theresa May’s surprise announcement that the government will relax borrowing rules for local authorities so that they can build more council homes has delighted housing specialists but will make life harder for chancellor Philip Hammond.

Closing the Conservative Party conference in Birmingham yesterday, the prime minister said restrictions on how councils could use their Housing Revenue Account funds to invest in new housing – rules introduced in 2012 – were being scrapped. Ending the restricition was already a Labour Party policy.

While the move is seen as a key step towards the government’s target of raising housebuilding levels to 300,000 new homes a year by the mid-2020s, it will also boost public-sector debt: the very thing the introduction of caps for councils had been designed to prevent. One estimate puts the figure at up to £15bn for the modest increase in new homes the government is targeting.


The Ministry of Housing, Communities and Local Government, which oversees the delivery of new homes, said scrapping the HRA cap would give councils the tools they needed to deliver “a new generation of council housing” at an estimated pace of up to 10,000 additional homes a year. Last year councils delivered around 3,000 new homes.

Housing charity Shelter said it believed the end of the borrowing cap could free up councils in England to deliver 27,500 new homes a year.

MHCLG said the cap would be lifted “as soon as possible”, with further details to be confirmed in Hammond’s 29 October Autumn Budget. However, other measures announced last month to fund the delivery of new affordable housing attracted criticism from councils for involving funding that would not be available until 2022.

In her speech, May said solving the housing crisis was the biggest domestic policy challenge of this generation.

“It doesn’t make sense to stop councils from playing their part in solving it,” she said.

“So today I can announce that we are scrapping that cap. We will help you get on the housing ladder and we will build the homes this country needs.”

Currently the government tells individual councils how much it will allow them to borrow against their housing stock and the revenue it generates, but property analyst Savills said local authorities had the capacity to take on £10bn-£15bn in additional debt as a result of the policy reversal.

Housing consultancy director Steve Partridge said the figure would to equate to up to 100,000 more homes, with at least 15,000 more council homes deliverable each year.

“Subject to the detail of the announcement and the precise timing and arrangements to be put in place, this could offer a great opportunity to add significantly to the number of new homes provided by councils,” he said.

“The appetite from authorities in putting forward their recent bids for extra borrowing headroom in the existing system has clearly shown the extensive ambitions of councils to make a big contribution to the delivery of new affordable homes.”

Rob Whiteman, chief executive of the Chartered Institute of Public Finance and Accountancy, said the end of the cap appeared to confirm that the Treasury’s historic concern that council borrowing to build homes increased the public sector borrowing requirement had been “overcome by the anticipated need for greater post-Brexit workforce and social mobility”.

He added that it was “an unfortunate irony” that councils could borrow for commercial investment purposes outside their own boundaries, but cannot borrow to build much needed homes within their areas. 

Councils and the construction sector have welcomed the announcement of the cap’s pending abolition. However, if councils delivered new homes at the rate indicated by MHCLG – or the upper end of Savills’ projection – the rate would still fall short of the numbers delivered at England’s council-house peak.

In the early 1970s, when housebuilding was at the 300,000 units-a-year level the Conservative Party has set as its goal for the next decade, councils were delivering more than one-third of those homes.

A report from the Association of Retained Council Housing and the National Federation of Arm’s Length Management Organisations last year said all councils wanted new homes of all types and tenures.

It suggested that if councils used their entire HRA borrowing headroom to fund new homes around 22,500 new properties could be delivered, based on 2016 figures. The report estimated the average all-in development cost of each new home at £140,000 to £145,000.

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