Funding the council houses of the future

The review of council housing finance promises sweeping changes. Colin Woods examines the proposals.

After months of inactivity, the output from the review of council housing finance finally started to appear during the summer. First we got the ministerial statement on 30 June and then just three weeks later the consultation paper came out to add some meat to the bones of the statement. This could result in one of the most far reaching set of changes to local authority housing for decades.

The review first saw the light of day in the Housing Green Paper in 2007 and throughout 2008 there were numerous working groups and consultation exercises taking place on the issues around council housing finance. In addition a number of research projects were carried out looking at the existing allowances within the subsidy system.

The key headlines from the consultation paper are obviously the proposed dismantling of the housing subsidy system and the option of self financing linked with redistribution of the national housing debt. Many have been arguing for some time that a locally controlled ‘self financing’ system is far better than a centrally controlled one and the government is now acting on that.

However the consultation paper does also cover a number of other issues and is worth a wider view following the detailed work that has been undertaken by numerous groups during 2008 to identify the problems with the current system.

They can be summarised as:

• Lack of fairness in the subsidy allowances caused by trying to set local allowances on the basis of a national system;
• Redistribution of rental income seen as unfair as 75% of local authorities now paying into system;
• The annual nature of the subsidy system mitigates against councils developing long term plans particularly in respect of investment in the housing stock;
• The subsidy system has become increasingly complex and correspondingly less transparent;
• All the above has resulted in local accountability for the housing service becoming weaker.

In order to address these problems the consultation paper proposed two options for consideration.

Self Financing

One is the ‘Self Financing’ route whereby councils would keep their rental, Right to Buy sales receipts and other income but there is a one off allocation of the national housing debt of around £17bn. This means councils would be in a position to develop a 30-year business plan for their housing service and hopefully borrow against that business plan, although there may still be controls on the amount that can be borrowed.

This should allow councils to plan over a much longer time period particularly in respect of investment in their housing stock and potentially also for the development of new affordable housing. Linked to these freedoms though there will be a transfer of risk to the ‘Self Financing’ HRA.

The key question for local authorities trying to assess what self financing means for them is "How will the mechanics of debt redistribution work?" We look at this issue later.

Enhanced Subsidy

The other option came as somewhat of a surprise and is simply an improvement on the current national housing subsidy system. This would involve:

• three to five-year fixed subsidy allowances rather than annual;
• Either redistribute debt based on value of housing stock;
• Or centralise debt with an annual charge to each council;
• National Ring Fence so that any surpluses generated through the subsidy system are reinvested in affordable housing.

At first glance it is difficult to see that this option really addresses the problems with the current system and would leave councils still at the mercy of the determinations within the subsidy system, albeit they are longer term.

Other Issues

The other issues that the consultation paper addresses are quite widely spread. One of the key ones is the research that has been carried out into the adequacy of the current subsidy allowances for management and maintenance and the Major Repairs Allowance (MRA).

As many would have suspected, the research has shown that the allowances are inadequate and that Management & Maintenance Allowances should rise 5% nationally and more significantly that the MRA should increase on average nationally by 24% in order to meet the future work to maintain Decent Homes and 19% to address the backlog over a five-year period.

These increases will be important in all options – even self financing – as they will have a bearing on the value of each council’s stock and hence the amount of debt redistributed to it.

Other issues addressed by the consultation paper include:

• The Housing Revenue Account (HRA) ring fence with research identifying that at least 40% of general management costs are additional to core management costs;
• Leaseholders – service charges and sinking funds;
• New Build opportunities for councils;
• The future of stock transfers.

Proposals include strengthening the HRA ring fence and greater clarity in the recharges between the HRA and the General Fund and giving councils the power to set up sinking funds for works to leaseholders stock where supported by leaseholders. On stock transfers the paper suggests that in future a transfer will receive no more financial support than councils would under self financing.

The issues covered by the consultation paper are quite broad, although many will be obscured by the major headline of the self financing option.

Self Financing – Redistributing the debt

There are a number of fundamental problems with the way the system works currently but one of the key issues is the lack of any correlation between the housing debt held by authorities and the surpluses (excluding debt charges) that each authority generates.

One of the reasons that the financial arrangements in the housing association sector work so much better than the local authority system is that associations are able to borrow against the future income streams and therefore plan better – unline authorities who depend on the annual determinations made by government.

The housing debt held by local authorities is nevertheless quite low, in aggregate. The DCLG quotes this as about £7,000 per dwelling (less than half that of the association sector). The logic behind the debt redistribution proposal is therefore quite straightforward in principle:  reallocate the existing debt based on individual authorities’ ability to service it…

Fine in theory - but what about the practice? This is the tricky bit. There are more than 180 stock holding authorities left in the system. How does one reallocate it all so that everyone is happy?

The consultation document proposes that housing debt would be allocated to councils on the basis of each council’s ability to service it, using the same updated figures for costs of management, maintenance, major repairs and income that would be used to calculate subsidy if the subsidy system were to continue.

It goes on to suggest that each council's existing “debt would be adjusted to reflect the value of its stock” and that the “value of the stock would be calculated from the present value of the cashflows in the business plan”. The (30 year) business plan itself would be based on a set of common service standards and government rent policy.

The implication is therefore that the Department for Communities and Local Government wishes to use a variation of the current formulaic approach to allocate the debt. This may differ of course from the authority’s own valuation of its stock.

The DCLG is clearly keen to avoid a separate negotiation with all the authorities remaining in the system but at the same time each authority must be prepared to assess whether the proposed deal works for it.

Despite the progress made, it is recognised that none of this can be delivered quickly so how it will be dealt with by the opposition parties in the year of an election also remains an unknown at present.

But the first steps on the exciting journey towards a new future for locally controlled housing have been taken. Who knows where it might lead?

The timetable for response to the paper was 27 October with the outcome being announced in early 2010. It is expected that the timetable for implementing self financing, if adopted, would run until 2012/13. The DCLG has left the door open for individual self funding opt outs and hopes to have the terms for that ready by next Spring, but suggests that this is subject to getting the necessary agreement with all authorities on those terms.

Of course in the interim there will be a major political event that could yet throw a significant spanner in the plans.

Colin Woods is director for housing finance and treasury at Tribal. He can be contacted by email at This email address is being protected from spambots. You need JavaScript enabled to view it. or by phone on 01264 338042.