Sunday, 21 September 2014

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.

Implications

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.

Readers' comments (9)

  • I understood the phrase "tax on tenants" to mean the situation whereby rent levels are higher than is necessary to keep the national Housing Revenue Account balanced. Where you have HM Treasury creaming off any national HRA surplus from CLG, then tenants could rightly claim that they are funding non-housing expenditure from their rents - i,e, paying a kind of stealth tax. Whether you agree with that analysis or not, it strikes me as a bit patronising to characterise that view as "somewhat unjustifably" held.

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  • The big lacuna in Ms Silverman's analysis is that the figure for housing benefit is not keyed into the equation.

    In many inner London boroughs 70% of the tenants are on housing benefit.

    The surplus therefore on the national account is purely notional.

    Money taken from the taxpayer is used to subsidise tenants which results in a billion-pound surplus.

    This is accountancy worthy of planet adventurers such as Progressive Solutions Required but for bog-standard earthlngs this transubstantiation exercise to generate a surplus is a tenant subsidy.

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  • Indeed. Although the author does not buy into the overt falsehoods spread by the likes of DCH that these benefit dependent tenants in HRA surplus boroughs are somehow "subsidising" the taxpayer - as various mathematically challenged Spartist loons have claimed in the pages of this forum and elsewhere. "It has somewhat unjustifiably been viewed by residents (who are themselves heavily subsidised)" she says. Quite. Heavily subsidised Sparts. Got that?

    The author makes reference to building through RTB receipts. RTB is dead. Prescott killed it with his £16K cap. As IH figures have revealed RTB is at an all time low, thanks solely to Prescott. The only place RTB is healthy is in Scotland where old style tenancies still attract the full discounts. Unless Prescott's cap is scrapped, forget about RTB.

    In terms of where Government is going with the settlement for HRA dismantling, it is difficult the see the earlier proposals sailing through without dissent. The Trowers & Hamlin excel file breakdown published here earlier showed 5 out of 5 of the Top 5 HRA debtors are £3.2Bn in debt to the national HRA and are all Labour Councils. That debt was to be distributed across the other 167 councils in system with 16 out of the top 20 HRA surplus boroughs who were to receive that debt being Tory. Whether Pickles will stomach that proposal is open to question especially being that 3 out of the 5 top debtors are inner London municipalised boroughs with vast portfolios of social housing that vastly London average of 26%. The boroughs could be instructed to sell some of their portfolios to pay down their unsustainable debt rather than expecting more prudent councils, elsewhere in London and around the country, to pay for their past spending sprees. That would be true Localism in action...

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  • What's the betting that Pickles is going to take a typical Tory attitude on rights and responsibilities.

    Those spendthrift Labour councils which have built up massive deficits are going to have to eat humble pie and pay down their debts with stock sales.

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  • I wouldn't want to be labelled a 'spart' but the facts on council housing subsidy contradict what is being said here.

    Council housing nationally makes a surplus, there is no cash injection. There is what economists like to call an 'economic subsidy' that reflects the opportunity cost, which is the difference between the market and the social rent. But you would also have take into account the fact that the current value of the estate is so much greater than its original cost, so you end up going round in semantic circles. It’s much more sensible to see subsidy as a cash injection or a relief against a specific tax designed to achieve a policy objective.

    The HRA system is virtually neutral in the national subsidy/tax calculation. It takes from some councils and gives to others, mostly due to historical accident - who built what under which regime and who sold what under which regime. But over time it had become a monster that no-one understood or could rationally explain. The Labour government spent a long time talking to tenants, landlords and experts before devising a way out of this system and into something that would be locally managed and would give council housing a secure future - and even opened up the possibility of new council house building. Shapps should implement it without delay.

    The point about housing benefit is just a diversion. There are subsidies in all tenures that help individuals afford to pay for their homes - Labour went a long way in extending the system beyond social and private tenants to give help to home owners as well. One day we might have a system that applies equally to all tenures based on need. But it is not right or fair to pick out social tenants as if they were the sole beneficiaries of income support for housing costs.

    Whatever its problems, and there are many, council housing has proved to be an extraordinarily effective financial model, with surpluses on some homes cross subsidising the cost of other homes that make a deficit. It has made a huge contribution to meeting the nation’s housing needs, and will do so again given the chance.

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  • So Len White wants the freedom to walk, talk and think like a Spart without being labelled a Spart. The duck that would rather be a hobbit.

    I'll keep it simple. Where does £12.5bn worth of housing benefit for social tenants go if it doesn't go into the housing revenue account? Better still, why do the CEs of social housing providers scream blue murder if there is the suggestion of a reduction in HB.

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  • So this is what it is like to be savaged by anonymous. Reminds me of the story about Geoffrey Howe and the dead sheep.

    I did not say that council tenants do not receive HB. What I said was that there is an income related benefit available in each tenure to help meet their housing costs. The availability of ISMI – income support for mortgage interest – does not mean that home ownership is ‘subsidised’ just as the availability of local housing allowance and housing benefit do not mean that private renting and social renting are subsidised. It simply means that people on low incomes are given help to meet their housing costs – I would prefer it to be even more tenure-blind than it is already.

    Council housing has suffered from narrow ideology and stigmatisation for far too long. The baby has been thrown out with the bathwater. It could make a huge contribution to meeting housing needs if a little common sense was applied in place of bigotry.

    Labour’s HRA reform package is attractive to many Conservatives – localist, business-like, covering costs whilst opening up the possibility of more housebuilding. The coalition talks a lot about the new politics – implementing HRA reform would be a very good example of new politics in action.

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  • So what are the figures for ISMI versus HB? More pertinently, is ISMI remotely in the £12.6bn category? The difference in support is of such a degree that it is clearly a difference of kind.

    Labour's HRA reform package was a pille of freshly-minted pooh. It wanted to lumber well-managed Conservative-run housing authorities with the reckless deficits of piss-poor Labour-run ones. See the Trower and Hamblin Excel spreadsheet on this site.

    What is attractive about that apart from to a numpty Sparty, unfairly stigmatised as a dead sheep drowned in bath water and suffering narrow ideology in search of a little common sense in place of bigotry and new politics.

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  • A pathetic post as usual from anonymous. What kind of mind produces such insulting rubbish? Please get help. Nobody with any experience of Westminster and Hammersmith Councils will recognise the phrase 'well-managed Conservative Councils'. The councils with deficits were those that built homes for their people in times past. Councils generally accepted the HRA reform proposals as the best way forward. Even Tory ones.

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