Raising the HRA cap / raising aspirations

By Kevin Fenning

Theresa May’s recent announcement of the end of the Housing Revenue Account (HRA) borrowing cap has received a very warm welcome across the local government sector. Since the changes to the HRA system in 2012, the chorus of voices demanding either an increase in the HRA cap, or its abolition entirely, have become louder and louder as the cap has become an increasing barrier to local government getting housing delivered. 

With the cap on borrowing to be removed, local authorities will now have to reconsider what this means for housing in their area. It is clear that across the country developer housing completion numbers are far below the level of permissions being granted, even allowing for the lag between permission being granted and the building of homes.

Many local authorities have concluded that the only way to get development moving in their areas to the level needed, is to start building or contracting directly. Work by the Smith Institute last year suggested that there were as many as 150 local housing companies in operation, most of which have been set up in the last few years. This surge in the number of direct delivery vehicles reflects the desire by local authorities to address the real and pressing housing affordability challenges that are facing communities and people across the country.

One of the big constraints on public sector house building is the ability to finance development. Recent work by ARCH and NFA has demonstrated that the vast majority of local authorities are at or above 80% utilisation of their available debt cap, with many above 90%. It also highlighted that the remaining debt cap is not really ‘available’ as it is used by most authorities as a form of reserve within a system of prudent financial management.

The result is that most local authorities are straining against existing debt limits, and therefore the removal of the HRA cap is an important step. MHCLG have estimated that this could result in an additional 10,000 homes a year being built.

Nonetheless, removing the HRA limit is not a magic bullet. The Housing White Paper last year rightly identified the systemic nature of the UK’s housing challenge and it is important not to lose sight of this.

In particular, ‘the Treasury view’ is still fundamentally one in which public housing is a subsidy not an investment. This is simply not true. Public housing achieves a financial return through rental income (and reducing Housing Benefit), and a social return by improving the provision and quality of homes. Whilst the importance of financial prudence remains, it is vital that the UK stops treating new homes as debt, and starts treating them as assets. This is especially true given the increased recognition of the need for inclusive growth.

Local authorities are also constrained by the uncertainty created by Right to Buy, the potential Sale of High Value Assets programme, and the cuts to social rents. Very simply, any additional risks to revenues / stock management create a very challenging environment for local authorities, forcing them to hold more cash in reserve and spend less on building housing.

Lastly, all development – public and private – is adversely affected by the UK’s dysfunctional land market. At present, local authorities who take an active role in assembling sites are faced with high prices and limited CPO powers.

In this context, the recent findings of the Housing, Communities and Local Government Committee on Land Value Capture are very welcome. The Committee has recognised that reforms are needed to strengthen local CPO powers, reduce the role of ‘hope value’ in inflating land prices, and explore the potential for other forms of taxation and tariffs to better capture the private benefit of investment in large scale public infrastructure schemes.

If these findings are realised fully, it will be a significant boost for the ability of local government to finance infrastructure and housing schemes at the scale needed to tackle the housing crisis.

So whilst uncertainty remains, the tide does appear to be turning. Local authorities now need to continue to invest what they can to develop their local housing companies and their planning / delivery capacity, and proactively use their own and available land to boost delivery. Creative partnerships with private investors offer the potential to increase the scale and impact of development. It will also be important to work with neighbouring authorities to ensure that housing development addresses not only local challenges, but the challenges that exist across wider housing market areas.

For more information on Metro Dynamics’ work on housing and development, please contact: patrick.white@metrodynamics.co.uk / kevin.fenning@metrodynamics.co.uk