188.Local authorities and housing associations have an important role to play in increasing the supply of new homes. This chapter examines their importance and looks at how barriers to building can be removed.
189.Local authority housebuilding has significantly declined and, as Table 6 demonstrates, the increase in building by housing associations has not fully compensated for the long-term decrease in local authority supply.
Local authority completions
Housing association completions
190.Witnesses from some local authorities were enthusiastic about housebuilding. Dr Clive Skidmore, Head of Housing Development at Birmingham City Council, told us “there is no limit to our [housebuilding] ambition.” In written evidence, the City of London Corporation said that they were about to embark on their biggest housebuilding programme since the completion of the Barbican in 1976.
191.A note of caution was sounded by other witnesses. Lord Best thought that the enthusiasm for building is not universal. He said that “lots of [local authorities] are out of this game altogether” and do not wish to become “deeply immersed” in housebuilding. Other witnesses noted that local authorities’ long absence from substantial housebuilding meant that they now lack the skills to oversee major development.
192.Despite their ambitions, the number of units started and completed by local authorities is trivial compared to the number required. In contrast, housing associations have built a substantial number of homes over the past decade. In written evidence the National Housing Federation pointed to the record of housing associations, claiming that the sector “built one in three of all new homes in England” in 2015 and wanted “to do even more”. Some of the large housing associations emphasised their commitment to putting resources into housebuilding. Asked to quantify how many houses could be built by housing associations, David Orr of the National Housing Federation estimated 75,000 homes each year. Chris Walker from Policy Exchange considered that the sector had the capacity to produce 100,000 homes annually.
193.Local authorities and housing associations can, if properly supported, make a significant contribution to the number of homes built across all tenures. This contribution is crucial as private building companies alone will not be able to build the number of houses required.
194.Local authorities and housing associations are able to build homes for social and affordable rent that would normally be unprofitable for the private sector. Lord Porter of Spalding explained how local authorities can benefit from cross-subsidy between tenures as they can “build private homes for sale and use some of the profit from those units to be able to build some more affordable homes”. Housing associations can also channel revenues from more lucrative private building into the construction of affordable and social rented property.
195.In addition, in local authority or housing association properties, vulnerable individuals and families with complex needs can be identified and supported by their housing providers. Councillor Sue Derbyshire, Housing and Planning Lead for the Greater Manchester Combined Authority, pointed out that there are “significant further pay-offs to the public purse of people who need to be in social housing being in there.”
196.As well as increasing the overall supply, local authorities and housing associations can possibly build homes more quickly than the private sector. The pace of building by private building companies is constrained by their business model which is to maximise the profit made from a site and not the speed of delivery. Because private house builders frequently start building before they have got a buyer, they are exposed to a significant risk of carrying unsold homes on their balance sheet. Local authorities and housing associations are in effect the client who can sell or let the property and so do not carry this risk to the same extent.
197.In 2015 the Government spent nearly £27 billion on housing benefit payments, representing 10 per cent of total welfare spending. As Figure 12 demonstrates, government spending on housing benefit has increased.
198.Two long-term factors play a part in this increase: the reduction in the number of tenants paying social rents and the increase in tenants in the private rented sector.
199.The Shout Housing Campaign believed that “the cost to the welfare system of supporting a household renting privately is almost always greater” than supporting the same household in socially rented accommodation. In 2015 a tenant in local authority accommodation received, on average, £82 a week in housing benefit; the average private sector tenant received £109 weekly.
200.The National Federation of Arms’ Length Management Organisations and the Shout Housing Campaign highlighted research that attempted to quantify how the housing benefit bill would be affected if more tenants were housed in the social rather than private rented sector. This analysis claimed that building 100,000 new homes for social rent would, after an initial outlay, create a surplus for the Exchequer by 2035.
201.We consider that local authorities and housing associations must be incentivised and enabled to make a much greater contribution to the overall supply of new housing. Without this contribution it will not be possible to build the number of new homes required. The likely reduction in the housing benefit bill over the long-term is a further reason to increase the supply of social and affordable rented housing through building by local authorities and housing associations.
202.Housing associations have been able to build homes in greater numbers than local authorities.
203.Chris Walker of Policy Exchange considered that housing associations were in a strong position to fund the building of houses from their existing resources. HSBC agreed, noting that housing associations had “accumulated significant resources”. In terms of their ability to borrow to fund development, Barclays, a major supplier of funds to the sector, wrote that housing associations “generally borrow on more favourable terms than mainstream builders, reflecting the historic stability of their core business model”. We heard evidence that their ability to fund this building is threatened by Government policies on housing.
