House of Commons - Financing of new housing supply - Communities and Local Government Committee

Financing of new housing supply - Communities and Local Government Committee Contents

6 The role of local authorities

88. We consider in this chapter the role that local authorities can play in the financing of new housing. Some of our evidence suggested that local authorities had a direct contribution to make to the provision of new homes; Cllr Clyde Loakes, Vice Chair of the Local Government Association's Environment and Housing Board, for instance, pointed to research that showed "in every region of the country it is cheaper for the local authority to build a new build than for a housing association to do it".[205] Other evidence referred to councils' role as enablers of housing development, and the important contribution they could make through the provision of land.[206] During our visit to the West Midlands, we saw for ourselves the direct role the councils in Birmingham and Dudley played in the provision of new housing supply, and the effective partnerships they had established with housing associations, developers and other organisations.

89. In this chapter we will first consider how to maximise the opportunities for local authority house building offered by reform of the Housing Revenue Account (HRA); we will then examine the contribution local authority land can make to development; finally, we will look at the implications of the revival of the Right to Buy upon local authorities' ability to fund new housing development.

Reform of the Housing Revenue Account

90. The Government's evidence, provided in October 2011, described the reform of the HRA:

The abolition of the Housing Revenue Account subsidy system and a new system of self-financing should put councils in a better position to increase their supply of new homes. These reforms, which are being taken through in the Localism Bill [now enacted], will mean councils with their own housing stock will be able to keep their rental income in return for a one-off adjustment of their housing debt (councils will only be asked to take on extra debt if their rental income will be able to service it after costs are met). When reforms come into effect in April 2012, councils will have an average of 14% more to spend on their stock than under the present system. They will also be able to plan more effectively over the long term on the basis of a reliable income stream.[207]

Witnesses supported the reforms of the HRA in principle, and agreed that they could potentially increase the finance available for the building of new homes, but considered that there were further steps that should be taken to increase councils' borrowing capacity if the reform was to lead to the delivery of significant numbers of new homes.[208] In our view, it is important that councils are able, working in partnership, to maximise their potential contribution to the building of new homes. We consider some of the suggested steps in the following paragraphs.

HRA REFORM: MAXIMISING THE BENEFITS

Lifting the borrowing cap

91. Some witnesses expressed concern that, notwithstanding greater capacity to borrow under HRA reform, the Government was imposing a cap on local authority borrowing for housing. Birmingham City Council stated that it, along with a number of other authorities, would be at the "maximum cap at the start of the reforms and will therefore not be able to generate more funding for new housing in the short term until such time [as] that debt is repaid over the medium term".[209] We heard similar concerns when we visited Dudley. The Local Government Association (LGA) suggested that local government had a "strong track record of prudent financial management, a strongly positive net worth, and a manageable, low level of debt" and said that if "councils were to have the cap removed and follow the principles of the Prudential Code,[210] this would enable many councils to borrow to build additional housing".[211] The Chartered Institute of Public Finance and Accountancy (CIPFA) stated that the Prudential Code had "clearly proved that Local Authorities can be trusted to act prudently with regard to borrowing", pointing out that since 2004, when the Code was introduced, the Treasury had "never had to use its reserve powers to intervene in these borrowing arrangements".[212] It added that local authorities' borrowing for council housing was "around £7,000 per unit—less than half that of housing associations", and that "councils could borrow more than this and still stay within the agreed borrowing rules under the prudential borrowing framework".[213]

92. Asked whether he would reconsider the decision to impose a cap, Mr Shapps said that the answer was "no, for the time being, but I will keep this under review". He considered that the call for the cap to be lifted was essentially "a plea for more borrowing, and more borrowing means more debt". The Government was therefore "very hesitant lest we lose sight of the big national goal of getting the deficit under control and having a convincing plan in place to do that".[214] The 2012 Budget referred to the Office of Budget Responsibility forecasts that the HRA reform would "increase public borrowing more than originally estimated". It said that while these estimates were "very uncertain", if they remained the same, "then the Government will take action to address the increase in public debt".[215]

