Shelter is calling on the government to cancel the Housing Revenue Account debt1. It asked Savills to do a report on the options for reducing debt. Martin Wicks gives an assessment of the report.
Shelter is asking people here to email their councillors, calling on them to sign an Open Letter to the Chancellor calling for debt cancellation.
Shelter recently called for the government to “remove the historic debt local authorities owe to the government” for council housing. They say that “historic housing debt” is based on an outdated financial settlement from 2012; that it “sucks away money that could be invested in building new social homes”. Shelter calls for the government to “remove this debt from councils and put it on its own books without affecting the overall national balance sheet”.
To provide evidence for this proposal Shelter asked Savills to carry out research into the level of debt held by Housing Revenue Accounts and “how that debt is affecting the capability and capacity of local authorities to deliver on their objectives – and the objectives set by Government and the Regulator of Social Housing – and the options for reducing debt to release capacity in new homes.”
Read on below or download a PDF here
Savills’ report concludes that
- The original debt settlement has been “undermined by successive adverse policy interventions”;
- The 10 year rent settlement of CPI+1% and ‘rent convergence’ “barely move the dial in terms of the impact of the previous adverse changes”;
- “The level of HRA debt is unsustainable for authorities to deliver on all their commitments, that there is little or no capacity to support the ability for local authorities to contribute meaningfully to the government’s target of 1.5 million new homes and therefore to enhance the delivery of social rent homes.”
The research sought feedback from councils which highlights
- “Debt levels and financing costs are a major limiting factor for investment, exacerbated by rising interest costs and refinancing risk”;
- There is a shift towards investment in existing stock;
- Authorities have reduced or constrained new build;
- Whilst there is universal ambition to deliver social rented homes, “there is a tension between ambition and financial reality.”
The document concludes
“When seen in the context of what authorities are required to spend compared to the resources available in business plans, a complete write-off of debt might offer the optimal route to ensuring that standards are met for the existing stock whilst creating capacity for new build delivery; such a write-off would release and unlock borrowing capacity and could enable the delivery of over 280,000 additional new social rent homes, a figure which would provide the basis for further future additional delivery as the stock was added to.”
It recommends
- Government should commit to the write-off of all Housing Revenue Account debt – “this is consistent with the principles of the self-financing settlement; only a complete write-off enables local authorities to deliver the investment needed within the existing stock and unlocks the capacity and potential to deliver new social rent homes at scale and make a contribution at scale to the Government’s 1.5million homes target”. At March 31st 2025 the debt was £31.8 billion.
- Establish a Housing Delivery Compact linking debt write-off to new delivery.
- Maintain and potentially significantly enhance capital grant programmes for local authorities, especially to support the delivery of new social rent homes.
- Government to consider reform of the fiscal rules to support local authority housing investment.
- The Government should commit to long-term rent policy certainty, which is critical for local authorities to unlock investment into new social rent homes.
The first thing to be said is that it is positive that the document calls for a complete debt write-off. The case for it could have been made even stronger by reference to the fact that the 2012 debt settlement built in under-funding of the HRAs from the start. The government’s own research showed that a 67% increase in funding was required for the work that was needed. But the settlement only increased the Management & Maintenance Allowance by 5% and the Major Repairs Allowance by 28%. In 2021 we produced an online pamphlet which explains in more detail The case for cancelling council housing debt.
Let’s look at the report’s recommendations.
1. Debt write-off
Writing off the debt will affect the “overall national balance sheet” because the Public Works Loans Board would lose the payments to service the debt. However, it would cost the government only around £1.2 billion a year. Councils would immediately have this amount to bolster spending on existing homes under circumstances where they are being asked to do more by the government but without the resources needed (e,g, Awaab’s Law, fire and safety measures, Decent Homes Standard, decarbonisation). This is a negligible amount in the scale of the government accounts, which would help prevent the deterioration of existing council housing. Whilst on its own, debt cancellation won’t resolve the underfunding of HRAs, it will help to fund some of the new work required.
The under-funding built into the 2012 ‘debt settlement’ was exacerbated by government policies such as the ‘enhanced’ Right to Buy. The increase in tenants’ discount led to a fourfold increase in sales and hence, the loss of much more rent than was projected in the ‘debt settlement’. The four year rent cut (1% a year) from 20162 was estimated by the Chartered Institute of Housing to result in a direct loss of £2.6 billion and cumulative loss of £42 billion over 30 years..
