Historic debt is an anchor on the new PM's council housing ambitions - this is how we can fix it

Historically, local authorities were the biggest builders of social housing. In the 1960s, on average councils built over 120,000 social homes a year. That's two-fifths of all the homes that were built in England. Andy Burnham, who is widely expected to become the next prime minister, has said he wants to empower regions, with a cornerstone of this vision being an ambition to return council building of social housing return to the levels seen in that period.

Making this ambition a reality could be a game-changing moment for social housing: finally building at the scale needed to end the housing emergency for good. But the latest statistics show that, while councils are building more than they have been since the early 1990s, they are far away from those historic highs. Around 4,000 social homes were completed by local authorities last year.

We desperately need more of these homes. Social rent homes are the only genuinely affordable homes because their rents are linked to local incomes. They are the only homes that most homeless families are able to afford. To end the use of temporary accommodation and house all 1.3 million households on the waiting list, we need to build 90,000 social rent homes a year for 10 years. As we’ve learnt from recent decades of government, there’s no short cut or planning loophole that can end the housing emergency.

Councils held back from their potential

We know that things could be different. Councils have huge untapped potential to deliver homes at scale. They have the power to assemble land for building and masterplan local areas to ensure development aligns with local priorities. And crucially, they have the motivation to put social rent homes at the heart of new building, because they see the human impact of homelessness and poor housing in their communities every day and bear much of the financial cost themselves, including the £2.8bn annual bill for temporary accommodation.

But the government's current fiscal framework treats council housing unfavourably in the eyes of Whitehall, keeping associated debt on the government’s balance sheet and placing a straightjacket on councils’ ability to build. Most recently, Whitehall excluded councils from the low interest government loans that private providers of social housing enjoy.

Earlier this year, Shelter published our Roadmap to the future of council homes, which set out the five key policy changes needed to get councils building at scale again. The crucial first step the government needs to take is to tackle the problem of debt which is holding back councils from building. That’s why we commissioned Savills, who support many councils with the financial plans for their housing, to model a sustainable financial settlement for council housing which unlocks the potential for councils to build new social rent homes at scale.

Where did councils' housing debt come from

In 2012, central and local government came to an agreement about how council housing would be funded. The principle was that the Housing Revenue Account – councils’ ‘landlord’ account – should fund itself, with the cost of maintaining existing homes and building new ones coming from the rents received. As part of the settlement, councils agreed to pay back HM Treasury around £29bn debt for the homes they owned. This was meant to be affordable based on assumptions about the income councils would expect from rent and the spending they would have to do on maintenance. The agreement included a clause that the settlement could be adjusted if there were changes to the assumptions about income and spending it made.

Fast forward fourteen years and things have changed a lot. Successive governments have broken their side of the agreement with councils. Almost immediately in 2012, the government turbocharged Right to Buy with increased discounts, leaving councils with fewer properties to generate income, but the same amount of debt to pay back. Rent freezes and caps – while protecting tenants from rising costs – have also cut the income councils receive without any funding from the central government to make up the difference. And rightly, there are now higher expectations about the energy efficiency and standards of homes, with increased requirements for building safety following the tragic Grenfell fire and an expectation that social housing will meet the government’s Net Zero goal by 2050.

All of this is expected to be covered by the Housing Revenue Account (HRA) because of the ‘self-financing’ principle that still applies – and the debt has now grown to £31.8bn. Councils have had few choices about these changes, but somehow council housing is meant to bear the costs. And that means that, while many councils do their best to deliver new homes, far too many simply cannot afford to take on the risk that new building involves. Councils collectively spend around £1bn a year paying Treasury interest on the debt, money that could instead be invested in the social housing that communities desperately need.

What would cancelling the debt do

The research from Savills found that for every £1 billion debt that the government cancelled, councils could deliver around 8,900 new social rent homes. That’s more than double the number they delivered last year.

