Councils across England are not waiting for government to give them the green light to get building again. Hundreds of councils are in fact already providing new homes to rent or buy through their own arms-length local housing companies. This ‘quiet revolution’ in council-home building could see local housing companies collectively delivering up to 15,000 extra homes per year by 2022.
The study, published by the Smith Institute, shows that councils are going it alone, and without government grant are directly funding their own housing companies to meet local housing need, mostly private homes for rent and sale. Many are recycling the profits from their companies to cross-subsidise new affordable and social rented homes, as well as providing temporary accommodation and housing for the young and elderly.
The study, the first of its kind to document the rise of local housing companies (LHCs), finds that the number of such companies has now reached around 150 and could top 200 by 2020. Over half of all the councils in England may soon have a housing company, including many district councils. Most of the LHCs are building on council land and paying a dividend back to the council. Because the LHCs are commercial entities providing private housing they are free of the rules and regulation governing social housing (including exemption from the Right to Buy and Housing Revenue Account borrowing caps).
The report — ‘Delivering the renaissance in council-built homes: the rise of local housing companies’ — concludes that LHCs are leading a renaissance in council-built homes and that government should do more to help them. The author calls for: a high-level task force to recommend how best to maximise the potential of LHCs, a centre of excellence and best practice; flexibility for councils to invest all RTB receipts into LHCs; and encouragement of multi-authority LHCs to deliver extra housing at scale.
Main findings
- LHCs offer councils a ‘triple dividend’ in the form of much needed extra housing, a greater stewardship role in place-shaping and a financial return to the council.
- There are now around 150 LHCs in England, most formed in the past few years. On the current trend, this could increase to 200 by 2020 — covering just over half of all councils in England.
- LHCs have been established by all kinds of councils, across the size spectrum, including, in some cases, with participation by counties. The largest concentrations are in London and the South-east.
- Most LHCs have modest ambitions to build (averaging around 50 units a year), although there are larger housing companies in urban areas with major build programmes.
- Collectively LHCs could increase completions over time from 2,000 homes a year to 10,000-15,000 homes each year by 2022, with perhaps a quarter of the total in London.
- We estimate that around 30%-40% of new LHC homes are likely to be ‘affordable’, with a minority at the equivalent of social rented levels.
- Councils are attracted to LHCs because they want more control and influence, and greater freedoms and flexibilities (especially over rents, borrowing and the Right to Buy).
- LHCs can generate income and cross-subsidise new private affordable and sub-market housing at social rents.
Other key findings
- Councils, many of whom are frustrated with the performance of private developers and housebuilders, have responded by delivering homes (and kick-starting schemes) through their LHC.
- LHCs have cross-party support and are widely viewed as an example of ‘entrepreneurial councils’ taking the initiative and innovating to meet local housing needs.
- Government broadly welcomes ‘councils building again’ and the establishment of LHCs, but has no specific policies or funding to support them.
- Many LHCs have been established by stock holding councils as a reaction to government constraints on the Housing Revenue Account (e.g. borrowing caps, rent controls and the RTB), as well as to cuts in housing budgets. Others have been motivated by the desire to intervene in the housing market, often because of a frustration with the pace, scale and cost of delivery by the private sector and housing associations.
- LHCs provide a mix of housing tenures, with the focus on renting (at equivalent affordable rent and market rent levels) and to a lesser extent at social rented levels. Some LHCs provide homes for sale and to meet specialist housing needs (e.g. for temporary accommodation and homes for older people) and several are involved in estate renewal and regeneration schemes.
- The majority of LHCs are wholly owned by the council, which typically provides loan finance and land. Most are governed by a mix of members and officers and partly staffed by the council and external consultants.
- Most councils expect their LHC to generate a profit, which can be re-invested into the housing company. Besides income from rents and sales, LHCs attract funds from the New Homes Bonus, additional council tax, and planning gain.
- Councils are also generating income from ‘on-lending’ to the LHC (borrowing long-term at below market rates from the Public Works Loan Board and on-lending at a market-rate premium).