93. We understand the Government's desire to reduce the national deficit, and nobody wishes to see council borrowing for housing getting out of control. However, we consider that the principles of the Prudential Code should provide sufficient safeguards to ensure that council borrowing is affordable. Were the Government-imposed cap to be lifted and councils allowed to borrow within prudential limits, more finance could be raised for the building of new homes. We heard that it is cheaper for councils to build new homes than housing associations. Increasing councils' ability to do this would therefore secure good value for the taxpayer. We recommend that the Government lift the cap on local authorities' borrowing for housing, and allow councils to borrow in accordance with the Prudential Code. We are also concerned at the Government's warning that it will "take action" if public borrowing increases as a result of Housing Revenue Account reform. It is important that it does not place any further constraints upon local authority borrowing for housing. The cap is already unnecessary, and further borrowing restrictions would have a detrimental impact upon the contribution councils can make to new housing supply. Later in this chapter, we consider whether councils' borrowing for housing needs to be included within the public sector debt calculation.[216]

Sharing and pooling headroom

94. We also heard that additional homes could be built if councils were given the freedom to 'trade' or otherwise share the borrowing headroom created under HRA reform. London Councils referred to research they had commissioned, which had identified the 'trading' of headroom as one option London Boroughs could pursue to increase housing supply. They suggested that:

it may be the case that some boroughs will have the desire or need to access capital to invest in their housing stock, but are constrained by their debt cap from doing so. Similarly, some boroughs will find themselves with some borrowing capacity that they do not need to use, as their investment priorities can be met without borrowing. In these circumstances, there is the potential for the authority with higher needs but no borrowing headroom to access the borrowing headroom of the 'better off' authority. The lending authority could charge a fee for providing this capital [...].[217]

Another option put forward by London Councils involved boroughs with a shortage of land but a high borrowing capacity working in partnership with those in the opposite position to make best use of the limited financial and land resources available.[218] London Councils also suggested that in the longer term HRA reform could see councils "combining their HRA operations", potentially "even pooling or aggregating the debt caps of a number of authorities".[219] They said "that these options would require consent if not legislation from Government permitting them".[220] Birmingham City Council also expressed support for "a mechanism to allow the transfer of any headroom across local authorities" but warned that "this would be complex to administer and require an ongoing national framework to be maintained".[221]

95. Mr Shapps said that the Government was not minded to support pooling or swapping arrangements between local authorities. He welcomed "more innovation and creative ways of their working together" but explained that:

This is a settlement that has taken many years and a piece of primary legislation to work out. I have looked through all the figures and the percentages available to each authority, and although there is movement it is not that some authorities only have 2% more and some have 25% or something. There is not that much of a range in there. I think the average is 15%. I am satisfied that authorities can work within those means to make sure that they provide the best possible service to their tenants.[222]

96. We are disappointed that the Minister has ruled out allowing local authorities to pool or swap Housing Revenue Account borrowing headroom. Such arrangements could help to make best use of councils' borrowing capacity, enabling more homes to be built. In our experience, the Government is usually enthusiastic about local authorities collaborating, sharing services and pooling resources to achieve better value for money; we consider that it should take a similar attitude to joint working on housing finance. We recommend that the Government consult on proposals to enable local authorities to 'trade', swap and pool borrowing headroom. This should be subject to councils' agreeing that any borrowing under these arrangements will still be in accordance with the Prudential Code.

Changing the constitution of Arm's Length Management Organisations

97. We heard that borrowing capacity could also be boosted by enabling Arm's Length Management Organisations (ALMOs)[223] to change the way they are constituted. In June 2011, the National Federation of ALMOs (NFA) produced a report setting out a series of options for the future of ALMOs.[224] The Chartered Institute of Housing (CIH) said that "the approaches explored would all require ALMOs to be reconstituted so that their majority ownership passes from the LA to tenants".[225] Chloe Fletcher, Policy Manager at the NFA, said that the models would "allow the ALMO to borrow additional moneys privately, which would not count on the public sector [balance] sheet". Therefore, changing the ownership would enable ALMOs, amongst other things, to "significantly add to the new build properties in the country".[226] She also indicated that such models would not be necessary in financial terms if council borrowing for housing was classified as a trading activity and did not count towards public sector debt.[227]

