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Financing of new housing supply Matthew Warburton - 10/05/2012

NewBuild300Financial constraints, including restrictions on local authority borrowing, are a major cause of the chronic housing shortage in England.  Local authorities should be given greater freedom to enable them to drive housing delivery in their areas, concludes a report from the cross-party House of Commons CLG Committee published earlier this week. 


Its recommendations include removal of the debt cap on council borrowing for housing, freedom for councils to pool and swap borrowing headroom and amendments to the recent RTB reforms to exempt some areas from the new discounts and ensure one-for-one replacement is feasible for all councils.


To meet current and expected future need for housing, there has to be an adequate supply not only of privately-provided housing for sale and market rent, but also of affordable and social rented housing.  Council housing provides a considerable asset base from which local authorities could finance a major part of the required supply of sub-market rented housing, and self-financing gives them some scope to do this.  With the reforms proposed in the Committee's report they would have more.  But the government seems in two minds whether or not this would be a good thing.  One the one hand, Laying the Foundations, its national housing strategy, is clear that "getting house building moving again is crucial for economic growth", and "without building new homes our economic recovery will take longer than it needs to".  One the other hand, local authority housing debt is treated as contributing to the deficit which it is desperate to reduce.


Perhaps the most radical, and interesting, proposal in the report is that the Government examine changing the treatment of housing debt in the public accounts to conform better with the approach of other European states.  UK public accounts work on the public sector net cash requirement, where all the debts of local authorities are treated in the same way as public sector debt.  Elsewhere in Europe a different approach is used which means that trading activities, such as housing, are viewed as off-balance sheet.  This approach reflects the important fact that public investment in housing creates an asset which attracts a future rental stream and which, in some circumstances, may be sold. 


The argument that council housing borrowing should be treated differently from other public borrowing is not a new one.  The Treasury has proved resistant to advocacy on this issue for at least two decades.  Meanwhile, as the national housing strategy baldly states "we have not built enough homes for more than a generation".  And, to borrow the words of the strategy's conclusions, the problems we face are stark and it is time for a new approach.

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