- Councils claim that LHCs are there for the long-term and are more resilient to market and financial risk than private developers and that the LHC can ‘flip tenures’ and defer dividend payments if needs be.
Recommendations
- DCLG and local government, perhaps through the LGA, should consider establishing a high-level commission or task force to consider how best to maximise the potential of LHCs as alternative providers of affordable housing.
- The Government should give unambiguous support to LHCs and remove the caveat that ‘we want to see’ LHCs offering tenants the RTB. It appears that LHCs are not subject to the RTB or Right to Acquire, but the prospect that they might be is confusing and undermines investor confidence in LHCs.
- Councils should be able to retain all their RTB receipts and be able to choose whether to invest them via their LHC or HRA as they wish.
- The Government should revise upwards the regulations which restrict the number of HRA-properties that a council can transfer to its LHC.
- The Government should move ahead with its promised CPO reforms and examine the potential benefits to LHCs.
- Local government, perhaps through the LGA, should offer a centre of excellence or learning hub on LHCs.
- Both central government and local government could do more to raise awareness of LHCs, particularly among other agencies which can support housing growth (e.g. LEPs, HCA, NHS Estates, National Infrastructure Commission).
- DCLG should monitor the growth of LHCs and seek to keep an open register or database on the homes they are providing.
- Combined authorities and the GLA should consider the case for supporting wholly owned or joint venture LHCs as well as multi-authority LHCs.
Paul Hackett, Director, Smith Institute, and Author of the report, said: “Local housing companies are spreading like wildfire. At this rate, the majority of councils — of all types and all political colours – will soon have a housing company. It’s not a silver bullet to solving the housing crisis, but it will make a difference locally. Surely it makes sense to support these companies, many of whom are providing affordable homes.”
Lord Porter, Chairman of the Local Government Association, added: “This report shows that councils are taking the lead when it comes to delivering desperately-needed homes for their communities. Local Housing Companies are an example of how councils, with sufficient powers and resources, can help plug gaps in housing markets, look for ways to build outside of the restrictions on the housing revenue account, and help generate much-needed funds to help councils build more genuinely affordable homes.
“It’s crucial, though, that the Government provides a stable environment to allow councils to invest in homes and get on with the job. This means allowing councils to self-finance new homes, lifting the housing borrowing cap, and allowing councils to use 100 per cent of the receipt from Right to Buy sales to invest in new homes. It’s also essential that councils can set fees locally to cover the costs of processing applications and that there are no further increases in the threshold for the New Homes Bonus. Councils are determined to lead the way in building new homes, and are leading local innovations finding different ways to make this happen. We’d like to see the Government properly throw its weight behind our work and provide us with the tools to get on with the job.”
Gary Hartin, Programme Manager of the Nationwide Foundation, said. “A key outcome of this work that we want to see, is for more local authorities to give serious consideration to how LHCs could help them deliver more genuinely affordable homes. We welcome the recommendation from the Smith Institute that the DCLG and local government should consider establishing a high-level commission or task force to examine how best to maximise the potential of LHCs as providers of affordable housing. In terms of making systemic change happen, there now needs to be wider recognition that LHCs enable local authorities to get on with the job of building and improving affordable housing in their localities. Encouragement and endorsement to raise awareness would give confidence to local authorities not yet exploring LHCs.”
Terrie Alafat, Chief Executive of the Chartered Institute of Housing, commented: “This report highlights the extent to which, even in the absence of government funding, councils are finding ways to build new homes for the people in their communities. It is clear that councils are having to work hard to find a way around a number of restrictions which prevent them from financing new genuinely affordable homes rather than being actively supported to do so.”
“With the right support, councils can once again become major contributors to building the housing we so desperately need. We would urge the Government to create an environment which enables them to do that — giving councils more freedom and flexibility around things like borrowing caps, rent levels and allowing councils to keep all of their right to buy receipts could be transformational.”