The 2011 Localities Act gives government the power to reopen the debt settlement “if a change is made that would have a substantial, material impact on the value of the landlord’s business”. Since councils were losing tens of billions of pounds as a result of the four year rent cut alone, there is a clear case for revisiting the 2012 debt settlement.
The Savills report points out that “debt was relatively stable at between £26-£27 billion from 2012 to 2022” but has risen to £31.8 billion. Evidence suggests that new debt being taken out is largely to fund capital work on existing homes, to bring homes up to the new standards. The report says “There is likely to be a continued need to borrow for investment into the existing stock.” That itself is a reflection of the underfunding of HRAs.
The report suggests that debt write-off could both ensure that standards are met for existing stock “whilst creating capacity for new build”. Write-off would “release and unlock borrowing capacity and could deliver over 284,025 additional new social rent homes”.
This doesn’t seem plausible. The average delivery cost of a new build council home, according to Savills, is £290,000. The average borrowing for each home they estimate at £112,750. The borrowing which would be required for 284,025 homes, therefore, would be £32 billion. Given the fact that even with the reduction for council house building, interest rates for a 30 year maturity loan (paid at the end of the loan period) is currently around 6%3, councils are not likely to commit to such an exorbitant rate.
Even if all the £1.2 billion was devoted to new build, which it certainly won’t be, grant of £177,250, suggested by Savills, would only fund 6,770 homes a year. That number would certainly be higher with an element of acquisitions, since they are cheaper than new build, but still nowhere near the scale needed to begin to resolve the housing crisis.
2. A Housing Delivery Compact
Instead of simply focusing on the grant that is needed, the idea of a Housing Delivery Compact is proposed. This is problematic. Currently 1344 councils don’t have a Housing Revenue Account so cannot build council housing. Instead of encouraging them to relaunch HRAs and build council housing, the government has increased the number of homes at which they are obliged to set up an HRA, from 200 to 1,000. The problem with this is that councils building outside of an HRA have to borrow at commercial rates of interest rather than lower rates from the Public Works Loans Board. The consequence of this can be seen in the fact that less than one in four homes built by council owned private housing companies are social rent5.
Would such a compact involve making a commitment to build a specific number of homes? What if events prevent them building as many as they agreed? The reality is that councils do not need an “incentive” to build. Give them the grant so that they can develop annual building programmes and they can put together the teams needed to do the work, and they will. There is already an incentive; more council homes will save councils the fortune that many of them are spending on temporary accommodation, which is driving some of them to the financial edge.
3. Enhanced Grant Programme
The report calls on the government to “significantly enhance capital grant programmes for local authorities”. Currently its Social & Affordable Homes Programme offers funding for only 30,000 “affordable homes” a year. The programme overall would offer an average grant of £130,000 per property (£39 billion for 300,000 over ten years). Since the other tenures such as “affordable rent” and low cost home ownership are likely to offer less grant than social rent6, that implies that social rent grant will be higher than £130,000. The problem is that the government has not set a definite level of grant per property and told bidders they should minimise the level of grant they ask for and maximise their own contribution, so we can’t as yet say what the grant per social rent property will be in the new SAHP.
If grant of £130,000 was available for 90,000 social rent homes a year, which Shelter and many others consider necessary to begin to resolve the housing crisis, then the grant needed for 10 years would be £117 billion; £11.7 billion a year. The Savills report suggests a grant of £177,250 per unit. They estimate that councils could build 284,025 homes with a grant level of £59 billion. However, with that level of grant, the 90,000 social rent homes a year would require £159 billion over 10 years; £15.952 billion a year.
4. Fiscal rules
The government has offered housing associations and for-profit providers the opportunity to bid for loans at the negligible rate of 0.1% (albeit for a small pot of £2.5 billion). Councils are not allowed to apply for it because of “the fiscal implications”; i.e. it will be deemed to increase public sector debt. The Chartered Institute of Housing has argued for alternative fiscal rules which would bring HRA borrowing closer to other European countries. Savills proposes “to separate housing debt from core fiscal measures and therefore link borrowing for investment in new homes without the requirement to increase national net boring”. However, even if this was done it would still have to take account of what the report highlights:
“The net rent income arising from new social rent property will not cover the cost of borrowing without grant or subsidy, especially given prevailing interest rates.”
