Removing the Housing Revenue Account debt cap
Readers of QHU, and not just those concerned with council housing, will be aware of the recent removal of the Housing Revenue Account (HRA) debt cap. This attracted a lot of attention, not least because it was unexpected.
We published an article here a year ago about a £1bn programme based on a partial relaxation of the housing borrowing limits. We little realised that within 12 months or so the debt cap would be removed completely for all local authorities.
And that is the point. For once, there are no strings attached. The Limits on Indebtedness (Revocation) Determination 2018, issued at the end of October last, does what it says in the title and it really is as simple a measure as the civil servants could achieve.
In other words, local housing authorities are no longer required to keep their debt within pre-determined limits, derived from the selffinancing settlement in 2012.
This is a radical change. When local authorities with housing stock left the HRA subsidy system in 2012 it was on terms acceptable by the Treasury, which wanted to ensure that for the sake of public sector borrowing controls there were limits on the amount of housing debt local authorities could hold. Clearly, the Prime Minister's desire to encourage local authorities to build more homes meant that the Ministry of Housing, Communities and Local Government was able to persuade Treasury that the loss of these borrowing controls was a price worth paying.
The immediate question is what use local authorities will make of this new freedom? The Government is hoping that the result will be a significant boost to housing supply; and certainly the signs are encouraging. Local authorities have been vying with one another to announce substantial programmes of new homes. The scale may still be modest by comparison with the commercial house-builders and the larger housing associations, and longlost development skills will need to be sourced; but local authorities are now real "players".
Local authorities may also use their new borrowing power to increase their stock numbers in other ways. Local authorities could look at expanding their acquisition programmes, whether 'off the shelf' new build units or ex-Right to Buy properties. They may even decide to acquire portfolios of properties, perhaps from housing associations looking to rationalise their scattered holdings.
In assessing these and other opportunities, local authorities will appreciate that though the Government has removed all the debt cap constraints, this does not mean that there are no constraints at all. The removal of the debt cap merely provides scope to borrow and a decision to borrow needs to take account of the advice of the so-called Section 151 officer, who must assess whether his or her local authorities can afford to take on the debt; and key to that decision will be the availability of surplus income to service the loan. Low-interest loans are available from the Public Works Loan Board but they still need to be repaid. Any debt is a direct burden on the HRA and an indirect one on local authority finances as a whole.
Local authorities will also be aware that the basic HRA rules have not changed. The HRA remains a ring-fenced account, which means that it must neither be subsidised by, nor subsidise, other local authority finances (called the General Fund). Complex rules apply to the appropriation of land from the General Fund into the HRA (although an interesting change to these rules is in prospect) and there are also specific rules attaching to the disposal of HRA property, requiring either general or specific consent from the Secretary of State. Sale proceeds, whether from the Right to Buy or otherwise, are also the subject-matter of regulations, guidance and so-called retention agreements (which are also likely to be revised).
Then there are rules which apply to council housing, whether within the HRA or not. Local authorities can only issue secure tenancies, conferring the Right to Buy; and there is to be a new rent standard, applicable to local authorities as well as housing associations. Some of the 'corporate' concerns that local authorities had – higher value voids and fixed term tenancies – have gone away; but regulatory pressures will increase and align local housing authorities more closely to private registered providers.
And beyond these rules, local authorities will need to allay tenants' concerns about using the new capacity to increase supply rather than improve existing homes, particularly to deliver an enhanced decent homes standard.
The removal of the HRA debt cap is indeed significant: it is the most radical (and positive) change since 2012; and we expect to see a good deal of new build and other activity arising from it. It does however bring into focus how both existing and new rules apply to the HRA and to council housing. Local authorities and those doing 'business' with them will need to familiarise themselves with those rules and, as in the past, form a judgement about whether it is best to work within the HRA or outside it.
The latest version of our Unofficial HRA Manual, reflecting the debt cap and other changes, is now available. If readers have not had a copy, please contact us.