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Local authorities’ role in housing supply

18.02.2019

By Matt Hutchings QC - This article was previously published in the Local Government Lawyer

Local authorities and the housing crisis

In her foreword to the housing White Paper Fixing our broken housing market presented to Parliament in February 2017, the Prime Minister stated that "Our broken housing market is one of the greatest barriers to progress in Britain today. Whether buying or renting, the fact is that housing is increasingly unaffordable – particularly for ordinary working class people who are struggling to get by."

According to Ministry of Housing statistics, in 2017 there were 1.15m households on English council housing waiting lists and, by the first quarter of 2018, there were approaching 80,000 homeless households in temporary accommodation provided by the same councils pursuant to the main housing duty.

Whilst the White Paper did not mention a specific target for the number of new homes to be built, the government had committed itself to an ambitious figure of 250,000 each year in England. By the Autumn Budget 2017, this target had increased to 300,000.

In the White Paper, the main role of local authorities in boosting housing supply was identified as strategic, in enabling the private sector to deliver much needed new homes using their planning powers.

This article explores three alternative roles for councils in boosting housing supply: (i) as house builders, (ii) via their strategic role as planning authorities and (iii) through the use of local housing companies.

Local authorities' traditional role as house builders

Local authorities' traditional contribution towards increasing housing supply comprised building subsidised council-owned homes. This model has a long history, dating back to the Housing and Working Classes Act 1890, and is epitomised by the large number of council estates that sprung up around the country in the post-war years.

In the 1950s and 60s the delivery of council homes in England ran at about 200,000 new homes a year. In 1969-1970 the figure was 135,700. By 1999-2000 it had crashed to 60. What happened to cause this collapse? The enactment of the Right to Buy ("RTB") in 1980, which entitled tenants to buy their council homes at substantial discounts, together with strict restrictions on local authorities' use of RTB receipts, is the obvious answer.

More generally, local authorities fell out of favour with central government as suppliers of social housing. Social housing grant was targeted at the housing association and charitable sector. From the first such stock transfer by Chiltern District Council in 1988, successive governments encouraged large scale transfers of council housing stock to housing associations, as the preferred providers for delivering decent homes for social tenants. The resulting shift in the social housing sector can be illustrated by the statistic that by 2015 there were some 1.6m council homes, as compared with 2.4m housing association homes, an almost exact reversal of the figures in 2003.

Significantly, from the perspective of central government policy in this area, housing association borrowing to finance the delivery of new homes is not counted as part of the Public Sector Net Borrowing ("PSNB", in old money, the Public Sector Borrowing Requirement). A move by the Office of National Statistics in 2015 to reclassify housing association debt as part of the national debt was reversed in 2017 as a result of deregulation of the housing association sector under schedule 4 to the Housing and Planning Act 2016 and the Regulation of Social Housing (Influence of Local Authorities) (England) Regulations 2017.

In April 2012 English local authorities became self-financing in relation to their housing stock. To the uninitiated, this may sound like a route to independent local decisions on housing investment. However, central government imposed a cap on Housing Revenue Account ("HRA") debt (ironically under Localism Act 2011 powers), which significantly restricted councils' ability to borrow against their housing rental streams, and thus to invest in housing stock.

The Local Government Association has consistently called for the borrowing cap to be scrapped, with support from the Chartered Institute of Housing and other bodies in the housing industry. The example of Scottish councils' successful building programmes has often been cited in support of this contention. In its unanimous report on the Autumn Budget 2017, the Treasury Committee agreed, recommending that "in order to increase Local Authority construction to levels sufficient to meet the Government's 300,000 target, the Housing Revenue Account borrowing cap should be removed."

