Consultation on the proposed changes to the council house finance system in England began under the previous government and the new arrangements will come into force in April 2012. These will impact the 171 local authorities who still own council houses.
At present all rents are pooled nationally and redistributed through the subsidy system. In the future local authorities will retain their rents in return for a one-off payment to reflect the difference in value between their existing housing business and the existing housing debt supported through the subsidy system. Where the value of the business exceeds the capital subsidy financing requirement, the authority will make a payment to the government. Where it is lower, the government will pay the difference to the authority.
The existing business will be valued on the basis of a 30-year cash flow derived from rental income and expenditure on matters such as management, repairs and maintenance. Any surplus figure will be discounted at a notional rate of 6.5% per annum. Assumptions are made about rents based on formulae similar to those used by housing associations, with time allowed to converge towards formula rents by 2015-16, where current rents are lower.
As a result, many local authorities will take on additional debt. Current estimates range from £396 million to be paid by Birmingham and £780 million to be received by Hackney. Payments received by local authorities will be used to pay down existing debt. The overall effect will be to transfer £6,711 million of debt onto local authority balance sheets.
So is this just localising debt in return for local authorities retaining their rents, or is it also a first step to more council house building? What might be the other consequences? Here are some thoughts:
- New build depends on accepting the 80% market rent model if Homes and Communities Agency (HCA) funding is needed. Some authorities may want to resist such increases because of concerns about the impact on tenants at the price of funding new build 100%, possibly through the capital receipt otherwise due from a land disposal for a mixed tenure scheme. Will government refuse consent to disposals on such terms? How many authorities will be able to afford to give up capital receipts to fund such schemes, or even have land with sufficient value?
- Some authorities will take on a significant treasury management role associated with their new debt. Does this mean more opportunities for specialist public sector consultants such as Sector? Is this another item on the shared services agenda? With the hike in the Public Works Loan Board rates in the Budget, will the temptation to look at the bond market grow even more?
- Borrowing controls are to return for council house related debt. Expect some authorities to try and work around the rules, whatever their final form. It is also likely that payment in kind, such as new build houses, will be caught by a credit arrangement definition.
- Stock transfers are dead? Well possibly. It is hard to see what can be gained by moving stock off balance sheets, or how housing associations can compete on financing rates. The exception here might be where authorities find the new borrowing limits a constraint on their new build ambitions.
- Will we see a return to management outsourcings to keep the in-house team, or even the arms length management organisation (ALMO), on its toes. Will housing associations be up for that?
- Will local authorities with housing stock and land for development look for new stock to manage in joint venture disposals with housebuilders or even through planning agreements? This would effectively exclude housing associations from future new build opportunities in these areas?
Watch this space.