London Councils Housing Directors Meeting
Review of Council Housing
Finance
Report by:
Nigel Minto
Date:
17 July 2008
Contact Officer:
Philip Clifford
Telephone:
020 7934 9792
Item no:
Job title:
Head of Sustainable Communities
Email:
[email protected]
4
Summary
This paper updates directors on recent developments around the review
of council housing finance and sets out London Councils’ proposals for
taking work forward in this area.
Recommendations
Directors are asked to agree:
1. London Councils’ proposed ‘twin-track’ approach to meeting the
challenges of the review:
i. A focused lobbying campaign around levels of subsidy
entitlement, rents and allowances supported by an all borough
conference in the summer.
ii. A more ambitious exercise to develop a position paper which
articulates a vision for local authority council housing that goes
beyond current aspirations.
Introduction
1. Government formally launched its review of council housing finance on 10 March
2008. Since then, London Councils, along with other local government stakeholders
has worked to structure the emerging debate so that local authority landlords are
provided with the freedoms, flexibilities and resources to deliver high-quality,
council-managed, social rented homes for their tenants.
2. Progress so far has been mixed. Government has convened a number of expert
panels but their activities to date have suggested an educative rather than
transformative role. Similarly, local government stakeholders have worked to
develop their lobbying positions, largely favouring a move towards a properly
resourced ‘self-financing’ settlement.
3. London, as a whole, does reasonably well out of the current system and given the
national importance of the region this situation is unlikely to change significantly.
However, with much of the debate already being channelled along essentially
conservative lobbying lines there is a real opportunity for boroughs to step up and
propose something radical. This paper sets out the case for radical action and offers
a way in which this work might be taken forward.
Drivers for Change
4. The Housing Revenue Account (HRA) subsidy system is an outdated, opaque and
obstructive mechanism which allows central Government to retain control over local
authority managed housing stock. It is outdated, in that it doesn’t reflect the
complexities facing local authority landlords, opaque in that it is highly technical,
volatile and divorced from conditions on the ground and obstructive in that it offers
no reward for financial prudence or the development of local efficiencies.
5. These views are widely held and well evidenced: they should come as no surprise to
anyone working in the field of council housing finance. However, convincing
Government of the case for change, has, up until recently, proved to be a frustrating
task and, as such, calls for reform have resulted in little more than tinkering with
formulae: resources diverted from one region to another on the basis of changed
perceptions in need.
6. It was largely a report by the Audit Commission, Financing Council Housing, in 2005
which helped structure much of the impetus behind the current review. Whilst
essentially merely codifying much of the criticism articulated above, its
recommendation that high performing local authorities should be able to leave the
subsidy system and explore the possibilities of self-financing led Government to
commission six local authorities (Sheffield, Hounslow, Carrick, Darlington, Warwick
and Cambridge) to undertake a pilot exercise.
7. This exercise, initiated in 2006, attempted to establish the benefits and risks of
allowing local authorities to leave the subsidy system through a buy-out
arrangement. This would see thirty years of subsidy contributions replaced by a
single transaction, subsequent to which, the local authority would run its Housing
Revenue Account outside of the national subsidy system: able to keep surplus
income locally and develop long term business plans free from the volatilities of an
annual determination.
8. By the time the pilot exercise had concluded in 2008, the efficiencies accruing to
local authorities from operating outside the subsidy system were well established.
So too, were HMT’s concerns around issues of risk transfer and the need for
ongoing borrowing controls. With both sides lacking an overriding case for either
adopting or rejecting self-financing, the project appeared to be on the verge of being
sent back to the drawing board.
9. However, whilst the case for adopting self-financing, all things being equal, proved
to be only slightly better than marginal, the pilot exercise produced a significant
amount of evidence that clearly demonstrated the inadequacies of the current
system:

management and maintenance allowances have not kept pace with the need
to spend;

failure to properly resource the major repairs allowance is undermining the
billions invested through the Decent Homes programme;