98. The NFA's report set out three models. The first model involved "the ALMO having a much longer contract and on the local authority having a one-third (rather than sole) interest in the ALMO's ownership". The second model was similar but also involved the transfer of some vacant properties or land, thereby giving the ALMO an asset base. The third, and most radical, model involved a transfer to a "Community- and Council-Owned Organisation (CoCo)". This model would see the ALMO becoming "the owner of the stock, but on a different basis to current stock transfers".[228] The report set out some of the key legal implications of these models:

In Models 1 and 2, the ALMO is primarily still a management vehicle, but no longer majority-owned by the local authority. The authority could no longer award the management contract to the ALMO without a tendering process that complies with EU procurement rules. They would need to assess the risk that potentially another housing management provider could be awarded the contract. However, steps can be taken to reduce this risk while still complying with the rules.

In Model 3, where the ALMO takes ownership of the stock, there is no requirement for a tendering process. But it would mean that tenancies would no longer be secure council tenancies. However, legal steps can be taken which effectively give all tenants the same security in future as they enjoy now.[229]

99. We asked Mr Shapps for his view on the NFA proposals:

This could be the so-called CoCo model in particular. [...] actually, I like all this innovation. Colleagues in the House sometimes come to me with a chief executive or housing boards and put these ideas to me. I am always keen to explore them. Some of them stack up and some of them do not. They all have the same test, which is: number one, is it good value for the public purse; and number two, are the tenants going to be better off? Are they going to get better quality housing and more say over their housing? I am very keen to promote the interests, or allow tenants to, on all of these things. They are always subject to tenants being happy and voting on it, and I think it is absolutely right it should be that way.[230]

Chloe Fletcher confirmed that the NFA had held "very warm discussions with DCLG" but that it also needed the engagement of the Treasury.[231] She stated: "We have not been told that [the Treasury] is not interested; it is just that we are waiting for a meeting".[232]

100. In March 2012, Inside Housing magazine reported that the ALMO, Gloucester City Homes, was "set to become the first 'community owned, council owned' organisation", subject to its tenants approving the change in a vote later in the year. The report said that ALMO representatives had met with Mr Shapps the previous month "and he was reportedly 'positive' about the move".[233] A slightly different example can be seen in Rochdale. In December 2011, tenants of the ALMO Rochdale Boroughwide Housing (RBH)voted in favour of transferring ownership of 13,700 homes from Rochdale Borough Council to RBH, creating "the largest housing mutual in the country".[234]

101. We consider that Arm's Length Management Organisations should be free to adopt one of the new ownership models, subject to approval from the council and tenants. As well as promoting the involvement of tenants in the management of their housing, these models could also enable ALMOs to raise additional finance for the building of new homes (although any borrowing should continue to be affordable and sustainable). We are encouraged by reports that Gloucester City Homes will be consulting its residents on proposals to establish a 'community owned, council owned' organisation. We recommend that the Government give its support to those ALMOs wishing to adopt the new models, which would enable them to borrow prudentially to build more homes.

Changing the classification of debt

102. Some witnesses suggested that another way to increase councils' borrowing capacity would be to change the way their debt was classified, so that it was not included within the national debt figures. Jim Vine of the Building and Social Housing Foundation explained:

In the UK we work on the public sector net cash requirement, similar to the old public sector borrowing requirement, where all the debts of local authorities are treated as public sector debt. Pretty much everywhere else in Europe they use the GGFD—general government financial deficit—model, which means that trading activities, such as housing, are viewed as off-balance sheet, off the national debt figures. It would be a relatively simple step to move to that, because in terms of the perception of our national debt on international markets, which like to compare like with like anyway, they are probably looking at our GGFD figures anyway.[235]

Mr Vine said that he could not "see our moving on to the same accounting system as is used across the rest of Europe causing too much of a problem".[236] Westminster City Council proposed that local authority housing be "regarded as an activity outside the main public sector debt so councils would be brought into line with housing associations in their ability to borrow".[237] The CIH stated that, when four councils made this case for this change in 2011, it was rejected by HM Treasury.[238]

103. The Government argues that a cap on local authority borrowing for housing is necessary because of the need to reduce the deficit; by implication, a cap would not be necessary under the GGFD rules as such borrowing would be outside of the national debt. We are not convinced that the existing accounting treatment, or the cap, is justified. A change of rules would bring the UK in line with other European countries and enable councils to borrow on the same terms as housing associations. As we have already established, the provisions of the Prudential Code should be a sufficient control upon council borrowing. We recommend that the Government thoroughly examine a move to the General Government Financial Deficit rules and then consult on proposals.