However, the main thrust of government policy has been heading in a different direction. In its evidence to the DCLG Select Committee inquiry leading up to self-financing, the Chartered Institute of Public Finance and Accountancy had called for the government not to press ahead with the borrowing cap. The government responded as follows: "Our reforms must not jeopardise the Government's first economic priority, which is to reduce the national deficit." The government's position was that adherence to the Prudential Code governing local authorities' capital finance decisions would ensure local affordability but would not achieve national priorities. The UK is alone within the EU in counting local authorities' debt as part of the national debt. As a result, councils' borrowing for house building has remained firmly in the sights of the Chancellor of the Exchequer as part of government policy of deficit reduction.

Little was said in the Housing White Paper about reviving councils' traditional role as house builders. At paragraph 3.32, there was a vague commitment to: "work with local authorities to understand all the options for increasing the supply of affordable housing." This may be contrasted with the statement at paragraph 3.24 that: "Housing associations have a vital role to play if we are to build the homes we need. They already build the vast majority of new affordable homes, in addition to increasing numbers of homes for market rent and sale." Recent relaxations of the cap including an extra £1bn headroom for areas of high demand have been very modest, when compared with the Association of Retained Council Housing's June 2013 estimate of the financial capacity of national council housing stock, at £27.5bn.

A strengthened strategic role

The government announced a review of local authorities' role in supporting housing supply in the 2013 Autumn Statement. The result of the review was the Elphicke-House Report dated January 2015. As its sub-title From statutory provider to Housing Delivery Enabler suggests, the main emphasis of the report's recommendations was in strengthening councils' strategic role in planning and facilitating the required house building by the private sector.

The Elphicke-House Report thus laid the foundations for the 2017 White Paper, which announced three things that the government was going to make happen to fix the broken housing market: (i) planning for the right homes in the right places, (ii) building homes faster and (iii) diversifying the housing market.

So far as local authorities were concerned, the Executive summary stated as follows:

"The Government is offering higher fees and new capacity funding to develop planning departments, simplified plan-making, and more funding for infrastructure. We will make it easier for local authorities to take action against those who do not build out once permissions have been granted. We are interested in the scope for bespoke housing deals to make the most of local innovation. In return, the Government asks local authorities to be as ambitious and innovative as possible to get homes built in their area. All local authorities should develop an up-to-date plan with their communities that meets their housing requirement (or, if that is not possible, to work with neighbouring authorities to ensure it is met), decide applications for development promptly and ensure the homes they have planned for are built out on time. It is crucial that local authorities hold up their end of the bargain. Where they are not making sufficient progress on producing or reviewing their plans, the Government will intervene. And where the number of homes being built is below expectations, the new housing delivery test will ensure that action is taken."

The use of the National Planning Policy Framework ("NPPF") to influence local authorities to deliver the local need for new housing, often despite resistance from their existing residents, may be illustrated by the Morris Homes case in the Supreme Court, reported at [2017] 1 WLR 1865. The Supreme Court decided that, because Suffolk Coastal District Council could not demonstrate a five year supply of deliverable housing sites, paragraph 14 in conjunction with paragraph 49 of the NPPF provided for a presumption or "tilted balance" in favour of granting planning permission for the development, which the Inspector refusing planning permission had wrongly found to have been displaced.

The draft revised NPPF published in March 2018 takes this presumption further. It would incorporate via paragraphs 11.d and 75 a new Housing Delivery Test, as part of the trigger for the presumption in favour of development. These revisions to the NPPF gave effect to the commitments made in the Housing White Paper "to ensure that action is taken" to boost housing supply.

However, it is questionable whether boosting housing supply through the private sector will meet the particular needs of "ordinary working class people who are struggling to get by". The draft revised NPPF proposes that, on major housing development sites, at least 10% of the housing should be for affordable home ownership, subject to some exceptions. The requirement for developers to include affordable housing within housing developments is usually imposed by local authorities via planning obligations entered into under section 106 of the Town and Country Planning Act 1990. In the ordinary way, private sector developers will look to maximise profits and only deliver non-market housing when under an enforceable obligation to do so.

