Lifting the lid on the HRA cap

Budget 2018 may have been a bigger deal than most of us expected but it’s been underwhelming when it comes to housing, especially given the government claimed just weeks ago that ‘solving the housing crisis is the biggest domestic policy challenge of our generation’. That said, we do now have details about the lifting of the Housing Revenue Account (HRA) borrowing cap and what this could actually mean for councils, allowing us to estimate the potential effects of this significant policy change for families and the state alike.

The budget makes clear that the HRA cap is lifted with immediate effect for local authorities in England (with steps being taken to do the same in Wales). As a result, the Treasury estimates councils could access an extra £385 million of additional spending for house building in the next fiscal year. This figure will continue to rise over time, with councils projected to borrow an additional £1.24 billion at the end of the forecast period in 2023-24.

So far, so good, but how much more building could this actually enable local authorities to undertake? The Office for Budget Responsibility (OBR) estimates that councils could complete an additional 20,000 new units by 2023-24 (and we estimate a further 7,000-plus units could be started by this point). Construction on this scale would represent a significant step-change for local authorities: in England and Wales they built a mere 1,900 new homes in 2017-18.

Building true social rent homes at such levels would reduce the pressure on many low income families who currently have no option but to rent in the private sector. We estimate that if a lone parent family with one child (with annual earnings of £20,000) renting at the 30^th percentile of private rents moved to the social sector in 2023-24 they would save £610 a year. Likewise, a low-paid couple with two children (with total earnings of £30,000) would be £720 better off in 2023-24 if they were able to move out of private renting and into the social rented sector.

But spending on a new era of council building would mean savings accruing not just to individuals but also to the state. Social rents are generally lower than the Local Housing Allowance (LHA) level of housing support that low income families receive if they rent in the private sector. Taking our example families above, we estimate the housing support received by the lone parent family would drop by around £2,200 if they were able to move into a social rent in 2023-24, while the state would save around £2,900 a year for each two parent family able to access social housing.

That said, the OBR regards uncertainty around local authorities’ use of the extra borrowing room as ‘medium to high’. There could be a number of factors that inform this assessment. To begin, many point to Scotland as an example where increased borrowing capacity has gone hand-in-hand with higher levels of building by local authorities. But it’s worth remembering Scottish councils are not subject to Right to Buy. In contrast, could English councils’ appetite to repeat the performance be limited by the continued requirement that they offer council homes for sale?

Second, councils will often need other sources of funds to combine with borrowing if they are to ratchet up the number of social homes they build. With money available for affordable homes still below the levels we saw in 2008-2010, and much already allocated to ongoing activities, councils may not be able to take full advantage of new borrowing opportunities without additional grant finance.

Third, the existing in-house capabilities of many councils to manage complex building programmes should not be over-estimated. After decades when local authorities have barely built at all, the institutional knowledge required to deliver at scale could take some time to re-establish (although it is worth noting that some councils have upskilled considerably in recent years as a result of creating housing corporations). Interestingly, the OBR notes that as councils seek to draw in building expertise this could have the unintended consequence of driving down output in the market sector.

So there may be many reasons why we should temper our optimism about the number of homes local authorities will actually deliver as a result of increased borrowing capacity in future years. But for those families who get the chance to move from a private rental to a social home sometime soon as a result of this policy change, let’s not pretend that the lifting of the cap is a small deal.