SOURCES OF FINANCE

104. Birmingham City Council suggested that local authority bonds could provide a new source of finance for house building,[239] as well as an alternative to the Public Works Loan Board. It said that bonds had been used by councils in the past, pointing to its own use of a bond to finance to National Exhibition Centre. It pointed out, however, that "central government tightening of financial regulations on the use of public sector debt have made this much harder since the 1980s", and called on the Government to ease restrictions on bond finance.[240] The LGA told us that it was investigating the development of "a financing institution owned and run by the local government sector which would issue bonds on behalf of all participating councils". It considered that "this has the potential to deploy the sector's considerable financial strength to good effect and will manage risk in a collective manner".[241]

105. The New Local Government Network (NLGN) recently produced a report considering the potential of retail bonds in local government capital finance. The NLGN suggested that in some circumstances bond finance might prove cheaper for councils than borrowing through the Public Works Loan Board. It said that while the focus had previously been on wholesale bonds, "retail bond issuance could provide some unique advantages alongside the potential for a cheaper cost of credit": it could take place "on a smaller scale than wholesale issuance and as such would allow far more authorities to access bond markets"; it would allow for a "stronger, more local connection between citizen, council and housing investment"; and would enable authorities to "significantly widen their investor base".[242] We have already considered the potential of housing associations to issue retail bonds and established the need for robust regulation both to address any risks to balance sheets and protect the consumer.[243]

106. The bond markets could offer local authorities an alternative source of finance from the Public Works Loan Board. We welcome the Local Government Association's work to explore the possible establishment of a financial institution to issue bonds on behalf of councils. There are also good arguments in favour of local authorities issuing retail bonds to raise finance for housing: as well as potentially giving more authorities access to the bond market, they could also enable people to invest their money in a way that brings social benefits to their local area. We recommend that the Government work with local government to enable councils to raise finance through the issuance of retail bonds; in doing so, it should establish whether there are any current restrictions on bond finance that can be eased.

Local authority land

107. Councils could support the building of new homes through the release of their land. On the provision of land by public bodies, Andy Hull, Senior Fellow at the Institute for Public Policy Research, said that it was important to bear in mind that "51% of the publicly held land that is fit for residential development is owned by local authorities, not by central Government".[244] Cllr Clyde Loakes, Vice Chair of the LGA's Environment and Housing Board, said that local authorities were "doing a lot already" to bring land forward for development. He explained:

In the scenario where they cannot build because they cannot borrow the money, they are working in partnership with housing associations, private developers, adding their land to a piece of land that a private developer has got to create a better scheme.[245]

On the suggestion that a local authority might contribute a site for housing alongside privately-owned land, John Stewart, Director of Economic Affairs at the Home Builders Federation, said:

Surely the local authority should work with the developer and if the two sites combined make a critical mass and give a good scheme, the two of them together can come up with a good scheme that meets the needs of local people.[246]

Cllr Loakes said in response that this was what tended to happen but that there were "instances where you cannot necessarily bring the two sides to agreement".[247] We urge local authorities and developers to work together wherever possible to make land available for development in a way that meets the needs of local people. We encourage councils to enter into partnerships with developers, and to maintain equity involvement in the development to secure best value for the taxpayer.

108. We heard that there were many examples of local authorities using their land to support development. Birmingham City Council, which had a programme to build 1,340 new homes for both rent and sale, said that it had established an "innovative model for derisking development and attracting private sector developers to build in challenging market conditions".[248] It stated that its model—branded as the Birmingham Municipal Housing Trust (BMHT)—demonstrated how councils could "use their land to incentivise development".[249] The Council explained that under the model:

The Council enters into a profit sharing arrangement with the developer through which instead of receiving the land plot premium at point of sale the Council receives a percentage of the overall development profit.[250]