disparities between the rate of guideline rent increase and the allowances
made available to local authorities are increasing the level of resources
siphoned out of the system back to HMT with no guarantee that this money
will be spent on housing.
10. As a result, Government found itself in the unenviable position of facing mounting
pressure from housing finance experts, local authorities and tenants whilst at the
same time presiding over a pilot exercise which had produced significant evidence
of the system’s shortcomings and of the extent to which progress in other policy
areas such as devolution and the decent homes standard was rapidly being eroded.
Ironically, two of the key barriers to the subsidy system’s rapid overhaul were two of
the most powerful drivers for reform: HMT’s accrual of the national surplus
generated by the subsidy system and the complexity of system itself.
11. With regard to the former, it is clear from discussions that HMT takes the surplus
generated by the subsidy system into account when determining expenditure within
a Comprehensive Spending Review period. If these funds were no longer available,
resources would have to be found from alternative sources; in the current financial
environment, this is likely to mean that services would be cut. Given that HMT has
factored the current (2008-2011) expenditure programme on the basis of a £713m
surplus arising from the subsidy system these cuts would likely have a substantial
impact.
12. In this light, it can be seen that the review was borne of out a need to respond to
criticisms of the current subsidy system rather than a desire for a new mechanism
for financing council housing per se. At the same time, the fact that rapid,
transformative change, whilst desirable, is likely to be impeded by the complexities
of the current system means that the process of piece by piece deconstruction that
is currently underway is understandable, if not ideal.
Key Challenges for London
13. Before moving on to discuss the activities and structure of the review it is worth
briefly spelling out what the implications of the current system are for London
boroughs in terms of subsidy levels and how these levels are derived, in part, from
assumed rents and property allowances.
14. For a start, we should be clear that when compared against the eight other English
regions, London is a net recipient of subsidy. As the graph below indicates, in
2007/08 London received an average subsidy entitlement of £644 per property
whilst, at the other extreme, the Eastern region paid £912 per property into the
system.
Subsidy Entitlement per Property 2007/08
800
600
400
200
£
0
-200
-400
-600
-800
-1000
East
East Midlands
London
North East
North West
South East
South West
West Midlands
Y&H
15. However, as the map below illustrates, within London there are significant
differences between subsidy paid and received by each of the boroughs. Broadly
speaking, outer London local authorities make subsidy contributions, inner London
local authorities receive subsidy.
16. Such differences mean that the issue of subsidy distribution, whilst important, is
often articulated in a way which is locally divisive and ahistorical. Local authority
tenants across the country, regardless of their position in the subsidy system have
been recipients of substantial investment by Government over a period of many
years. Also, the rallying cry that tenants in one region are subsidising the services
delivered in another, whilst a powerful tool, neglects to recognise that much of the
redistribution of resources within the subsidy system takes place so that large-scale,
historic debts can be serviced.
17. Essentially, the rush to fight one’s own regional or local corner has resulted in
something of a zero sum game: when Government has chosen to respond to
lobbying, it has done so at the expense of another region rather than tackling the
problem of underinvestment endemic to the system.
18. Furthermore, as the chart below indicates, this form of local bargaining has
obscured the fact that as assumed rental incomes continue to outstrip allowances,
all local authorities will eventually be paying more into the subsidy system than they
receive. Simply dividing the country into subsidy payers and subsidy recipients fails
to properly capture the nature of the problem or highlight the direction of travel.
London Average Subsidy Entitlement 2003/04 - 2007/08
25,000
20,000
15,000
10,000
5,000
0
2003-04
2004-05*
2005-06*
2006-07+
2007-08+
19. Broadly, this move towards negative subsidy is driven by the divergence between
the rate of increase in assumed rental income and that of expenditure allowances.
Whilst it is beyond the scope of this paper to explore this process in detail, it is worth
noting the extent of these differences.
20. As the graph below indicates, average actual rents from 1999/00 to 2007/08
increased by approximately 4.5 per cent per annum. This increase is largely the
result of Government policy which underpins the determination of guideline rents
and the interaction of subsequently assumed income streams with actual rent levels.
Average actual rents across London (1999 - 2008)
90.00
80.00
Average Rent per week £
70.00
60.00
50.00
40.00
30.00
20.00
10.00
1999/00
2000/01
2001/02
2002/03
2003/04
2004/05
2005/06
2006/07
2007/08
21. As an interesting aside, if one compares lowest decile gross earnings to average
guideline and actual rents over the last six years, it can be seen that whilst the ratio
of actual average rents set by London boroughs to lowest decile earnings has
broadly stayed the same (at roughly 25 per cent), the ratio of guideline rents, set by
Communities and Local Government, to such earnings has increased (from just over
21 per cent to 25 per cent); indicating that Government has raised the level of what
it classifies as an affordable guideline rent.
Ratio of Actual and Guideline Rents to Lowest Decile Earnings
0.260
0.250
Ratio of Rents to Earnings
0.240
0.230
0.220
0.210
0.200
0.190
2002
2003
2004
Average Guideline Rent
2005
Average Actual Rent
2006
2007
22. If we turn now to considering allowances we can see that, whilst management and
maintenance allowances increased at a reasonable rate, the major repairs
allowance largely remained stagnant. Again, as an aside, once the effects of
inflation are brought into play, we can see that the real value of the major repairs
allowance has actually decreased year-on-year, seriously jeopardising the ability of
local authorities in London to maintain their stock.
Impact of Inflation on M&M and MRA
50
40
30
%
20
10
0
-10
-20
Average M&M £ PD
Average MRA £ PD
Average M&M £ PD - RPI
Average MRA £ PD - RPI
23. A quick comparison between the growth of assumed rents and allowances supports
the above chart indicating declining levels of subsidy entitlement. Indeed, analysis of
day-to-day costs (guideline rent minus Management and Maintenance allowances
and the Major Repairs Allowance, excluding subsidy on debt charges, paid by
Government to London borough Housing Revenue Accounts) shows that the net
payment of Housing Revenue Account Subsidy from London boroughs to
Government has increased by 260 per cent from £171 million in 2003/04 to £445
million in 2008/09 and that London is now loosing £36 million more HRA Subsidy to
Government than in 2007/08.
Review Structure, Timetable and Progress
24. The Review of the Housing Revenue Account Subsidy System was formally
launched by the housing minister, Caroline Flint, on 10 March 2008. The review is
cross-departmental, being jointly led by Communities and Local Government and
HM Treasury with input from the Department for Work and Pensions. Indications
have been given that the review is to complete by spring 2009. Given the complexity
of the current system this tight timescale has raised concerns that the eventual
outputs will neither be robust nor aspirational enough.
25. The review has taken the form of four core workstreams supported by expert panels
made up of a variety of housing finance experts, practitioners and tenants. Following
the first round of meetings, the scope of the review was expanded to include
consideration of capital receipts. As such, it has been renamed The Review of
Council Housing Finance. By the end of July each of the panels will have met twice.
The table below captures the key developments in each of the work areas and notes
the London borough representative.
Expert Panel
Costs and standards for
social housing
London Representative
 Dick Johnson – Westminster
 David Sutherland – Croydon
 Rachel Sharpe – Southwark
Rents and service
charges