204.Housing associations argued that their financial stability and long-term planning was undermined by changes in Government policy, in particular the reductions in social rents (see Box 4).
In July 2013 the Government announced a 10-year settlement for social housing rents. Social housing rents would increase from 2015/16 at a rate of the consumer price index plus one per cent for a decade.Final guidance on the new settlement was published by the Government in May 2014.
This policy was reversed in the Budget of July 2015 when the Chancellor announced that rents in social housing would be reduced by one per cent a year for four years, resulting in a 12 per cent reduction in average rents by 2020/21.
These changes were contained in the Welfare Reform Act 2016 which received Royal Assent on 16 March 2016.
205.The Government believed that housing associations could mitigate the impact of the reduction by making “savings in their operating costs and other parts of their business”. Housing associations were less sanguine in their analysis. The Orbit Group housing association predicted a “substantial impact” on its revenue. The Sanctuary Group housing association estimated that:
“In real terms the rent cut equates to a cumulative 16 per cent reduction in our projected income between now and 2020. This reduction equates to £13 million in the first year, growing to £53.8 million by 2020. This is an annual loss; the cumulative loss across the four years totals £133 million.”
206.Housing associations were also certain that efficiency savings alone would not cover the revenue shortfall and their building programmes would need to be altered. David Montague, Chair of the G15 Group of London housing associations and chief executive of the L&Q housing association, told us that as a “direct consequence” of the reduction to social rents, his association would change the tenure mix of its proposed developments. This would mean building more houses for private sale and fewer for social and affordable rent. The Office for Budget Responsibility has estimated that 14,000 fewer affordable homes will be built by 2021.
207.We conclude that the cuts to social rent are short-sighted. Whilst they may reduce the immediate housing benefit bill, in the longer term they are likely to deter investment and reduce the available stock of social and ‘affordable housing’, thus requiring a greater number of tenants to live in, more costly, privately rented accommodation.
208.Housing associations were also concerned about the reclassification of housing associations as part of the public sector. In October 2015, following a review, the Office for National Statistics announced that ‘private registered providers’—the definition of which includes almost all housing associations—would be considered as part of the public sector.
209.As a result of this decision, the borrowing of housing associations is now included in the calculation of the public debt. Housing associations were concerned that this could place restrictions on their ability to borrow.
210.The Government responded to the reclassification by bringing forward measures in the Housing and Planning Act intended to reverse the decision. Housing associations supported this move.
211.We support the Government’s efforts to reclassify housing associations as part of the private sector. The ability of housing associations to borrow to fund new development could otherwise be at risk.
212.We now turn to consider how local authorities could restart significant housebuilding. The current focus on fiscal restraint and deficit reduction means that large grants to local authorities to fund housebuilding are unfeasible. Therefore most local authorities must fund the building of new homes through borrowing.
213.The ability of local authorities to borrow to build new social housing is constrained by the system known as the Housing Revenue Account. This imposes limits on the amount each local authority may borrow to build new social housing.
214.This is different from local authorities’ powers to borrow to build housing for private ownership or rent which are governed by the same prudential rules as other local authority borrowing. Under this prudential borrowing regime there is no upper limit on borrowing and the local authority may borrow for any purpose relevant to its functions. In practice local authorities are able to secure loans at low rates from the Public Works Loan Board.
Housing Revenue Accounts were created, in their current form, in 2012 and are for the management of council-owned social housing stock. The accounts are primarily designed for the management of the income received from social housing. Housing Revenue Accounts have three important features:
215.Local authorities and other public sector bodies thought the restrictions on borrowing to build social housing were unhelpful.
216.The Chartered Institute of Housing said that some local authorities have the ability to borrow more than they need whereas others have caps set far below what they could borrow prudentially. They believed that if the current borrowing limits were exploited to the full, only 3,000 houses a year could be built in total. The Institute calculated that in theory there would be capacity to build 170,000–230,000 additional homes over five years if the limits were lifted. However, a survey of councils indicated that they would aim to build 12,000 new homes for social or affordable rent a year if they were released from borrowing constraints.
217.Opponents of the current limits on borrowing also argued that local authorities should be able to borrow to build social housing within the existing prudential regime. They considered it to be an anomaly that social housing was excluded from the general regime whereas other building, such as the construction of leisure facilities, was not.
218.The Minister for Housing pointed out that the Government would be cautious about allowing unrestricted borrowing as any spending that local authorities fund from their Housing Revenue Accounts “has an impact on the PSBR [public sector borrowing requirement]”.
219.The Local Government Association and the Chartered Institute of Housing have pointed out that it would be possible to overcome this issue by calculating the public debt using international rules which exclude council-owned housing. Paul Johnson from the Institute for Fiscal Studies had “sympathy with the idea that the way we currently consider the government balance sheet is not wholly rational”. He sounded a note of caution about proposals to change the rules saying that “fancy financing plans to get things off balance sheet” could “end in tears”.