109. Oxford City Council told us that it had established a joint venture partnership to build around 1,000 homes on its own land. It said that this project aimed "to deliver the greatest number of affordable homes at social rent as is possible in the current economic circumstances".[251] David Edwards, Executive Director of Housing and Regeneration at the City Council, said that it effectively had "a relationship with a master developer and funder for a period of probably five to eight years".[252] We have already established that the investment of public land into "build to let" projects can play an important role in securing investment from large financial institutions.[253]

110. The provision of local authority land can make a contribution to the financing of new housing supply by helping to reduce the risks of development and to make it viable for the private sector developer and social landlords. It can also help ensure that the maximum number of affordable homes is delivered. We encourage all councils to consider how they can release land to support the delivery of new homes, whilst securing full value from the development. There are a variety of ways to do this, in line with the localism agenda.

The Right to Buy

111. The Government plans to "reinvigorate" the Right to Buy. Laying the Foundations set out proposals to raise discounts to make the Right to Buy more attractive to tenants and included a commitment to "replace every additional home sold under Right to Buy with a new home for Affordable Rent".[254] This has implications for the supply of housing.

112. In December 2011, the Government launched a consultation on Reinvigorating Right to Buy and One for One Replacement. As well as a proposal to increase the cap on discount entitlement to £50,000 throughout England, the consultation set out options for how the replacement programme could be delivered. These options ranged from local delivery, where receipts would be left with the local authority, to national delivery, where receipts would be brought together centrally and then allocated by the Greater London Authority and the Homes and Communities Agency.[255]

113. On 12 March 2012 in its response to this consultation, the Government announced that it would increase the discount cap to £75,000. It also stated that the best option for delivery would be "a version of the 'Local Model with Agreement'". It explained how this would work:

The Government expects that, if it were to retain the net receipts, it would be able to provide one-for-one replacement homes while restricting the contribution made from the net Right to Buy receipts to 30% of the cost of the replacement homes. Where a local authority is satisfied that it can match this (in other words, that it could apply the remaining receipt—after deducting the cost of covering the debt, administration costs etc—to new affordable rented housing, while restricting the contribution made from the net Right to Buy receipts to 30% of the cost of the replacement homes), the Government will be willing to enter into an Agreement that the authority may retain the remaining receipts.[256]

THE RIGHT TO BUY: CONCERNS

114. We heard a number of concerns about the Government's Right to Buy proposals. In particular, some witnesses questioned the Government's ability to achieve one-for-one replacement. Peter Williams, Director of the Cambridge Centre for Housing and Planning Research, said that the "idea that it will allow one-for-one replacement seems highly questionable" and considered it to be "a policy that has been advanced in advance of the evidence".[257] Hometrack, an independent property analytics business, had carried out analysis of the Right to Buy proposals, on the basis of a £50,000 discount cap. This analysis found "that to deliver one new home would require an average of 1.4 RTB sales", ranging "from a 1.1:1 rate in the North West to 1.6:1 in London".[258]

115. There was some unease amongst witnesses that social rented properties sold under Right to Buy would be replaced with housing for Affordable Rent. David Orr, Chief Executive of the National Housing Federation, was concerned that one-for-one replacement differed from "like-for-like, because we would be selling social rented homes and replacing them with near market rented homes".[259] Some witnesses also said that the impact of the policy on the availability of social housing stock would be particularly acute in certain areas. Cllr Paul Andrews, representing the Association of Greater Manchester Authorities, said that past experience in Manchester had suggested that Right to Buy took "large, family-type houses out of the stock"; he considered that there had to be a way of replacing this type of housing in particular.[260] The Highbury Group on Housing Delivery considered that there had to be "one for one replacement in qualitative as well as quantitative terms: i.e. the receipt from the sale of a low rent social [three] bedroom house in inner London should be sufficient to fund the provision of a replacement low rent social [three] bedroom house in central London".[261]

116. Mr Shapps accepted that there was a difference between "one-for-one" and "like-for-like" replacement, but suggested that the need to get the figures "in proportion". He said that of the 2.5 million homes to which the Right to Buy would apply, "this policy looks to take 100,000 of them over a period of time". He thought that this was "unlikely to decimate the stock of social housing".[262]