Affordable housing is currently defined in Annex 2 of the NPPF as rented at no more than 80% of market rent. In many areas, such rent levels are unaffordable for "ordinary working class people", let alone those reliant on housing benefit. By contrast, social rents (including council rents), are commonly set at around 50% of market levels. Against the background of a 52% reduction in the social housing stock over the previous 35 years, social rented
now accounts for just 3% of new supply. In 2015/16 in England only 6,550 new social rent homes were completed. Within the same year, RTB sales across council and housing association stock were in excess of 16,000.

The White Paper did not specifically address this unmet need, notwithstanding plans to extend the RTB to the generality of housing association tenancies via the so-called Voluntary Right to Buy, to be funded by the enforced sale of higher value council houses, under the Housing and Planning Act 2016. There is no sign of the overall trend of a reduction in the number of houses let at social rents being reversed.

Local housing companies

Local authorities have for a number of years enjoyed the power to provide housing through companies, under section 95 of the Local Government Act 2003 and, more recently, under the general power of competence conferred by section 1 of the Localism Act 2011.

The Elphicke-House Report embraced the concept of local housing delivery organisations and at paragraph 7.24 recommended that councils consider setting them up. Paragraph 7.2.1 of the report contained a description of three such models: (i) a wholly owned company funded by the council, (ii) an investment partnership, with funding provided by a developer and the council providing land and (iii) an operating lease granted by the council to a registered provider. Relevant case studies were set out at Appendix 5. Indeed, at paragraph 4.2.4 the report suggested that innovative finance models, using local housing delivery vehicles, might be the answer to the cap on local authorities' borrowing capacity.

The government's response was unenthusiastic in relation to the use of local housing companies ("LHCs") to deliver any form of social housing. In a written statement to Parliament made on 20 March 2015 (HCWS441), the Minister of State for Housing and Planning said this:

"It is important that new council tenants should have access to the Right to Buy, and that new homes should not be built by councils which are excluded from the Right to Buy. In order to be eligible, local authority tenants need to have a secure tenancy. All forms of secure council tenancies are subject to the Right to Buy, including new flexible tenancies, regardless of whether they are accounted for in the local authority's Housing Revenue Account or the General Fund. A number of local authorities have established local housing companies to help deliver local housing solutions. The Government recognises the benefits that public private partnerships can bring in supporting new forms of housing, and notes that the Elphicke-House review into the role of local authorities in housing supply identified that different housing delivery organisations offer different strengths and opportunities. The Government welcomes approaches where local housing companies are developing new homes for market sale or purchasing private rented homes for the accommodation of homeless households, through an appropriate legal entity structure and/or the borrowing does not count as public sector borrowing."

The point to note is that the above expression of government support for LHCs is limited to their use in the provision of market housing or temporary accommodation, activities which fall outside the remit of social rented housing and the HRA.

Nevertheless, the establishment of LHCs by English local authorities appears to be on the rise. Current legal structures incentivise the delivery of council housing through LHCs. In particular: (i) LHCs are accounted for in the General Fund, therefore the HRA borrowing cap is not a constraint on council investment, (ii) LHCs are subject to the same regulation as ordinary private sector providers, and in particular are not subject to rent control, and (iii) LHC tenancies do not attract the RTB. It is easy to see that factors (ii) and (iii) above make long-term investment in housing via LHCs financially more viable than a similar investment in traditional council housing stock.

In a report published in October 2017, Delivering the renaissance in council-built homes: the rise of local housing companies, the Smith Institute noted a rapid rise in LHCs. Other studies carried out by the Association for Public Sector Excellence (Novemner 2017) and Inside Housing (February 2018) have noted the same trend.

The Smith Institute paper estimated that there were currently a total of 150 LHCs in England, which were being used by councils to deliver a mix of housing tenures, including 30-40% affordable housing and some at social rents. The paper predicted that LHCs could increase completions over time from 2,000 homes a year to 10,000-15,000 homes each year by 2022.

This development may present a quandary for central government: on the one hand, it represents a much needed contribution towards easing the housing crisis for "generation rent" households struggling on low incomes, but on the other, a potential way around its prized policy of enabling home ownership through the RTB.