Ready for reform
With an announcement on the future of council housing finance due this month, social housing lawyer Kate Silverman examines what the current proposals would mean for local authorities and housing associations.
Housing and local government minister Grant Shapps’ recent announcement that the coalition government is committed to an overhaul of the council house financing system will be welcomed by many.
The current housing revenue account subsidy system requires local authorities to record all income and expenditure in relation to their housing stock in their housing revenue account. This system is also the method by which central government determines the level of subsidy local housing authorities require. Where authorities’ assumed expenditure exceeds their assumed income, they are deemed to be ‘in deficit’ and where their income exceeds expenditure, they are deemed to be ‘in surplus’.
Critically, where an authority is in surplus, the surplus is required to be transferred along with up to 75 per cent of all right to buy receipts to central government, where the receipts are pooled and paid to housing authorities which are ‘in deficit’ - and therein lies the issue.
For many years local authorities in surplus have expressed the view that they are financing local housing authorities that are in deficit. It has somewhat unjustifiably been viewed by residents (who are themselves heavily subsidised) to be a ‘tenants tax’ where tenants in one housing authority are paying for tenants in another housing authority through their rent.
Somewhat ironically given the current economic climate and the historical debt burdening some local authorities, the HRA subsidy system at a national level is predicted to make a surplus of £34 billion over the next 30 years. Even after taking into account the current debt and servicing costs of £21 billion this still leaves a healthy surplus of £13 billion.
It is probably this more than anything which has led to calls that the system is no longer ‘fit for purpose’ and has meant that the time is now right for reform.
Plans for reform
It was against this background in June 2009, that John Healey, the then Labour housing minister announced the government’s intention to dismantle the current system.
Published earlier this year, the proposals in effect put a deal on the table whereby local authorities could buy the right to future surpluses, in return for taking on extra debt now. The amount of total debt would be determined on a notionally discounted stock valuation and divided amongst local authorities in accordance with their ability to pay, based on assumed rental income.
The notional discount is intended to give council’s headroom to start building new council housing. However, crucially, borrowing would be capped at a level equivalent to the initial debt allocation.
So what does all this mean for housing associations? There is no doubt that the drive towards localism, the opening up of access to capital grant, and the recent announcement by the coalition of the new homes bonus (the scheme to match council tax raised from new homes for six years) shows the political will to devolve power to local authorities and to see local authorities build more homes.
Local authorities have started building again, and there is undoubtedly an appetite on their part for house building. If the current proposals are implemented, however, local authorities are simply not going to have access to enough capital to seriously compete with housing associations unless the cap on borrowing is lifted, which seems unlikely given current levels of public debt.
However, housing associations cannot afford to be complacent. If reform goes ahead, local authorities could be able to fund replacement housing through revenue and right to buy receipts as soon as 2011/12. This represents both a challenge and an opportunity for housing associations. Local authorities may need to deploy housing associations’ expertise, but they may not be quite so willing to sell or gift public land to housing associations in future, if they can build new housing themselves.
For more information please contact Kate Silverman on 020 3465 4167. Kate is a specialist social housing lawyer at law firm TLT.