Will Labour invest big time in council housing?

Back in 2009 John Healey, the then Housing Minister, consulted on reforming the way council housing was funded under the housing revenue account (HRA). This technical sounding reform was not on the party’s pledge card and never likely to get people marching in the streets. However it has since heralded a rebirth of municipal housing. The extent of this renaissance is at present small but has enormous potential.

Under a future Labour government councils all over the country could be building again at scale.

Until the end of the last Labour government council housing was seen as part of the problem. The Tories decimated the social housing sector with the introduction of Right to Buy (with few funds available to replace lost stock). New Labour’s preferred providers were housing associations who had freedoms to leverage in private finance while the policy focus was on ‘decent homes’ rather than new build.

The HRA reforms have started to reverse this trend, allowing council’s greater autonomy over their housing stock and freedoms to borrow to build. In our new survey (with Housing Voice) of councillors leading on housing, the HRA reforms have gained strong support (only 9% of those surveyed were dissatisfied). Moreover, the appetite for building is impressive with 93% stating that they were planning to build new council housing. Given the chronic undersupply of housing this should be a good news story, especially given that many of the most ambitious building plans have emanated from Labour controlled councils, such as Southwark and Manchester.

However whilst most councillors in the survey viewed building new social housing as the top priority, the numbers of homes local authorities plan to deliver still remains small compared with housing associations. The majority of councillors envisaged building less than 500 homes over the next ten years, and 40% thought that new build would not compensate for loss of stock through Right to Buy, void sales and estate regeneration.

The challenge then for Labour’s shadow team is how best to support councils to supply more homes at sub-market rent. Under the reformed HRA councils can only borrow up to a certain limit (far lower than housing associations, who can borrow billions off the public books through the bond markets). Maybe it is time to level the playing field?

Although much of the talk since the financial crash has been about deleveraging, for council housing the opposite is true. The problem is that a future Labour government will have to keep an eye on the deficit. Allowing councils to borrow more could provide much needed homes (78% of councillors said they would build additional new homes if the debt cap over council housing was to double) but equally by doing so it will push (as things stand) up public sector borrowing. This is, of course, a matter of political will and priorities, but movement on the cap would undoubtedly help increase supply. Moreover, it could potentially help reduce the Housing Benefit bill in the expensive private rented sector, provide new jobs and help dampen market rent increases. The extent of the gains is unknown, not least because a consequence of undersupply is overcrowding. Reducing overcrowding would come at a cost of increased Housing Benefit claimants and higher rents (i.e. moving from a two bed to three bed property). Nevertheless the economic and social gains seem compelling.

Increasing the ability to borrow clearly follows the line of reasoning of greater localism which was behind the reforms. But subsidised council housing will still need subsidy! If councils could borrow more those debts would still need to be serviced and paid down over the medium term. At present, sub-market rent levels fail to cover the build costs, with many social landlords turning to ‘affordable’ rent (up to 80% of market rent) and councils using planning gain (levies on private development) to cross subsidised new housing at social rents. There is a limit to the latter (and the former remains highly controversial) meaning new build housing requires grant funding to cover the shortfall.

Despite the Coalition’s talk of investing in infrastructure, grant for social housing (as opposed to ‘affordable’ housing) has been cut dramatically. Labour has pledged to invest more on housing, but how much more is unclear.

Labour councils are leading the way in delivering new council housing. However, the levels are unlikely ever to match the heyday of municipal housing, not least because of the mistakes that were made with system built tower blocks. However, councils have the potential to do much more if they have additional freedoms over borrowing. To expand still further, and to deliver genuinely affordable homes, will also require further public investment. The evidence shows many (Labour) councillors have a strong appetite to build subsidised council housing, but the extent to which this happens will depend largely on how much of a priority it is for central government.

Paul Hunter is Head of Research at the Smith Institute – their survey ‘Does council housing have a future?’ can be viewed here