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‘Jaws of doom’: what does the state of councils’ finances mean for their development ambitions?
Analysis of the financial accounts of the biggest stock-owning local authorities in England shows net debt is on the rise. Why is this happening now, and what will be the consequences? Gavriel Hollander reports. Illustration by Mark Long
Analysis of the financial accounts of the biggest stock-owning local authorities in England shows net debt is on the rise. Why is this happening now, and what will be the consequences? Gavriel Hollander reports #UKhousingWhen the self-financing revolution swept across English town halls in 2012, it was supposed to usher in a period of financial freedom for councils.
The idea behind self-financing was that councils would be able to exert greater control over how they spend the revenue generated from their housing stock, held within their Housing Revenue Accounts (HRAs). In exchange, each of the 171 stock-owning councils took on a share of £29bn of public debt that had previously been centrally held.
At the time of the reform, some commentators heralded it as a new dawn of council housebuilding. Grant Shapps, then housing minister, declared that it was “an opportunity to give councils the freedom they need to be innovative and ambitious in how they manage, maintain and improve the existing stock, and to invest in new homes”.
But the housing world we inhabit today is very different to the one of 2012. Although some at the time warned that government-imposed borrowing limits would curtail new development, few could have predicted how many additional capital spending obligations would be piled on creaking HRAs.
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The Building Safety Act 2022 brought in a new safety regime, while 2023 saw the passing of Awaab’s Law and the introduction of the regulator’s consumer standards regime. The beefed-up Decent Homes Standard also arrived last year, which will require the removal of hazards from homes and provision of core facilities.
Satisfying these new regulatory standards has created increased cost pressure, particularly for councils with housing stock that is nearing old age. Throw into the mix a macroeconomic picture of rising costs and stubbornly high interest rates, and it is easy to see why some councils are gloomy about the future of their HRAs.
Inside Housing has looked at the latest available accounts for the biggest stock-owning councils in England to take the temperature of their HRAs. After more than a decade of relative stability since self-financing, one of the key metrics – net debt – is starting to rise. So why is this happening now, and what are the consequences for cash-strapped councils?
“We’ve got to invest in existing stock and there’s so many new regulations that have to be dealt with, but the income coming in is insufficient,” says Steve Evans, cabinet member for housing at Wolverhampton Council, which manages around 21,500 homes.
He says Wolverhampton will have to spend around £100m over the next five years on its high-rise properties alone just to get them up to standard, and the council also has plans to build 500 new homes.
And this work cannot be funded through HRA income alone, particularly since the Right to Buy has eaten into the council’s stock, with more than 900 homes sold over the past five years.
“Nobody would argue about fire safety regulations or tackling damp, mould and condensation – but it makes it difficult for councils when you say, ‘Here are these changes, you find the money to deal with it,’” Mr Evans says. “We’re already struggling with finances [and] it’s not as if the changes are accompanied by support and funding.”
What this all means in terms of financial health for councils is that their net debt – essentially how much they’ll need to borrow to fund their capital programmes – has started to rise, and in some cases that rise has been precipitous.
To map the scale of the problem, Inside Housing analysed government figures for 2024-25, collected annually and known as the capital outturn returns (COR), alongside councils’ audited accounts to gauge the health – or otherwise – of the biggest HRAs in England.
While housing associations’ financial robustness might sometimes be judged on the size of their surplus – however crude an assessment that is – the equivalent figure in HRAs is their end-of-year balance. On this metric, the situation doesn’t look so bad.
Indeed, across the 20 councils that own the most homes in England, the average reduction in reserves from 2023-24 to 2024-25 was just over £0.5m. And this figure was inflated by the two councils where reserves took the biggest hit: Bristol (down £27.1m) and Birmingham (down £20.6m).
But reserves don’t really tell the story of what’s going on in the HRAs. For that, you need to look at the year-on-year change in capital financing requirements, essentially their net debt. The average increase in net debt from 2023-24 to 2024-25 across the top 20 stock owners was close to £29m. See our table below for the full council-by-council breakdown.
£29bn
Public debt taken on by councils in 2012
£264m
How much London councils need to reduce their spend on housing by 2027-28
33
Stock-owning councils that said they were likely to struggle to balance their HRAs by 2029-30
“Yes, councils performed better than expected [in terms of reserve levels] in 2024-25, but that’s been taken by some as meaning the problem’s done – it’s not,” says one expert in local authority finances, who asked not to be named.
“If you glance at the 2025-26 budget data, you can see that the deficits are coming back. Reserves will be drawn on more.”
Steve Partridge, head of Savills Affordable Housing Consultancy, points out that the figures for the biggest stock-owning councils reflect a wider trend in the HRAs.
According to Savills’ analysis of the COR data, total net debt in all the HRAs in England in March 2023 stood at £27.7bn. That grew to £29.7bn in 2024, then £31.8bn in 2025. Those £2bn annual increases are at odds with the historical norm.
“If you look back since 2012, it’s been really stable,” Mr Partridge explains. “It’s ebbed and flowed – it might have gone up a little bit, down a little bit – but it’s stayed roughly £26-27bn for the first 10 or 12 years after self-financing, and it’s suddenly started to go up.”