220.The Government states it is supportive of local authority building across all tenures. One aspect of this support must be to ensure local authorities who wish to build social housing have access to the funds to do so. The current restrictions the ability of local authorities to borrow to build social housing are arbitrary and anomalous. Local authorities should be able to borrow to build social housing as they can for other purposes. We recommend that the Government allows local authorities to borrow under the prudential regime to build all types of housing.
221.The Chartered Institute of Housing observed that local authorities have “much more freedom to borrow to build” housing for private ownership or rent. Whilst there is no specific data on this activity, the Local Government Association have estimated that 14 councils plan to build more than 6,000 homes over the next three years using general borrowing.
222.Local authorities are also continuing to design alternative ways of funding and delivering housebuilding in their areas. Lord Porter of Spalding commented that local authorities have demonstrated considerable “ingenuity” in developing methods of funding housebuilding.
223.London boroughs have been particularly keen to innovate: research by the London Assembly revealed that 14 of the capital’s local authorities were looking to develop new social housing by leveraging their own resources and those of third parties. Lloyds Banking Group pointed out that the advantage of many of these structures is that, currently, they do not appear on the local authorities’ balance sheets. Lloyds were concerned that changes to accounting rules were likely to remove this advantage.
224.We endorse the efforts of local authorities to innovate, co-operate and enter into partnership with others in the housing sector to increase the number of houses built. We note that these schemes are disparate and sometimes on a small scale. We encourage local authorities to share their experience and expertise to ensure the proliferation of successful schemes. As any uncertainty could deter innovation and investment, we urge the Government to provide local authorities with clear guidance about the future accounting treatment of public-private partnerships.
225.In the year to April 2016 local authorities held “potentially useable” reserves of £17 billion. In evidence Ministers indicated that they were “keen” that local authorities should be encouraged to use their reserves to fund housebuilding. Ministers considered that it was reasonable to suggest the use of reserves due to the increase in the level of those reserves over the last five years as shown by Figure 14 below.
226.The idea that local authorities can use these reserves to build houses attracted the Government. The Minister for Housing thought it was,
“quite right that local communities ask how they can use that in a way that helps in the areas where it is needed to solve some of the housing challenges.”
We note that, under local authority accounting rules, drawing down on reserves is equivalent to increasing borrowing and so would have an equivalent impact on the overall public finances.
227.Local authorities and local government finance specialists expressed caution about this idea. They pointed out that:
(a)Reserves are held by local authorities to manage uncertainty about future revenues and central government grants and may be needed to fund front line services.
(b)The ‘earmarked’ reserves are already allocated for other purposes and to spend them on housebuilding would be to restrict the funding available to other projects.
(c)Restrictions on the operation of the Housing Revenue Account could prevent the reserves being spent to build social housing.
228.Local authorities have increased the size of their reserves in recent years. Their cautious attitude is understandable given the uncertainty faced by local authorities which need to adapt to financial restrictions and new sources of revenue. However, given the current levels of reserves, we agree with the Minister for Housing that local authorities should consider how some of their reserves could be used for housebuilding.
233 See introduction, Figure 1
234 (Dr Clive Skidmore); Dr Skidmore explained that in Birmingham, “Since 2009 … we have built nearly 2,000 new homes through the council. … We are developing over a quarter of all the new homes in the city and we have a programme to build another 2,000 homes over the next four years.”
235 Written evidence from the City of London Corporation (); see also written evidence from the London Borough of Islington ()
236 (Lord Best)
237 Written evidence from the National Federation of Builders () and written evidence from Pocket Living ()
238 See Table 6
239 Written evidence from the National Housing Federation ()
240 Written evidence from Orbit Group Ltd () and (David Montague). Those involved in the sector acknowledged that smaller housing associations had less appetite for, and fewer resources to support, housebuilding programmes. (Ian McDermott)
241 (David Orr)
242 (Chris Walker)
243 (Brandon Lewis MP)
244 (Lord Porter of Spalding); see also written evidence from the City of London Corporation ()
245 (Cllr Sue Derbyshire)
246 See Chapter 1
247 Office for National Statistics, ‘How is the Welfare Budget Spent?’, 16 March 2016: [accessed April 2016]; see also (Dr Clive Skidmore)
248 (Dr Clive Skidmore), written evidence from Shout Housing Campaign () and written evidence from the National Federation of Arms’ Length Management Organisations ()
249 Written evidence from the Shout Housing Campaign (). Comparisons between the two sectors are difficult due to differences in the type of tenants and length of time households receive benefits.
