Your flexible friend?

The government is set to introduce a new self-financing regime for council housing from 1 April this year. Alan Aisbett explains what it means for local authorities.

The concept of the Housing Revenue Account (HRA) has been with local authorities since 1985. The underlying aim of the concept was to prevent cross subsidy between rent and Council tax/rates. In addition to establishing the HRA the Housing Act 1985 also established the current HRA subsidy arrangements for local authorities. These arrangements involve the movement of "subsidy" between local authorities derived from nationally allocated assumptions on income, expenditure and supported debt.

As a consequence of the allocation of these notional assumptions local authorities will either achieve a surplus or deficit within their HRA. A surplus in an authority's HRA is "pooled" and re-allocated to an authority in deficit. The subsidy arrangements work in this way no matter how efficient or otherwise an authority manages and maintains its stock and as a consequence they have never been seen as an incentive to improvement.

Now following on from work started by the previous government and continued by the current government authorities will, from 1 April 2012, benefit from a new self-financing regime for their council housing. However, as will be explained, the constraints of the new system will make it difficult for authorities to undertake housing redevelopment and new provision in the HRA and it is likely therefore that new emerging joint venture or fund models for mixed tenure housing will have an increasing role.

How the self financing regime works

The government has published new guidance, Implementing Self Financing for Council Housing, which sets down the proposed new arrangements in detail. The aim of self financing is to put local authorities who still own housing stock in the position where the housing stock is supported from income ie rents. This change will be achieved through a re-adjustment of each local authority's housing debt.

The basic method of calculating the reallocation of housing debt is through the use of a 30-year notional business plan of income and expenditure for each local authority, in effect a notional "stock transfer". This will give each local authority a basic valuation of its stock and the amount of debt which the stock will support. A payment either to or from each local authority will be made to reflect the difference in the value of the stock and the notional housing debt currently supported under the HRA subsidy system (ie if the valuation is lower government will pay the difference and if higher the local authority).

How are valuations reached?

Valuations of each local authority's stock will be based upon assumptions about forecast income and expenditure on the stock over 30 years. Assumptions of income will reflect the government's social rent policy (formula rent, convergence policy and limit on rent rises) and 100% rent collection with 2% voids. Expenditure needs will be based upon independent research on costs and on the assumption that 100% of the works are funded.

The valuation will also exclude income and expenditure from houses planned to be demolished from the scheduled demolition date. Local authorities will continue to hand over to government, at least for the current spending review period, 75% of net receipts from Right to Buy sales. However, the valuation will take into account forecast lost income from Right to Buys over 30 years based on OBR national forecasts for house sales (and authorities will continue to retain 25% of net receipts). PFI subsidy payments remain unaffected resulting in increased valuations and debt for local authorities with projects. Valuations will be reached using the 6.5 per cent discount rate currently used for stock transfer.

Borrowing limits

The government are also preparing to introduce borrowing limits within the Housing Revenue Account. Whilst significant rental income may allow local authorities to borrow within the prudential borrowing regime the government's priority is reducing the national deficit. Therefore whilst borrowing may be affordable locally it may not be nationally.

The borrowing limit for each local authority will be set at the level of the self-financing valuation. This will allow some limited borrowing "headroom" for those local authorities with less actual borrowing than that assumed under the HRA subsidy rules. However if actual local authority borrowing is greater than that attributed under HRA subsidy rules then the borrowing limit will be increased to take this into account (conditions will be put in place to avoid authorities artificially increasing their borrowing capacity).

Furthermore there will also be a positive adjustment for those local authorities who have incurred borrowing under the prudential regime to fund new house building under the HCA grant supported new build programme (LANB). Such borrowing is currently outside of the HRA subsidy system.

Miscellaneous

The legislation will also allow the government to re-open any settlement should there be changes in one or more of the factors underpinning the valuation (ie income, expenditure and debt).

Notwithstanding the abolition of the HRA subsidy regime, the requirement to retain a separate Housing Revenue Account will remain to avoid cross subsidy. The government also intends to rationalise the consents regime requiring a consent for disposing of housing land only where stock occupied by tenants is involved. Where any local authority is considering a stock transfer in the future the financial terms will need to be comparable with self financing and no government support can be assumed.

A real flexibility?

Whilst the aim of the reforms to the HRA subsidy rules is in theory greater freedom and flexibility for local authorities the constraints of the allocation of debt and borrowing ceiling will have a significant impact. Some local authorities will be allocated debt when they are currently almost or fully debt free. The limits on borrowing will mean those authorities who have reduced their debt below the notional amount supported by the HRA subsidy regime will possess some borrowing "headroom". Any attempt to artificially increase borrowing power leading up to 1 April 2012 will be negated.

As borrowing to fund new council build will become ever more difficult local authorities may need to look at "off balance sheet" or non-HRA means of building new homes. A corporate entity will take land and buildings outside of the HRA (although authorities may be wary of creating subsidiaries should the government impose limits on local authority "group" borrowing). However, unless subsidy is available dwellings at purely social rent levels will require a mixed tenure approach as there is no guarantee of cross subsidy from sales in the current market. With a mix of local authority land and private sector capital (equity, debt and potentially institutional investor) there are structures available for mixed tenure homes which can be tapped.

Alan Aisbett is a partner at Pinsent Masons. He can be contacted on 0121 626 5742 or by email at This email address is being protected from spambots. You need JavaScript enabled to view it..