The burden of whatever HRAs borrow falls on the tenants, whose rent services the debt, since HRAs have no subsidy7. The key to a large scale building/acquisitions programme is not increased debt but increased central government grant.
Rachel Reeves fiscal rules constitute a strait-jacket which restricts investment. Since each government department is treated as a separate silo, with a short-term financial focus, no account is taken of the fact that investment in building/acquisitions of social rent council homes (and improvement of existing homes) saves money by reducing the housing benefit bill and NHS costs, resulting from less people living in homes which will ruin their health. Investment today saves money in the future.
Yet, even in the context of the current fiscal rules the government could introduce tax changes such as the equalisation of capital gains tax with income tax (possibly £15 billion a year), and the Bank of England could stopping selling bonds which sit with it, at a loss (so-called Quantitative Tightening8). These two measures alone would raise considerable funds which could support a council homes programme.
However, underpinning the fiscal rules that debt must be falling by the end of a Parliament is the idea that an economy can be compared to a household account. Reeves and others have spoken of “the (country’s) credit card being maxed out”. This analogy originated with Thatcher. Larry Elliott in the Guardian is right to say that “if Burnham is serious about rolling back neoliberalism, he needs to start by challenging this entirely wrong-headed idea”.
5. “Long term rent policy”
The financial calculations of the report appear to accept the government’s policy of CPI+1%, borrowed from the Tories, and extended to 10 years. We have already highlighted that rent arrears for council tenants have risen to £393 million (an increase of nearly 39% in the last five years)9 and for housing association tenants to nearly £800 million. A decade of above inflation increases will further impoverish financially hard-pressed tenants and continue to drive up the housing benefit bill. One of the drivers of damp and mould is the inability of tenants to afford to put on their heating when it is cold. What is the sense of new rules designed to tackle the growing problem of damp and mould only to drive up rents to levels which undermine efforts to resolve the problem because more tenants cannot afford to put their heating on, for long, or at all?
The report admits that this policy “barely moves the dial” in terms of compensating for the impact of previous policies. The extra 1% above inflation, raises a small amount, approximately £82 million over all the local authorities with council housing stock. Further impoverishing already for the most part poor tenants will not resolve the financial crisis of HRAs and will only drive up the housing benefit bill. The poverty of tenants is reflected in the statistic that of those council tenants who are working, 39.7% are in receipt of housing support, though they make an average contribution of £47 a week.10 In its report on poverty this year, the Joseph Rowntree Foundation estimated that 40% of social renters and 37% of private renters were “in poverty after housing costs”.
The Labour Campaign for Council Housing argues for the government to end the policy of above inflation rent increases and the Tory policy of “affordable rent”. Above inflation rent increases can’t compensate for underfunding of HRAs.
Other issues
Decarbonisation
The report suggests an average cost per property for decarbonisation of £17,000. This seems unfeasible. If external wall insulation is required it would be more than that, without the heat pump and any other insulation required. An illustration of the costs is shown by government statistics in relation to their Social Housing Decarbonisation Fund11. In the latest round of funding for this we find that the costs were:
- External Wall Insulation £26,000;
- Air Source Heat Pump £15,400;
- Double or Triple Glazing £7,900;
- Solar PV £7,700.
If £17,000 is wrong, as it certainly appears to be, then it means the calculations on potential new build are wrong. Just as an example, if the average actual cost of decarbonisation was £34,000 then the difference in projected costs for 1,500,000 council homes could be in the region of £26 billion. This alone makes the projection for new build questionable.
Section 106 homes
“Local authorities may be particularly well placed to acquire section 106 homes from developers, especially for smaller sites; there is evidence that many HRAs have begun to switch from direct development to acquisitions, including Section 106 acquisitions.”
The rising number of section 106 properties uncontracted led to Homes England setting up a Clearing Service. The National Housing Federation reported that more than half of the largest housing associations had cut back on, or stopped buying, section 106 homes. This is because they have no say over what is built and because there have been quality issues. In response to this the government introduced ‘temporary’ measures which would enable house builders who had difficulties in selling homes to change the tenure. In London the government decided to cut the target of 35% to 20 percent. It would surely be presumptuous to assume that councils would step in.
Andy Burnham was certainly right when he told a Centre for Cities event last October that setting targets for private developers to build or pay for affordable housing ‘doesn’t work’; that councils should build more housing instead.