250 Department for Work and Pensions, Housing Benefit Caseload statistics, August 2015, updated February 2016: [accessed May 2016]; written evidence from the Cambridge Centre for Housing and Planning Research () and Capital Economics report (commissioned by the Shout Housing Campaign and the National Federation of Arms’ Length Management Organisations), Building New Social Rent Homes, an economic appraisal, August 2015: [accessed June 2016] . A tenant in housing association property received £93 on average each week.
251 Written evidence from the National Federation of Arms’ Length Management Organisations (), written evidence from the Shout Housing Campaign (). Capital Economics, Building New Social Rent Homes, op.cit.
252 (Chris Walker). Mr Walker told the Committee that the sector had an overall surplus of £2.5 billion held in reserves.
253 Written evidence from HSBC ()
254 Written evidence from Barclay Bank PLC ()
255 HM Treasury, Investing in Britain’s Future, Cm 8669, June 2013: [accessed April 2016]
256 DCLG, Guidance on Rents for Social Housing, May 2014: [accessed April 2016]
257 HM Treasury, Summer Budget 2015, HC 264, July 2015: [accessed April 2016]
258 Welfare Reform and Work Act 2016,
259 (Fiona McGregor)
260 Written evidence from Orbit Group Ltd ()
261 Written evidence from the Sanctuary Group (); see also written evidence from the Northern Housing Consortium ()
262 (David Montague)
263 Office for Budget Responsibility, Economic and Fiscal Outlook, Cm 9088, July 2015: [accessed April 2016]
264 Office for National Statistics, ‘Classification Announcement, Private registered providers of social housing in England’, 31 October 2015: [accessed April 2016].
265 (David Orr)
266 (David Orr), written evidence from Homes for the North ()
267 (Paul Johnson); written evidence from Liverpool City Council (). The Government has provided some funding to local authorities to build houses through the New Homes Bonus. See Annex 5 for details of this scheme.
268 These limits are part of the operation of what are known as Housing Revenue Accounts, see Box 5.
269 Local Government Act 2003, ; and Chartered Institute of Public Finance Accountants, Prudential Code for Capital Finance in Local Authorities, 2011: [accessed April 2016] and Local Authorities (Capital Finance and Accounting) (England) Regulations 2003 ().
270 Written evidence from Brandon Lewis MP ()
271 The Chartered Institute of Housing explained when the accounts were created: “each council was set a “borrowing cap” equal to or in excess of its debt, which placed a limit on its future borrowing for investment in social housing. Where the cap exceeded the council’s borrowing, this created “headroom” which it could use for new borrowing to invest in the stock.” Written evidence from the Chartered Institute of Housing ().
272 Written evidence from the Chartered Institute of Housing (); see also written evidence from the Local Government Association ()
273 Written evidence from the Chartered Institute of Housing (). The Institute cautioned that these figures may now be lower due to the impact of other Government policies on social housing—including the reduction in social rents and the Right to Buy—and concern about further reductions in local authority budgets.
274 (Lord Kerslake); see also written evidence from the Local Government Association () and written evidence from the National Federation of Arms’ Length Management Organisations ()
275 (Lord Kerslake)
276 (Brandon Lewis MP); see also Lord Best who considered that the cap borrowing for social housing was imposed as “the Government do not really want too much borrowing by local authorities... since everything that a local authority borrows goes on to the public accounts.”
277 Written evidence from the Local Government Association (), National Federation of Arms’ Length Management Organisation, Treating council housing fairly –how changed borrowing rules can help build more homes and boost the economy, November 2013: available at [accessed April 2016]. This suggestion has been endorsed by the House of Commons Communities and Local Government Committee: Communities and Local Government Committee, , (Eleventh Report, Session 2010–12, HC 1652)
278 (Paul Johnson)
279 Written evidence from the Chartered Institute of Housing ()
281 (Lord Porter of Spalding); see Annex 5 for details of schemes.
282 The London Assembly, Housing Committee, Right to Build: what’s stopping councils from building more housing?, October 2013
283 Written evidence from Lloyds Banking Group ()
284 DCLG, Local Authority Revenue Expenditure and Financing, 2014–15, Final Outturn, England, Table 6 (19 November 2015, revised 2 February 2016): [accessed April 2016]
285 (Brandon Lewis MP) and (Damian Hinds MP)
286 (Brandon Lewis MP)
287 Written evidence from the Chartered Institute of Public Finance Accountants ()
288 Written evidence from the Local Government Association () and written evidence from the Chartered Institute of Public Finance Accountants ()
289 Written evidence from the Local Government Association ()