Finance leaders welcome removal of HRA cap but say it is ‘not a silver bullet’ for the housing crisis

Projecting growth

Estimates of what the cap’s removal will translate to in terms of both debt and unit growth, vary between the government, Office for Budget Responsibility (OBR) and sector analysts.

In its initial 3 October 2018 release, the Ministry of Housing, Communities and Local Government said that the cap “gives councils the tools they need to deliver a new generation of council housing – up to an estimated 10,000 additional homes a year”.

The Budget ‘red book’, published on 29 October – the same day the cap was officially lifted – appeared to tweak this slightly, so that the figure becomes the total annual new build from local authorities as opposed to ‘additional’ capacity specifically. “[It will enable] councils to increase housebuilding to around 10,000 homes per year,” it said.

By contrast, consultancy Savills has said that it believes local authorities in England could build 15,000 homes a year in England, as the result of a potential £10bn-£15bn in additional debt.

The OBR was far more conservative in its Budget day ‘Economic and Fiscal Outlook’. It said that in the period to 2023/24, public sector housebuilding will increase by just over 20,000, but that, because this will be offset in the wider sector “by lower private sector housebuilding (including by housing associations)”, the aggregate additional housebuilding across the entire sector (private and public) will be just 9,000.

Helen Collins, head of Savills Housing Consultancy, told the conference that the sector was starting to see the re-emergence of land acquisition teams in local authorities.

She said she recognised an opportunity for Homes England to extend the scope of its strategic partnerships scheme – the second £653m allocation of which was announced on Tuesday across a further eight housing associations – to include local authorities.

“Now wouldn’t it be great if Homes England partnered up in a strategic way with ambitious local authorities, again, so that the local authority can access grant, which is an important part of the picture,” she said.

Also speaking at Wednesday’s summit, Paul Johnson, director at the Institute for Fiscal Studies, said that the uncertainty regarding how local authorities will respond to the cap lifting, as well as a recognition that “the large majority don’t use all the headroom that they have at the moment” both contributed to the OBR’s estimates.

“The reason the OBR give for the relatively small amount of houses built is that they assume this will crowd out some housing associations and private sector building, because they see a limited capacity in the overall sector for building, again with a lot of uncertainty,” he said.

Borrowing options

Some commentators have questioned whether the lifting of the cap could see councils look beyond the Public Works Loan Board (PWLB) towards alternative forms of debt finance.

“I think it’s likely local authorities will continue to pursue all options of financing,” Mr Williams, from Hackney Council, said.

“Hackney at the moment currently has no external debt and we internally borrow, and that’s partly as a result of the self-financing which saw all of our HRA debt removed, but certainly going forward I envisage with the ambition that we have, and the building programmes that we’re lining up, we will need to borrow – whether it be PWLB or bonds it will depend at the time when we make that borrowing decision.”

Jonathan Clarke, managing director at advisory firm Centrus, said the low rates PWLB can offer would be a barrier to other investors making a mark in the sector.

“The number of investors out there who would lend to local authorities for any sort of term inside PWLB is very, very limited.

“There have been a couple of bonds done by local authorities; you could argue sometimes about how these things were priced, [but] in reality they weren’t priced inside PWLB, they were just structures that PWLB wouldn’t do, so you can’t borrow on an inflationary basis for example from PWLB.”

He added: “For me there is nothing wrong with PWLB, I would focus on what you do with the money, rather than where you raise it from.”

However, speaking at a separate session, Danny Mather, head of corporate finance at Warrington Borough Council – which itself issued a £150m bond in 2015 – suggested more local authorities may follow into the capital markets.

“I do think some local authorities will come and borrow through a bond structure, largely to get away from probably the government-controlled borrowing mechanism of the PWLB.”

Mr Mather also pointed to a big opportunity for councils to fuel housing growth elsewhere through its wider treasury strategy.

“There’s roughly £42bn sloshing about in the market, [of] local government investment on a day-to-day basis – most of that is invested in the banks, or lent, [and] the local authority is earning a minimal interest there.

“You would be lucky if you got a 0.4 per cent a year, but I think if products could be structured from the housing sector, particularly secured products between the two-to-five-year range – I think they would be very appealing for the local government sector to actually invest in.”

HA and LA relationships

Speaking about the impact of the debt cap removal on housing association and council relationships, Tom Paul, treasury and commercial director at Optivo and Matt Cooper, treasury and tax director at Places for People, both agreed that “there’s enough of a housing crisis for us all to solve”.

Stephen Kitching, client director at Arlingclose, added: “RPs and local authorities have a lot to offer each other, whether through a short-term treasury loan or a really long-term joint venture or partnership.

“And the flexibility that you get from that, whether as lender or borrower.”

Mr Mather suggested that local government “will no longer give you property for a pound”.

“We’re actually going to develop it ourselves, and generate the maximum commercial value we can for local government,” he added.