Savills found that the scale of the changes since 2012 means that the full cancellation of all £31.8bn Housing Revenue Account debt is necessary to ensure councils can meet all the requirements to upgrade existing homes - especially if councils need to bring their homes up to Net Zero standards before 2050 - as well as invest in building new social rent homes.

The government was elected promising a council housing revolution, and cancelling the debt is a crucial step to seriously ramping up the number of social homes councils can deliver. The benefits of these new homes would be spread right across England. As the table below shows, every region would see increased capacity for new council-built social rent homes, from 15,126 in the North East to 70,023 in London.

Importantly, the government could cancel HRA debt without having any immediate impact on its fiscal rules. That’s because the money is mostly owed by one part of the public sector (councils) to another (HM Treasury), so is already included in the national balance sheet. Although HM Treasury would have to forgo the future interest payments on the debt, the proven economic benefits of building social homes would substantially offset this cost through savings to public spending and the boost to the economy from additional construction.

Debt cancellation unlocks the capacity for councils to get building at scale again. To get the homes built, councils will also need a financial package to ensure they can deliver, with access to low-interest loans and enough grant funding to make social rent homes viable. For some councils, cancelling the debt will immediately unlock the ability to build homes using income from existing rents. But to deliver at scale, central government will need to seriously ramp up grant and loan funding available. With record-breaking homelessness and a huge backlog of households stuck waiting for a social home, it’s an investment we can’t afford not to make.

Delivering a council housing revolution

With Andy Burnham promising to return council housing delivery to levels last seen in the post-war period when councils were building 100,000+ social homes most years, it is vital that government makes this crucial investment in the future of the country.

Cancelling the debt is a crucial first step to get councils back on the pitch as major housebuilders. Getting us building social rent homes on the scale necessary to end the housing emergency is going to mean more funding is required, both in low-cost loans and in top-ups to grants available through the Social and Affordable Homes Programme.

After half a century of failed 'trickle down' housing policy, which has left far too many families priced out of a home, it is clear that the next government must take a different fiscal approach if it is serious about delivering better outcomes for people across the country. Instead of a complete overhaul to the current fiscal framework, the government can take interim steps to rapidly devolve financial powers to public corporations, including councils’ HRAs. At present, self-financing public corporations that build social housing, such as HRAs, are included in the government’s debt measure that it targets in its fiscal rules[1]. This makes little sense given they pay their debts independently of government support.

In similar fashion to EU countries, the government should shrink the scope of its current debt measure to exclude self-financing public bodies. This would make low-cost government loans for council housebuilding fiscally neutral while placing HRA debt outside the fiscal rules, therefore ending Whitehall’s incentive to limit their borrowing. Not only would it help return council housebuilding to the heart of the government’s housing ambitions, but it would enable development corporations to build social housing too, securing the success of the government’s new towns programme.

Recent statistics released by the government showed that, while there are green shoots of recovery for social housing, current measures are far from delivering homes on the scale that Andy Burnham says he wants to see built. The number of social rent homes starting construction last year was up 33% annually to over 11,300, the highest level since 2010/11.

While a 33% yearly increase is a significant milestone, it doesn’t show the generational change we need to ensure everyone who needs one can access a permanent, genuinely affordable home. We need radical interventions which rewrite the script on decades of failed housing policy. To do it, the government must use its power and make the bold changes needed to end the housing emergency for good. To meet the ambition Andy Burnham has set out and get councils and other social housing providers building at scale again, we need a generational step-change in the level of investment and strong political commitment to drive forward change.

The next prime minister must start by removing HRA debt to get councils building again, and make the major investment needed to build at least 90,000 social rent homes a year for 10 years.

[1] HRAs are seen only as ‘public quasi-corporations’ by the ONS (as councils remain the liable owners for this debt), but the mere international quirk that much of England’s social housing and future delivery potential sits under local authority-controlled HRAs must not derail government ambition to unleash council housing delivery. Explicit exclusion of HRAs is justifiable given their market credentials.