Acquisitions
Councils can buy housing as well as build it. Over the last six years, additional council homes in England have comprised 44% acquisitions. Whilst it is irritating to have to buy back ex-council homes at market rates, it still makes economic sense given the extortionate costs of new build and the shortage of grant.. From a practical point of view, it makes no difference whether you are putting people who are on the waiting lists, or in temporary accommodation, into a social rent council home, be it built or bought, so long as it’s a decent standard. The government has said that grant from the SAHP can be used for acquisitions, though for a limited (but unspecified) amount. This restriction needs to be abandoned. Devolving power from Westminster to local authorities means giving them the freedom to use the grant as they wish, provided it produces social rent council housing.
Conclusions
Whilst the call for debt cancellation is welcome, the main benefit would be the availability of approximately £1.2 billion a year for use on existing homes rather than funding new build. Given increasing government demands on council HRAs in relation to the quality and condition of existing homes, it is likely that very little of that extra money would be spent on new build. A large scale building/acquisitions programme would require a significant increase in central government grant.
If the implied average grant of £130,000 per property (£39 billion for 300,000 properties over 10 years) available in the government’s Social & Affordable Homes Programme was applied to the 90,000 social rent homes a year which Shelter and many others call for, then £117 billion grant funding would be needed; £11.7 billion a year.
If Savills estimate of average grant per property of £177,250 was applied, then the grant needed would be £159.525 billion over 10 years; £15.95 billion a year.
No doubt we will be told that these amounts of funding are not possible. Yet it’s a question of priorities. Andy Burnham has said
“The government should make building hundreds of thousands of council homes its defining purpose. No other policy achievable within a Parliament, would have greater social and economic benefits.”
That cannot be done without grant on a scale indicated above. It has been done before. The Attlee government’s council home building programme was carried out under far worse economic conditions than we face, reflected in a debt to GDP ratio of 250% compared to under 100% today.
In 2019 John Healey was the Shadow Secretary for Housing. In the run-up to the General Election, the Fire Brigades Union convinced the trade union section of the Manifesto discussions to call for a commitment from Labour to cancel the council housing debt. John Healey didn’t agree but made the concession that a :Labour government would review the debt. The Manifesto said “We will review the case for reducing the amount of housing debt councils currently hold.” Obviously the election was lost and the review was dropped by the new leadership.
John Healey is now in a position, as Chancellor, to honour that 2019 commitment. Since then the deterioration of HRA finances, the increase in demands on councils, and the enforcement of new Standards, has reinforced the case for reopening the 2012 debt settlement. Refusal to do so threatens the future of existing council housing; the condition of homes, and hence the living condition of tenants.
The 2011 Localities Act gives the government the power to reopen it. The government should use that power now. The case for doing so is incontestable. The case for cancelling the debt, which for the most part, was a product of manipulation by the Treasury, is strong. If we are prevent the quality of existing council housing deteriorating, and improve it, then the under-funding of HRAs must be ended.
1The Housing Revenue Account is a ringfenced account which separates council housing from a council’s General Fund where all the non-council housing income and expenditure is accounted for.
2The Tory government introduced a 1% cut each year for 4 years; not for the benefit of tenants but to save on the housing benefit bill.
3The interest rates available for the self-financing ‘debt settlement’, in the example of Swindon council, were on average 3.26%. Councils took out loans for different periods to smooth out payments over the 30 years of the business plan. In the case of Swindon it took out 22 loans for periods of 11 to 40 years.
4Local authority statistical data returns for 2024/25 showed 162 councils with an HRA and 134 without one.
5Freedom of Information requests by Inside Housing. See our submission to an inquiry into barriers to building/acquisition of social rent council homes: Submission to the All Party Parliamentary Group for Council and Social Housing inquiry on the barriers to building and acquiring social rent council homes – Labour Campaign for Council Housing
6The average grant under the Tories Affordable Homes Programme was £89,995 for social rent, £54,501 for “affordable rent” and £48,925 for “Affordable Home Ownership. See 2021 to 2026 Affordable Homes Programme Summary to end of March 2025 – GOV.UK
7In 2024/25 93.5% of HRA income was tenant rent and service charges.
8See What is quantitative tightening and how has it affected UK finances? | Quantitative easing | The Guardian This is costing in the region of £20 billion a year.
9The statistics are from the Local Authority Statistical Data Releases sent in annually by councils to the MHCLG.
10English Housing Survey
Labour Campaign for Council Housing 