117. We heard some concern about the interaction between Right to Buy and the moves to self-financing resulting from the reform of the HRA. Oxford City Council said that the "ability of councils to repay the substantial housing debt that they will take on as part of the HRA reforms would be significantly undermined as the size of their stock is reduced through RTB purchases". It continued:

This would in turn limit Councils' ability to fund new house building and, in a location such as Oxford where land values are high and developable land in short supply, would mean that value taken out of the council's stock would most likely be used to build affordable homes in other locations where easier and more profitable development conditions obtain.[263]

118. Many of those submitting evidence argued that councils should be able to retain all their receipts at the local level. David Edwards, for example, said that in Oxford the City Council "would need a significant proportion of those receipts because, in our context, for example, to provide a two or three-bedroom family house will cost us, the council, at least £300,000". He argued: "The more we are left short, the more we are not going to be able to finance or replace housing stock".[264]

119. In its analysis of consultation responses, the Government stated that 80% of those responding to the question about the delivery of replacement housing—the majority of whom were local authorities—favoured either the "local model" or the "local model with direction" (under which the local authority retained all receipts but restrictions were placed on their use); 64% favoured the "local model" in particular.[265] However, the Government considered that these models did "not give sufficient assurance of one-for-one replacement for England as a whole" and, because of this, it had opted for the "local model with agreement" as described above.[266] The initial consultation document stated tellingly that this model added "a layer of administrative complexity and cost for both local authorities and this Department" and that it "would require local authority proposals to be assessed, specific arrangements to be drafted, and monitoring and enforcement arrangements implemented".[267]

120. In March 2012, following the publication of the Government's consultation response, the LGA expressed concern about the "single centralised" £75,000 discount cap, which it said failed "to take into account local housing demand and the cost of building new homes". It said that its consultation with councils had indicated that "different models would provide optimal levels of demand for right to buy and receipts for re-supply in different areas" which reinforced "the argument that councils are best placed to set the discount locally".[268] It was also disappointed by the Government's opting for the "local model with agreement" which would "make it difficult for many councils to retain receipts to reinvest locally because of constraints on alternative sources of funding, like land and borrowing".[269] It called on the Government to ensure that the "criteria 'agreement' required for councils to retain receipts is light-touch, does not require burdensome monitoring or reporting and allows councils reasonable timescales to reinvest receipts".[270] It also proposed that the Government review the discount in April 2013, and that "newly built properties should be automatically exempt from pooling arrangements rather than requiring councils to apply for exemption".[271]

121. There were also concerns that Right to Buy, along with the NewBuy scheme, would lead to a reduction in the availability finance in other parts of the mortgage market.[272] Paul Smee, Director General of the Council of Mortgage Lenders, said, however, that he thought that the scheme could be "be accommodated". He added that lenders would "want to look at the properties that are being purchased to ensure that those who are applying under the scheme can afford the payments under their mortgages and do not get into financial difficulties with them".[273]

122. We are not convinced that the Government will deliver on its plans for "one-for-one" replacement of additional properties sold under the new proposals, especially if the discount cap is set as high as £75,000. We are also concerned that the proposals will lead to a reduction in the country's social housing stock, with social housing being replaced by homes for Affordable Rent. Moreover, without a commitment to "like for like" replacement, there is a risk that more expensive family homes could be replaced by cheaper flats. We recommend that the Government ensure "like for like" replacement of homes sold under Right to Buy, so that each socially rented property is replaced by a new home of the same type for social rent. In order to achieve this, we further recommend that the Government commit to making additional resources available in the event that "like-for-like" replacement cannot be delivered under the proposed levels of discount.

123. We are concerned about the Government's proposals for the distribution of receipts, which, by its own admission, will be costly and complex for both local authorities and the Government. Moreover, even if the proposals succeed in delivering "one-for-one" replacement at the national level, they are unlikely to do so at the local level. They could see replacement homes concentrated in parts of the country where it is cheaper to build, leading to significant reductions in social housing stock in some higher value areas. There is a risk that social housing stock could disappear altogether from places, such as rural villages, where it is already limited. Along with the majority of respondents to the Government's consultation, we favour a local model under which all receipts are retained by the local authority. We recommend that the Government reconsider its decision not to opt for a local model for the replacement of additional homes sold under the new Right to Buy arrangements. We further recommend that the Government grant exemptions from increased discounts to places such as rural villages and other areas where social housing is limited and cannot easily be replaced. These places could otherwise be left with no social housing stock if there is significantly increased take-up of the Right to Buy.

