Magazine article Public Finance

Safe as Houses?

Magazine article Public Finance

Safe as Houses?

Article excerpt

A Whitehall-backed housing review has suggested councils could borrow from general funds if they have reached their Housing Revenue Account borrowing cap. But would such an approach make sense?

When Natalie Elphicke and Keith House launched their new report on local authorities' role in house building earlier this year, they called on councils that have reached the borrowing limits on their housing accounts to borrow from their general funds instead. But is this a good idea?

The Elphicke-House Review was specifically restricted by its terms of reference from looking at options that would breach the government's fiscal rules or require accounting changes. So although much of the evidence to the review stressed the need to reconsider the borrowing caps that apply to councils' Housing Revenue Accounts (HRAs), Elphicke and House weren't able to do this. Instead they questioned why councils were so concerned with the restrictions when, outside their HRAs, they could borrow freely (only needing to stay within prudential rules).

Some councils are already doing this and there are three main reasons why. First, some 159 local authorities no longer have council houses, so if they decide to build they are unlikely to want to recreate their cumbersome Housing Revenue Account. Second, houses built outside the HRA can be let at higher rents and are not subject to Right to Buy. And third, councils can borrow to reinvest the money in housing provided by an arm's length management organisation, or indeed a housing association. So what's the problem with doing this?

Well, there is a reason for the caps on HRA borrowing - it's a very effective basis on which to borrow, because it has a large, secure revenue stream and asset base. The Treasury knows this and has acted to ensure that borrowing is kept within tight limits.

To borrow outside the HRA, councils need an income stream to support the borrowing costs. Obviously they could put in free land to reduce the cost of a scheme, but even so they are going to have to build for market or near-market rents, or a combination of sale and near-market rents, to pay the loan costs. Where there is a very good market for such properties these schemes may work - but they do little or nothing to produce housing at genuinely affordable rents.

The Elphicke-House Review makes much of the idea of setting up local housing companies, owned or part-owned by the council and financed by borrowing outside the HRA. …

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