Using headroom to the max?

When ministers handed English Councils control of their housing budgets in 2012, most got a big and welcome boost.

This borrowing ‘headroom’ was, in effect, permission to borrow £2.9bn for projects that went beyond the upkeep of homes. The free capacity could be channelled instead into building homes for people who were homeless, or stuck in temporary accommodation, or to revamp run-down estates, to name but a few possibilities.

The loan bonus was not a bad deal from a Conservative chancellor hellbent on cutting public sector debt. But the onus was on the 171 stock-owning authorities given the permission to take it up: to turn this potential investment into much-needed new homes.

Four years on, most of this spending power has been left largely untouched, analysis by Inside Housing has found. Indeed, it has risen to record levels, despite a clear and pressing need for extra housing investment in many areas.

In total, the 141 authorities which responded to Inside Housing with usable figures account for £2.5bn of the total £2.9bn headroom allotted in April 2012. This group’s collective headroom had actually increased to £2.6bn for 2016/17, our analysis of the responses shows.

“There is a nervousness around making big financial commitments.”

More than half of the 141 have in excess of £10m of borrowing power at their disposal. At least 11 have £50m or more unexploited capacity left, and just 15 have no headroom at all.

How council headroom breaks down by region

In many ways, this year’s findings mirror a smaller-scale analysis of 117 authorities by Inside Housing, which first uncovered evidence of an apparent investment malaise.

So what are the reasons for this ongoing reluctance to exploit housing borrowing powers since 2012? And what are the prospects for a bolder approach to using it in the four years left in this Parliament?

According to observers of council housing finance, this apparent aversion to exploiting the borrowing power is for three main reasons - and the prospects for improved investment look increasingly shaky.

For starters, austerity has robbed many councils of their capacity and confidence to take on housing investment projects. Second, ministerial meddling in their housing business has also made them wary of taking on extra loan repayments. And last, a number have simply taken their time to get investment-hungry projects, like estate regeneration, off the ground.

The apparent diversity in investment appetite between councils is a reflection of how they have responded to austerity differently, according to Jonathan House, a partner at PwC, one of the largest local government consultancies. “Councils previously had a semblemence of similarity; now, no two authorities are the same,” he says.

“Austerity has been driven in councils in different ways and at different speeds,” Mr House says. “They have made decisions about investment and divestment and have different ambitions.”

“The issue now is not so much: have councils got enough headroom? But have they got the ability to pay back the money they borrowed?”

In the “complex” area of housing, many authorities now lack experienced staff at the top table, where decisions on spending are made, he adds. “Ten years ago, you used to have a director of housing, sitting around the top table. Now you have someone for whom housing is part of their much wider portfolio.”

Unrelenting government cuts to council funding under austerity had made many authorities averse to “risky” investments, Mr House adds. “There is a nervousness around making big financial commitments; some councils are more likely to make these commitment than others.”

Mr House’s analysis is borne out by our research. This shows that larger authorities, such as London boroughs and the metropolitan authorities that run English cities, are more likely to have exploited their loan bonuses than small district councils. Some 62% of London councils and 45% of metropolitan authorities have borrowed more since 2012, compared with just 34% of the smaller district authorities.

These capacity issues were in fact addressed in the high-profile, Treasury-commissioned Elphicke-House report into councils’ role in increasing housing delivery in 2015, says Matthew Warburton, policy advisor to the Association of Retained Council Housing.

But its proposed solution was to promote standalone housing companies, he says, which do not draw on Housing Revenue Account (HRA) borrowing or deliver truly affordable social rented housing. “These [housing companies] are going to be used more to deliver streams of homes off the HRA, for sale and shared ownership and market rent.” he adds.

Plunging revenue

“Councils need a stable financial environment in which to invest.”

Mr Warburton argues authorities are reluctant to borrow after a “double whammy” of government policy changes that severely affected their income from rents. Ministers had first altered the way annual rent increases were worked out in 2014. Then came the surprise social rent cut in the July 2015 Budget, which wiped out £30bn from their predicted income over their 30-year business plans, according to the Association of Retained Council Housing. As a result, many councils had even shelved investment plans drawn up in the past four years, Mr Warburton says. “They don’t have revenue to pay the borrowing.”

Thereafter, many councils are now no longer worried about the government-imposed caps on HRA loans, he adds. They were now more concerned about whether borrowing made financial sense at all. “The issue now is not so much: have councils got enough headroom? But have they got the ability to pay back the money they borrowed?”

The Chartered Institute of Housing (CIH) agrees authorities will be more cautious about exploiting their borrowing power, following the social rent cut and other examples of ministerial meddling.

“Councils are likely to be more wary of Housing Revenue Account borrowing now than they have been in the past due to a number of factors,” says its deputy chief executive, Gavin Smart. “These include the social housing rent reduction, the uncertainty created by the extension of Right to Buy - which they will be expected to finance - the continued impact of welfare reform on rent arrears and the withdrawal of Homes and Communities Agency grant for new homes for social rent.”

