Analysis reveals councils that manage own homes would take on more debt
£25 billion reform would leave councils with ALMOs better off
Councils with arm’s-length management organisations could see their collective housing debt fall by more than £5.3 billion under proposals for reform of the housing finance system.
Analysis of the government’s proposals by consultancy Housing Quality Network found councils with ALMOs would see their collective housing debt fall by 34 per cent from a total of £15.98 billion to £10.59 billion. But 27 ALMO authorities would see their debt rise.
Councils that manage their homes would see their housing debt rise by 164 per cent, from a total of £5.5 billion to £14.5 billion.
HQN’s paper said the debt reduction among councils with ALMOs was to be expected because those councils took on extra debt, including two rounds of ALMO funding, as part of their decent homes programmes. Councils which manage their own homes have lower levels of debt and so can afford to take on more.
The HQN analysis also found that the east of England would have the largest increase in debt - 519 per cent - while the north west and Yorkshire and the Humber would have the largest percentage debt reduction of 36 per cent.
The paper said debt rises in the south and east reflected higher rents charged in those regions, which would support higher levels of debt. London would see a debt reduction of 27 per cent because its authorities need to invest in their stock, despite having the highest rent levels.
Housing minister John Healey said the debt was calculated to be ‘sustainable’ for all councils. It was distributed in line with councils’ income and spending needs and the amount of debt they could afford to support.
The debt is made up of £21.5 billion of existing housing revenue account debt and an additional £3.6 billion transferred from central to local government to make the settlement fiscally neutral.
Meanwhile, HQN found that increases and decreases in debt varied from a 39,572 per cent rise at Runnymede (from £235,000 to £93.3 million) to an 89 per cent reduction in Hackney (from £883.8 million to £99.3 million). Runnymede is debt free while Hackney has ALMO debt which would be reduced under the proposals.
However, all councils would get at least a 10 per cent increase in combined management and maintenance and major repairs allowances and would also keep all their rental and sales income from new and existing homes.
HQN also estimated the number of homes each council could build per year if English councils were to meet the 10,000 homes a year figure by 2014/15 proposed by government. The study found that the Isles of Scilly could build one home per year while Birmingham could build 373. HQN assumed that each new home would cost £121,900 and that councils were able to borrow against the cushion created by using a 7 per cent discount rate proposed in the consultation rather than 6.5 per cent. This is because the 0.5 per cent increase reduces the amount of extra debt councils take on by £1.2 billion which allows them room to borrow to fund new builds. Councils would be forbidden from taking on more debt for housing than they have at the start of the settlement.
The consultation did not deal with the £3bn repairs backlog, which Mr Healey said would be a ‘central priority’ for a future spending review.
Robin Tebbutt, executive director (finance) at HQN, said: ‘There may be some councils that do not need as many homes as that analysis suggests and also the cost of building a new home differs by region.’
Deborah Blowers, director of housing and community services at Runny-mede Council, said: ‘In the past, people might have worried about taking on debt but if it provides opportunities then they might be more relaxed about doing it provided there is some security in the future. We do not know what a different government might do.’
Main points of the deal
- £25.1 billion of debt made up of £21.5 billion of existing debt and £3.6 billion of additional debt
- Distribution decided by a council’s income, spending needs and ability to service debt
- Repairs backlog not dealt with in consultation
- At least 10 per cent increase for councils in combined management and maintenance and major repairs allowances
- Councils to keep all rents and sales income from new and existing homes and land
- Councils’ housing debt capped at the amount at the start of the new system
Top 10 house builders under the proposals (homes built per year)
Birmingham - 373
Southwark - 189
Wandsworth - 181
Camden - 175
Leeds - 166
Sandwell - 163
Dudley - 149
Wolverhampton - 126
Dacorum - 125
Wigan - 121
HRA reform is to be welcomed but there are a few challenges to face first
The HRA reform proposals represent a real opportunity to escape the dreaded subsidy system. While there is a desire to see change, the deal has to be right for each authority.
To examine its effect on your council follow this step by step guide:
Create a self-funding business plan model to show the impact of the proposed debt settlement.
Carry out some sensitivity tests on the model to ensure that the business plan is robust enough to deal with different scenarios.
If the model does not allow the authority to carry out its future plans then examine the Communities and Local Government department calculations to see where they may be awry.
Key areas where there may be some scope to challenge the government include the following:
- Increase in expenditure allowances - there is little information on how these differentials have been calculated across authorities.
- Authorities with high levels of existing debt are likely to have some paid off but will have to service the remainder - and may be at higher rates than those authorities taking on new debt. Is this fair?
- Further clarification is needed on how the capital grant is to be allocated - particularly if you face significant investment needs in the immediate future.
- In the absence of grant will the proposed borrowing limits allow you sufficient headroom to fund extra investment?
- The CLG model assumes PFI funding will be built into the debt figures rather than annual payments - does this work?
- The current model makes no provision for other ‘reckonable’ expenditure - spending eligible for subsidy including old private leases for a handful of London councils.
- The CLG intends to continue with some form of cap on subsidy councils get for rent rebates paid to tenants.
In most cases the starting debt arising from the CLG calculation will be much higher than a new landlord would have been paying on a stock transfer. It may be worth assessing why. Also assess the impact on the general fund.
If there is spare capacity the CLG is expecting authorities to deliver around 10,000 new build units in aggregate. Authorities will need to assess this in their modelling.
If we do have a new government, a key issue will be how they see these proposals.
David Hall is director of Tribal Group