124. Some councils will be unable to meet the Government's requirement that Right to Buy receipts only fund 30% of the cost of the replacement homes, and will therefore not have the option of local delivery. This is especially true for those authorities with limited borrowing headroom, either because they have taken on debt under the Housing Revenue Account reform or because, often through no fault of their current administration, they are burdened with historic debt. The Government must ensure that these authorities are not precluded by their debt from replacing properties sold under the Right to Buy.

125. In the longer term, in line with the spirit of localism and moves to self-financing, we recommend that the Government give councils greater freedom to decide on the best housing solutions for their communities. The Government should consult on allowing local authorities to apply to the Government for an exemption to the Right to Buy where the council can demonstrate that housing is limited and cannot easily be replaced.

EXTENSION OF THE RIGHT TO BUY TO HOUSING ASSOCIATIONS

126. Some housing association tenants also have the right to buy their property under the Preserved Right to Buy.[274] The housing association, Home Group, has suggested that the Right to Buy should be extended more widely. It set out a proposal, involving the use of the historic grant discussed in the previous chapter:

[Registered provider] homes could be offered to tenants at a sale price which would cover the build cost of a new affordable home of a similar size locally. The sale proceeds generated would be used by the RP to build a home of equivalent size within the same local housing market area wherever possible. In order to help the tenant move into home ownership, Government would gift some of the grant that was utilised when building the original home to the tenant to use as a deposit when seeking a mortgage.[275]

Mark Henderson, the Chief Executive of Home Group, said that he would welcome "clarity about the former grant that would allow us to take it to the next step to model that through and, perhaps, potentially look at some pilot local authority areas where we could see whether it actually works and how it might be implemented".[276]

127. When we asked Mr Shapps about the extension of the Right to Buy to housing associations, he replied:

I would love to do it, if I am blunt. The trouble is, again back to Government debt, if we were to do that, these are housing associations who have gone out, borrowed the money or taken some subsidy from us and built the things, have a 30-year income projection, and would quite rightly turn around to the Minister and say, "We are happy to sell this house. Now you need to pay us per home that is sold for the privilege." Guess what? We do not have the money.[277]

Home Group, however, stated that its proposals "would not require 'new' Government money but the innovative recycling of historic grant".[278]

128. For some housing associations giving tenants the Right to Buy might be a useful means of raising funds for new housing. We are not convinced that it needs to cost the Government any money. We recommend that the Government work with housing associations wishing to introduce the Right to Buy to explore how their proposals might work in practice. If it is satisfied about levels of risk and value-for-money for the taxpayer, it should allow housing associations to run pilot projects. Any introduction of the Right to Buy should be a matter for individual housing associations.

Conclusion: the role of local authorities

129. We have seen that local authorities, working in partnership, have the potential to make a significant contribution to the financing of new housing supply. There is, however, a risk that local government will not be able to make the most of this potential because of constraints placed upon it by central government. The moves towards self-financing under Housing Revenue Account reform are positive and could significantly increase the finance available for housing supply. However, the cap upon borrowing, the refusal to allow councils to share headroom, and the centrally-imposed Right to Buy proposals will all place restrictions on councils' ability to finance the building of new homes. The local government sector should be trusted to manage its own finances in accordance with the Prudential Code. We urge the Government to give councils the freedoms they need to provide finance for new housing supply.

205 Q 82 Back

206 See, for example, Ev 127. Back

207 Ev 192 Back

208 See, for example, Ev 95 [Local Government Association]; Ev 133-5 [London Councils]; Q 154 [Sir Steve Bullock, Chloe Fletcher and David Edwards]. Back

209 Ev w16 Back

210 Ev w104 [Chartered Institute of Public Finance and Accountancy] explains that under "prudential borrowing, a local authority must only borrow when and if the debt repayments and interest are affordable". Back

211 Ev 95 Back

212 Ev w104 Back

213 As above Back

214 Q 337 Back

215 HM Treasury, Budget 2012, March 2012, para 1.223 Back

216 See below, paras 102-103. Back