Ken Florey – Wandsworth
Nigel Minto – London
Councils
Gary Chase – Brent
Mechanisms for
delivering funding


Neil Isaac – Hackney
Philip Clifford – London
Councils
Current rules regarding
operation of local HRA


Conway Mulcahy – Havering
Rachel Wigley – Kensington
& Chelsea
Rhys Mackinson – Camden

Progress to Date
 Delivery reflects money
available not need
 HRAs are moving towards
instability
 Recent improvements in
stock not sustainable
 Services increased over
time: ‘mission creep’ and
rising expectations
 Tenants not sufficiently
involved in rent setting at
local level
 Limited relationship between
costs and rents
 Questions about the
interaction between rents
and new supply
 HB rather than rent levels
impact on work incentives
 Greater efficiency and tenant
engagement arise from local
control
 Further testing on the selffinancing pilots required
 Moving debt to central
government would simplify
the system
 Capital receipts should be
retained locally and used for
housing
 Local ring fence should be
maintained
 Leaseholder costs should be
considered
 Capture of capital on
balance sheet
26. A quick glance at this table should be enough to recognise that much of discussion
generated so far has tended towards educating Communities and Local
Government about the operation and implications of the current system rather than
directly pursuing a replacement model. Over the summer, Communities and Local
Government has stated that it is going to consider the evidence it has collected and
produce a set of ‘solutions’ to be considered at the third round of expert panel
meetings in October.
27. As mentioned previously, London Councils has organised a ‘Contact Group’, formed
from the London representatives to share and discuss information generated at the
national workshops. Findings from this group are fed into London Councils’ research
and lobbying efforts.
Stakeholder Response
28. Aware of the significant interest that the review is likely to generate, Government
has sought to involve both the public and a wide range of housing sector
stakeholders. To this end, it has set up a website (http://moodle20.cih.co.uk) which
hosts a discussion forum and a series of narrative accounts drawn from each of the
expert panels, held two regional events, one in Bristol (4 July), one in Leeds (11
July) and is in the process of holding bilateral discussions with each of the key
representative organisations. The adequacy of these initiatives can be measured by
the response of the sector, which has largely been to push ahead with pursuing
lobbying efforts that essentially either pre-judge the outcome of the review or
criticise arrangements under the current system.
29. In this vein, the Local Government Association has established a Housing Revenue
Account ‘working party’ made up of London Councils, the Chartered Institute of
Housing, CIPFA, the Councils With ALMOs Group, the Association of Retained
Council Housing and the National Federation of ALMOs. This party has produced an
initial position paper ‘My rent went to Whitehall…’ (see Appendix 1) which was
launched on 3 July and which broadly endorses the principles of a properly
resourced and locally controlled replacement for the current subsidy system.
30. More specifically, the paper argues for a settlement that provides:

local authorities with a level playing field alongside housing associations so that
they are able to manage their services as a business

additional freedom for local authorities to use land and housing assets;

