Social Housing Speed Read – Cancelling the cap: removing the limit on local authorities borrowing against their Housing Revenue Account

What’s new?

In another speech where social housing remained one of the PM’s key focuses, May labelled the housing crisis as the ‘biggest domestic policy challenge of our generation’, and pledged to lift the borrowing cap on council’s Housing Revenue Accounts in a bid to remove barriers faced by local authorities when funding social housing.

Currently, each local authority faces an individual restriction, calculated by reference to existing housing debt, as to how much they can borrow against their Housing Revenue Account. This restriction has been met with criticism, particularly as whilst the need for an increase in housebuilding has been widely acknowledged as national priority, councils face no similar limit in borrowing in relation to commercial properties.

Under the proposed plans, the restriction shall be abolished and local authorities will be able to decide for themselves how much to borrow in order to fund social housing, subject to the legislative caveat that they borrow within their overall “prudential” limit. This limit is a self-determined assessment of what the local authority can afford to borrow.

Impetus for change

We previously discussed the additional £1bn borrowing capacity made available to local authorities in “high affordability pressure areas”, with half of this fund ring-fenced for local authorities in London. Although this additional borrowing was welcomed, many local councils felt that it still did not provide sufficient capacity to deliver an adequate number of affordable homes. Applications to the programme closed on 30 September, so funding allocations have not yet been published, however initial reports suggest the fund was hugely oversubscribed.

Further, May’s previous announcement of an additional £2bn funding for social housing was criticised by the Local Government Association (the LGA) as the measures focused on assisting housing associations, failing to provide funding certainty to councils and ignoring the limitations placed on them by the Government. Governmental statistics show that this argument should be given some credence; in the 1970s councils built over 40% of houses, whereas in 2017 local authorities contributed to only 1.68% of permanent dwellings.

Key responses

Perhaps unsurprisingly, the LGA’s response to the PM’s announcement was very positive; stating that it was great that councils are being given the chance to build homes again, and they were pleased that ‘the Government accepted [their] long-standing call to scrap the housing borrowing cap’.

The Chief Executive of the National Federation of Builders, Richard Beresford, echoed this sentiment, stating that the ‘entire housing supply chain should be very proud of their collective campaigning on this issue’ and that he was pleased the PM had recognised and acted upon this substantial barrier to meeting their aim of building 300,000 new homes a year.

Similarly, Robin Fieth of the Building Societies Association praised the Government for compounding their ‘warm words about tackling the need for truly affordable homes’ with definitive action.

However, Mark Littlewood from the Institute of Economic Affairs criticised the proposal, arguing that the issue the UK is faced with is not a specific shortage of social housing, but ‘an overall shortage of inexpensive housing’. He further stated that the private sector would benefit from increased opportunities to build more houses, and ‘permitting councils to borrow to do a similar job is likely to lead to less efficient outcomes, and is certain to lead to a higher debt burden’.

Local authorities now eagerly await information on the timescales as to when the cap will be abolished, and will no doubt bear this proposal in mind when considering long-term developments. After campaigning for this decision for so long, councils will be keen to prove that they are capable of providing an increased volume of quality social housing for their residents.

If you have any questions on the above and how it will affect social housing providers, or any other questions as a social housing provider, please do not hesitate to contact John Murray or a member of our expert Social Housing Team.