Mr Partridge doesn’t necessarily think this means that HRAs are facing collapse, but town halls might have to rein in their spending plans.
“People are being defensive and are holding on to reserves, but I think the knock-on impact of that has been to increase debt, so effectively they’ve pushed their overspends from revenue into capital,” he says.
“HRA debt is going to go up, so people will be borrowing more and they’ll be borrowing at a higher interest rate, and therefore it will put additional pressure on the business plan in the medium term.
“If that borrowing is for the existing stock and not for new build, it will put pressure on the government’s plans to involve local authorities in new build.
“It doesn’t necessarily make the business plans unsustainable, but what it does throw into sharper focus is this notion of having to prioritise between different ambitions.”
Rob Beiley, a partner at law firm Trowers & Hamlins who advises both local authorities and housing associations, sees a parallel between the two parts of the sector when it comes to making these investment decisions.
“You’ve actually got exactly the same pressure in the HRAs as you’ve got in the housing association sector,” he tells Inside Housing. “That is a drive for investment in existing stock to deal with things like Awaab’s Law, damp and mould, stock condition.”
When it comes to building new affordable homes, “there is clearly an expectation from government that local authorities are going to do quite a lot of the heavy lifting”, Mr Beiley says. But “whether or not the HRA capacity is really there to deliver” remains a major question.
One way to boost town hall coffers has been through what is known as rent convergence, a process whereby rent charged to longstanding tenants is increased gradually to match the ‘formula rent’ at which new tenancies are set.
The latest rent settlement, agreed earlier this year and due to come in in April 2027, will allow landlords including councils to increase rent by Consumer Price Index +1% each year, plus up to an additional £1 per week, rising to £2 in 2028.
This settlement fell short of the £3 per week top-up that many in local government, including London Councils, had been calling for. Research last year by the body, which represents the 33 local authorities of the capital, found that councils would have to reduce spending on housing by £264m by 2027-28 as costs outstripped funding.
The data shows that London could even argue for a different rent-setting formula from the rest of the country. While the net debt increase for the top 20 English councils (including those in London) stood at an average of £28.7m, the average for the 17 boroughs in the capital with at least 10,000 homes stood at £49.1m.
“London boroughs are at the sharp end of all of this,” agrees Dan Hawthorn, executive director for homes and communities at Camden Council. He is speaking to Inside Housing in his other capacity as co-chair of the London Housing Directors’ Group.
“It’s not at all surprising to me, because there’s something about the nature of the council stock in London which drives that.”
As much of London’s stock is high rise, or reaching the end of its life, he explains, that means “it either requires estate regeneration, which faces a huge capital burden on HRAs, or the work needed to extend life and make it habitable is expensive.”
“If you accept the premise that HRAs are increasingly unable to absorb debt, you’re talking about slowing down development ambition, which is completely contrary to what the government wants us to do”
Mr Hawthorn recounts how “HRA accountants refer to the ‘graph of doom’” when looking at their long-term business plans and the inevitability of increased debts.
“Many of the assumptions that were made in 2012 that underpinned the settlement – most obviously about the way that rents would continue to rise, but others too about inflation, and so on – have been proved wrong. Those assumptions have deviated so far from where they started, that we’ve got to re-examine it.
“If you accept the premise that HRAs are increasingly unable to absorb debt, you’re talking about slowing down development ambition, which is completely contrary to what the government wants us to do.”
One of the assumptions Mr Partridge refers to is the government-set social housing rent formula that was in place in 2012. Many landlords – both local authorities and housing associations – had to tear up their business plans in 2016 when the then-Conservative government instituted a sector-wide rent cut.
A group of councils, led by Southwark in south London, has come together to try to put pressure on the government to renegotiate the current rent settlement. A survey they ran earlier this year, under the Securing the Future of Council Housing banner, found that half of the 66 stock-owning councils they asked were likely to struggle to balance their HRAs by 2029-30.
Another looming factor for HRAs is the reorganisation of local government, which will see unitary authorities replace county and district councils across the country.
In many areas, these plans are still to be decided, while the recent local election results have thrown plans in the air in a number of places. But this just means uncertainty, and that is the last thing anyone making long-term financial decisions needs.
“The HRA landscape will change a lot in terms of either merging them, having to open them or closing them,” elaborates one local government policy advisor, who asked not to be named.
“A lot of the new burdens and the legislation we’re seeing is not really taking devolution or reorganisation into account in terms of how that’s going to function with the HRAs and with the ringfencing, so I think people just have a lot of questions at the moment.”
However reorganisation ultimately shakes out, the growing debt pile coupled with the increasing number of costs councils have to manage out of their HRAs suggests a reckoning of one sort or another may be coming for the system.
As Mr Evans in Wolverhampton concludes, his description of HRA debt echoes the same words Mr Hawthorn uses in London.
“It’s almost like the jaws of doom,” Mr Evans says. “And it’s only going to widen over time, because we won’t have enough income coming in.
“You can’t just keep saddling us with debt. You can’t keep reducing the number of properties. They need to change the HRA model: it’s got to be sustainable, and they’ve got to allow us the opportunity to borrow and invest.”
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