a national ring fence around resources generated by local authority housing
stock.
31. These ideas will be developed in the coming months and a replacement model will
be available before the Government completes its review.
32. Elsewhere, Waverley Council has organised a campaign group around the negative
subsidy issue that has resulted in significant media attention (see Appendix 2) and
arguably skewed the debate along the lines of subsidy entitlement levels. The
Northern Housing Consortium has engaged in a process of research to explore the
impact of the current system on its members and is likely to lobby around protecting
their interests. The National Federation of ALMOs has produced a position paper
(see Appendix 3) recommending a replacement for the current subsidy system
broadly similar to the model under consideration by the LGA.
Delivering for London: Meeting the challenge
33. So far, this paper has discussed many of the underlying factors that have led to the
review, established the impact of the current system on London, set out the review’s
progress and provided an overview of the initial reactions of other relevant
organisations. Broadly speaking, it can be said that there are significant drivers for
change but that the complexity of these drivers combined with the divisive nature of
the current system means that delivering a revolutionary improvement will be a
challenge.
34. We believe that London local government is capable of meeting this challenge but
before setting out what we propose to undertake in order to move things forward, it
is worth exploring a couple of the big questions that lead us to this conclusion.
35. First, it should be recognised that although the review is significant in itself, it
provides far greater benefit as an opportunity for London boroughs to come up with
something that offers a positive, radical solution to Government. Whilst the
resources involved are no doubt substantial, it is difficult to imagine a settlement that
results in a system any worse than the one that already exists. Even if, after a
protracted period of review, Government decides to leave reform of the Subsidy
System until a date beyond the next General Election, the positive and normative
criticisms of the current system are so extensive and well publicised that inaction on
this issue by any Government seems unlikely.
36. Second, one cannot fail to note the degree of heat and noise generated around the
Review: some organisations have sought to lobby for the local government sector
‘as a whole’; others have sought to ensure that their particular concerns are
highlighted and addressed. Their common weakness is, however, a reliance on a
limited number of housing finance experts, who, despite their knowledge, risk being
tied up by the complexities of the very system they are charged with reforming.
37. In effect, there is a serious risk that Government and the housing sector will
conclude the review without ever seizing the opportunity to do something truly
transformative. As a result, London boroughs are potentially looking at limited ‘selffinancing’ settlement with local aspirations stymied by Government’s need to
maintain a substantial degree of control over local housing stock. This will happen
because the terms of the debate are constructed along the lines established by
those who have presided over its current incarnation.
38. To be sure, self-financing would militate against the crippling volatilities of the
current system and provide local authorities with the capacity to reinvest efficiency
gains as they see fit, but then, the current system could hardly be much worse.
Against this, London boroughs and London Councils have the potential to seize this
opportunity and move the debate away from simply arguing over the rationing of a
smaller or larger pie, stunted ambitions or no ambitions at all. Strong operational
and financial expertise combined with a wide-ranging, cross-party vision for housing
puts London local government in an ideal place to drive policy forward in a radical
and far-reaching way.
39. To this end, London Councils proposes a twin-track approach to meet the
challenges of the review and showcase London’s ability to bring a cohesive, robust
and imaginative perspective to the debate.
40. First, it should be recognised that there is a clear expectation that London Councils
should lobby on behalf of London boroughs around issues specific to London and
that an over reliance on critical analysis risks alienating key stake holders. It should
also be remembered that, regardless of how boroughs might wish things to be, the
reality is the current subsidy system and a national debate heading towards
endorsing some form of self-financing with a significant degree of inertia. In light of
these factors we propose an initial lobbying campaign around levels of rent,
allowances and subsidy entitlement.
41. This focused lobbying exercise would be relatively quick to develop, would largely
use research already carried out by London Councils and would act as both a fallback position and a tool to ensure that the particular challenges of undertaking the
local authority land lord role in London are uppermost in policy makers’ minds. It is
our intention that this element of London Councils’ work will be supported by an all
borough conference, currently planned for the 4 August, at which the technical and
operational arguments we seek to use are honed.
42. Second, in order to bring forward our more ambitious goal of expanding the horizons
of the current debate, we have established a task group, formed from a small
number of borough housing directors, to set about determining the scope for radical
change. This small group will be joined by non-housing finance professionals and
academics and will work towards developing a position paper which highlights the
potential benefits of devolving greater financial power to local authorities and
critically examines issues around social housing expenditure more widely e.g.
housing benefit.
43. This work will be supported by second housing finance symposium either in late
August or early September. For this, we propose a no-holds-barred discussion
about what a new system for financing council housing could look like and how the
challenges of meeting the needs of existing households can be reconciled with the
need to shape local communities to meet their future demands.
44. In effect, by pursuing both the responsive and transformative courses of action,
London Councils proposes to lobby for the resources London so desperately needs
whilst at the same time demonstrating capacity London boroughs have for leading
the debate in a cohesive, innovative way.