Funding for building new council housing has always included borrowing, usually from the government’s Public Works Loans Board, at interest rates which are lower than commercial rates. The news that the government is ending the borrowing cap, i.e. the amount of borrowing which each council which owns housing stock is allowed, has been widely welcomed as a means of increasing new building. Estimates vary as to how many homes a year will be built by councils taking on more debt. The Ministry of Housing, Communities and Local Government (MHCLG) estimates that councils will be able to build an extra 10,000 homes a year. However, given that councils are losing somewhere in the region of 15,000 homes a year from right to buy (RTB) sales and demolitions, this would not even stop the annual decline in the number of council homes in England. So long as RTB remains in operation more than 15,000 extra homes a year would be required to increase stock numbers even marginally.
Much of the comment on lifting the cap takes no account of two factors:
The level of existing debt which has to be serviced. At the end of the last financial year the combined debt of local authority housing revenue accounts (HRAs) in England was £26 billion. According to the Local Government Finance Statistics around 25% of annual income is eaten up by debt and interest charges.
There is no consideration of who pays for the borrowing. Under the new council housing finance system debt servicing is paid for by tenants through their rent and service charges. If there is no central government grant available for new building then the cost falls entirely on the shoulders of existing tenants. The danger is that if councils take on more debt then the cost of servicing it will eat into the resources available to maintain existing housing stock.
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