Despite councils’ wariness about HRA borrowing, many were spending on housing using other sources, says Mr Smart. “They are using receipts from council house sales, their major repairs reserves and revenue financing.” Official figures show that council expenditure on social housing properties has risen 47% since the government handed authorities control of their housing finances, according to the CIH. “This is quite a significant growth…and has reversed the previous decline in investment,” he adds.

The Local Government Association goes further than the institute in its assessment of the impact of ministerial meddling. Its housing spokesperson, Peter Box, the Labour leader of Wakefield Council, says government policies such as the social rent cut and the sale of high-value council homes will make building new homes “almost impossible”.

“Councils are being prudent; they are being cautious because of the uncertainty.”

“Councils need a stable financial environment in which to invest,” he added.

The Local Government Association (LGA) says the rise in borrowing power since 2012, revealed by our analysis, shows councils were pursuing “sensible and prudent” financial strategies. “These figures show that they have successfully managed to reduce the level of debt and in turn reduce debt repayments,” he adds.

Councils with plans in place to exploit their extra loan capacity confirmed that the concerns raised by the CIH and LGA were having a real and significant impact. Labour-led Thurrock Council, which has even agreed an extension of its borrowing power with government, says several of its developments were being reviewed. “Some of the schemes may not progress which may result in the borrowing capacity not be used,” a spokeswoman adds. The authority has plans to build 1,000 affordable homes in the borough and has 6,000 people on its waiting list.

Tower Hamlets, the east London borough with the second-biggest borrowing capacity, has been forced to completely revamp its development plans by government policy changes. While its £79m loan capacity was due to be ploughed into refurbishing existing homes, most of the investment must now be diverted to fund replacement homes for those sold under the ‘reinvigorated’ Right to Buy.

Rachel Blake, the council’s cabinet member for strategic development, says ministers’ decision to force the sale of high-value council homes would reduce its social housing supply and “damage our ability to borrow against the HRA to improve and increase council housing”.

“We’re committed to using all means at our disposal, including borrowing powers, to provide high quality social housing that our residents desperately need,” she adds. “But the government seems determined to make it harder for us to succeed.”

Tower Hamlets and Thurrock are not alone in reviewing and revamping HRA investment plans as a result of controversial government policy changes, such as the social rent cuts. So says Ken Lee, chair of the Chartered Institute of Public Finance & Accountancy’s housing panel, which represents housing finance chiefs.

He says councils now see their borrowing power as an option to keep in their “back pocket” in the event of further government intervention.

“Councils are so unsure of what is going to happen; the headroom is almost like a back pocket,” he adds. “Initially, headroom was an opportunity to go and do something extra. As certainty of the normal business is going away, councils now need protection. Councils are being prudent; they are being cautious because of the uncertainty.”

Many authorities will also be storing up borrowing power to fund the next major round of repairs to council homes following the Decent Homes programme, which began slowly in 2000. Major repairs programmes follow 15-year cycles in housing, Mr Lee says. “We are almost approaching Decent Homes II. The next splurge will come round in five years’ time and those big spends need to be paid for.”

Another reason for councils’ apparent reluctance to exploit their extra borrowing powers over the past five years, according to Mr Lee, is the time it can take to get large projects, such as major estate regeneration, off the ground. “That is not the sort of thing you can do overnight,” he adds.

Our investigation did find evidence councils had begun to make plans for more widespread use of their borrowing powers, including on estate regeneration. Some 61% of councils had secured extra loans of £1bn. And councils with some of the largest remaining unexploited borrowing powers told Inside Housing they expected to exhaust theirs within years.

Regeneration plan

Lewisham Council, which has £52m of unexploited borrowing capacity, says it will be used up within four years to help build 500 new council homes. And in March, Ealing Council unveiled plans to begin ploughing £32m of its £38m loan headroom into an estate regeneration programme.

Conservative-controlled Westminster and Wandsworth Councils, both of which are in the top 10 for largest borrowing capacity, declined to comment. Despite these signs of increased HRA borrowing, the fact that £2.7bn of public money has lain dormant for so long is striking. Natalie Elphicke, chief executive of the Housing & Finance Institute, states that: “People will be surprised to learn that £2.8bn of public money is available to councils that is not being used to build the homes we need.”

The Housing & Finance Institute, which teaches councils how to ramp up housing investment, believes they must learn to roll with the punches of government policy changes. And Ms Elphicke adds that many councils are trying to increase development in a number of ways, including working in private finance partnerships.

Whether the numbers will shoot up significantly is still open to question, given the impact of ministerial decisions on councils’ confidence to makes use of this loan bonus.

Who would risk borrowing billions, when capacity to meet repayments is undermined by ministerial whim? Much of the £2.6bn of borrowing bonus will languish in councils’ back pockets for some time.