Report reveals 30-year benefit of raised rents
HRA reform could create £54bn boost
The move to self-financing councils could produce more than £50 billion of new investment for housing over the next 30 years, according to a new report.
The study, Making the most of HRA reform, which will be published next week by accountancy firm Pricewaterhouse Coopers and think tank The Smith Institute, examines the potential of housing revenue account reform to generate extra investment for councils.
HRA reforms will let councils keep income raised from rents, predicted to be more than £330 billion over the next 30 years, in return for agreeing to take on £25 billion of existing debt.
Increasing rents by 0.5 per cent above inflation, in line with current target rents, will create a surplus if operating costs increase in line with inflation while interest costs on HRA debt remain unchanged. This ever-increasing surplus can be used to build more homes, which in term generates more rental income, said the report.
‘Over time, the new system has the potential to unlock capacity to support the delivery of housing investment,’ the report says.
But to benefit, councils will need to adopt a new approach to business planning in order to manage the ‘new discipline’ of servicing and managing long-term debt, argues the study.
Under the new HRA, which comes into effect in April, councils will be allocated debt according to the level they can manage from their asset base. This means, as long as councils invest to maintain the value of their stock, there is no reason why they can’t maintain the same debt level in the long term.
‘In some cases, there will be a natural inclination to pay down debt as soon as possible. In fact, in most cases it would not represent sound business practice to do so,’ said the report.
Richard Parker, head of housing at PWC, and report author, said: ‘It will be interesting to see how much of that potential we’ve identified gets delivered through the actions of local authorities.’
Senior housing figures acknowledge the potential of HRA reform to boost investment but are sceptical about the £54 billion figure and some of the report’s assumptions.
Robin Tebbutt, associate at consultancy Housing Quality Network, said: ‘Will governments really allow rents to increase by inflation plus 0.5 per cent over 30 years? I doubt it.’
Gary Porter, chair of the Local Government Association’s environment and housing programme board, said: ‘Maintenance cost increases will not be kept to inflation for more than 30 years, unless something really bad happens to the economy.’
Mr Porter said borrowing constraints under the new model and the fact that the Treasury will continue to keep the bulk of right to buy sales receipts will also limit the amount of money available for housing.
Nigel Minto, head of sustainable communities at London Councils, said: ‘I am quite surprised and have a few concerns about the level of surplus Price Waterhouse Coopers is stating.
‘In the context of London boroughs with decent homes and repairs backlogs and facing potentially increased costs if rent goes direct to tenants, I think the figure is optimistic. There will be a surplus, but it is the size of the surplus that’s the issue. It is too early to make assumptions.’
HRA reform: what the sector thinks
‘HRA reform is broadly positive for us, the numbers stack up and it means we don’t have to consider stock transfer, which we don’t want to do. Self-financing means it makes more economic sense to hold on to stock.’
James Murray, cabinet member for housing, Islington Council
‘HRA reform cannot be anything other than positive. Birmingham probably suffered more than the rest of the country as the negative rent subsidy was £72 million. But we are concerned about the debt and want to pay it off.’
John Lines, cabinet member for housing, Birmingham Council
Opinion - Susan Kane
In general, the principles behind housing revenue account reform are to be welcomed. Self-financing offers councils greater local control, accountability and the opportunity for long-term planning. But we do have concerns if grandiose claims are made about what the reforms to council housing finance will deliver.
Everyone knows the existing system is labyrinthine and technically complex. The danger is that simplistic claims could be made using a technical model, suggesting a degree of scientific sophistication that isn’t there.
Many authorities don’t have the expertise or the capacity to use the new model effectively, either to inform real decision-making or to address the issues arising from the complex treasury management required.
These are not insurmountable problems, but it will take time for local authorities to become capable of using business planning confidently.
History teaches us that, in such circumstances, councils are conservative with borrowing and tentative to a fault when driving through budget reductions required in the business model.
There are also some specific issues with the Pricewaterhouse Coopers/ Smith Institute proposals. Rent income amounts will vary due to the impact of affordability, the size of stock, voids and collection rates - rents won’t rise precisely by inflation plus 0.5 per cent. Similarly, costs are unlikely to always rise linked with the retail price index. Evidence suggests industry inflation rates are volatile.
The self-financing model is subject to the vagaries of government policy and world economics. In our opinion, it would be risky to factor into economic plans assumptions of huge investment resources being freed up.
Susan Kane is a partner at consultancy Altair. The opinion piece was co-written with Tim Willis, director at Altair