Councils face extra £2bn debt burden
An extra £2 billion will be added to councils’ debt as a result of the jump in inflation revealed by the government this week.
The increase will leave authorities facing dramatically worse debt settlements under forthcoming reform of the housing subsidy system.
This will mean authorities face tough decisions over whether to pass costs on to tenants through rent hikes when self-financing rules take effect from 28 March next year.
Proposed housing revenue account settlements, which work out how much debt councils will take on in exchange for retaining rental income, were calculated in February using the Communities and Local Government department’s indicative retail price index figure of 3.5 per cent. September’s RPI, which will dictate settlements, soared to 5.6 per cent.
According to the Chartered Institute of Housing, the change will mean that an extra £2 billion will be added to councils’ debt allocations.
From April 2013, councils will have to decide whether to pass the extra cost of this debt to residents through increased rents.
‘What it will mean is that business plans will only stand if rents continue to increase,’ said Ken Jones, director of housing strategy at Barking and Dagenham council.
‘There will have to be a serious health warning to residents that if they want us to deliver investment in their homes and estates, rents will go up.’
Steve Partridge, director of financial policy and development at the CIH, said: ‘The biggest risk for councils is that they are taking on a debt that has this rent increase included; if they don’t factor that in, they’ll start self-financing with one arm tied behind their back.
‘It’d be the equivalent of taking out a mortgage and then taking a voluntary pay cut.’
The government will set next year’s rent levels for councils later this year, with town halls taking over responsibility for rents from April 2013.
A CLG spokesperson said: ‘We have always encouraged councils to consider different levels of inflation, ahead of draft self-financing plans being published.’
The inflation figures also allow housing associations to increase rents by up to 6.1 per cent (RPI plus 0.5 per cent) next year. However, some landlords are considering not increasing rents by the maximum amount.
‘I am thinking very seriously about whether we should cap [rents],’ said Ruth Cooke, finance director at Midland Heart. ‘We would expect interest rates to remain low so, in a sense, organisations are getting a windfall. We could use that to cushion the blow of the rent increases.’