Local economic experiments: Getting housebuilding going

New financial freedoms are allowing councils to get house-building started again. Traditional council homes and self-build schemes are increasing supply but are they enough to meet demand?

Hamstrung by borrowing restrictions, their stock sold under the Right to Buy or transferred to housing associations, local authorities have not built new homes on any significant scale for 20 years.

Nobody is pretending that the heyday of council housing is about to return any time soon but a recovery of sorts is now underway thanks to new financial freedoms. The decisive shift came in April 2012 when the coalition government implemented plans it had inherited from Labour to introduce self-financing for councils that retain a housing stock (around half of English authorities).

This let them keep their own rents and some capital receipts in return for managing debt and meant that, within caps set by the Treasury, they could borrow for investment in their existing stock and in new homes. Social landlords were also given the option to charge higher ‘affordable’ rents and allowed to retain more Right to Buy receipts to reinvest in new homes.

All of these changes open up fresh options for local authorities when it comes to their own land. Where previously they might have looked to sell to the highest bidder or form a joint venture with a housing association now, after years of frustration, they can make their own decisions.

New models for housebuilding
For some, this means a chance to build council homes at traditional social rent. For others, it means a new sort of council housing that offers a mixture of social rent, affordable rent, market rent and low-cost home ownership. The choice may depend on local political priorities, land values and market conditions.

One east London borough was among the pioneers even before self-financing. Barking and Dagenham Reside is a special purpose vehicle that has brought in institutional investment for 477 homes. The council will manage and maintain them and guarantee the rental income before gaining full ownership on the expiry of the 60-year lease.

A fifth of the homes will be at close to social rent and the rest will be at 65-80% of market rent and specifically targeted at people in employment. ‘In terms of social and economic regeneration this is very important to us,’ explains Ken Jones, divisional director of housing strategy. The council see itself as in competition with a local private rented sector that has more than doubled in the last five years.

However, in the wake of self-financing, it is also planning traditional council-owned and built properties. The total programme is now 1,200 homes for completion by April 2016.

Across London, Southwark has ambitious plans to build 11,000 council homes over the next 30 years. ‘Before 2010 we could only have built as many homes if [a housing association] did it,’ says Fiona Colley, cabinet member for regeneration. ‘That’s no longer the case with self-financing and grant funding.’

The first 1,000 homes will be funded by section 106 affordable housing contributions from developers on high-value sites. As a substantial landowner within the borough, Southwark is currently investigating the options for funding the rest of the homes including borrowing within the Housing Revenue Account (HRA) or outside it via a wholly-owned company. ‘It all starts with attitude that you’re going to do it, you’re going to build 10,000, and all of a sudden you can do it,’ says Colley.

In Manchester, the city council has created a new housing investment model that will initially deliver 240 new homes for sale and rent. The land comes from the council and Homes and Communities Agency, with Greater Manchester Pension Fund providing the finance and the council taking an equity stake to keep the homes affordable.

New build and self-build
In Nottingham, the city council and its ALMO, Nottingham City Homes (NCH), have just announced plans for 400 new council homes, the biggest programme since the 1960s. They are part of a regeneration scheme that will see the demolition of eight tower blocks that are too expensive to maintain and their replacement with family housing, bungalows and independent living schemes.

These new homes are only possible because of self-financing, says Anthony Slater-Davison, regeneration manager at NCH. However, the city is also building five homes using a surplus made by its direct labour organisation and looking at using prudential borrowing outside the HRA to build another 62.

The innovations are not restricted to big cities or to councils that retain their own housing stock. In Oxfordshire, Cherwell District Council is encouraging residents to create their own homes with its Build! project. It has secured plots of land plus some long-term empty properties and is inviting bids from people who want to build or renovate 250 new homes and buy or rent them at a reduced price in return for the work they put in.

For all these new ideas, though, there are limits. ‘The scale of it does not compare with where they once were or where housing associations are now,’ says Chris Wood, a partner in consultant Altair. ‘There is no shortage of innovation but it is not having the sort of impact people want. I can’t see anything that’s currently going on that is going to deliver, say, 10,000 homes.’

Matthew Warburton, policy advisor to the Association of Retained Council Housing (ARCH) says it’s difficult to estimate how many homes could be built under current conditions. ‘We know how much money is theoretically available but two things condition how quickly councils could respond. One is land and other constraints on how quickly they can gear themselves up, the other is how many councils will really be prepared to stand up and do something.’

However, pressure is growing on the government to raise the borrowing caps. According to one estimate, councils could deliver as many as 60,000 homes over the next five years with greater financial freedom. Support has come not just from Labour councils but from Conservative mayor of London Boris Johnson.

The Treasury has resisted the idea so far but the pressure continues. And in the meantime councils that have already taken the plunge into new build are urging others to join them. ‘It’s about taking that first step and jumping into the swimming pool,’ says Ken Jones. ‘You can stand on the side and shiver or you can get in.’

 Tips to get house-building going again

Barking and Dagenham was one of the first pioneers in the new generation of council housebuilding. Ken Jones, divisional director of strategy, has these tips for others looking to follow suit:

• Make the link between housing and physical and social regeneration
• If you’re looking just for the upfront capital receipt as opposed to long-term value, forget it. ‘The land value must be seen as a long term investment,’ says Jones.
• Be pragmatic about rent levels: ‘If you’re saying “we only want social rent” you won’t make things stack up.’
• Be prepared to think differently: ‘The tried and tested development agreement working with a housing association is ok but there are other ways of doing things,’ he says. ‘You have got to be innovative.’

The experience from elsewhere amplifies some of those points:

• Look at funding sources inside and outside the HRA and be prepared to blend borrowing, grant, receipts and institutional investment.
• Be prepared to adjust the blend of tenures between social rent, affordable rent, market rent, shared ownership and market sale according to local conditions.