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Loan rate increase prompt fears of council house-building slowdown

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Innovative council housing schemes such as the RIBA Stirling Prize-winning Goldsmith Street could be stymied by a hike in the interest rate for local government borrowing, critics have warned

In an unexpected development, the Treasury this week announced that the cost of borrowing from the Public Works Loan Board (PWLB) would rise from 0.8 per cent to 1.8 per cent. In a simultaneous move that the government said would cushion the blow, the total amount that councils can borrow through the PWLB has increased by £10 billion to £95 billion.

The Stirling Prize win by Mikhail Riches with Cathy Hawley for Norwich City Council had been widely welcomed as heralding a possible renaissance in council house-building. The result followed an investigation by the Royal Town Planning Institute (RTPI) published in June, which concluded that more than 13,000 homes may have been delivered by English local authorities last year – the highest number since 1990.

Yet many fear the decision to add 1 per cent to the interest rate threatens that growth. The hike is said to have followed a substantial increase in some councils’ borrowing from the board to invest in commercial property – one in five shopping centres that have been acquired since 2016 have been bought by councils. However, the government has not confirmed this as the reason for raising the rate.

The increase – which came with no warning – has been greeted with horror by many council leaders. Duncan Whitfield, president of the Association of Local Authority Treasurers, told the AJ’s sister title, the Local Government Chronicle, that many councils would need ‘to revaluate their housing and regeneration programmes as a consequence and that will compromise the affordability of those programmes’.

Meanwhile, the Local Government Association said the rate increase could cost councils £70 million a year. ‘It presents a real risk that capital schemes, including vital council house-building projects, will cease to be affordable and may have to be cancelled as a result,’ a spokesperson warned.

Norwich City Council said said that borrowing from the public works loan board was not used for the Goldsmith Street development. Instead, it was 30 per cent funded by Right To Buy income with the rest coming from a mix of borrowing that was already in place and Housing Revenue Account reserves.

Goldsmith Street by Mikhail Riches with Cathy Hawley    2

The Stirling Prize-winning Goldsmith Street development by Mikhail Riches with Cathy Hawley which was funded by Norwich City Council

The Stirling Prize-winning Goldsmith Street development by Mikhail Riches with Cathy Hawley which was funded by Norwich City Council

But a spokesperson for the council did not rule out the rate increase having a chilling effect on council house-building. ’It is too early to assess any specific implications of this change,’ they said, ‘but it is always concerning to hear of additional financial barriers to building new council homes.’

RIBA president Alan Jones added: ‘Stirling Prize winner Goldsmith Street demonstrates that well-designed, sustainable social housing is achievable. But unfortunately this is not the norm, and local authorities need the right resources and expertise to do this. The UK government must enable local authorities to develop innovative social housing, and I’m concerned with the introduction of any more obstacles.’

Many councils, such as Croydon with its development arm Brick by Brick, have an arm’s length company that develops homes for council tenants.

This rise in borrowing costs is not good for councils

Councillor Alison Butler, Croydon Council’s deputy leader and cabinet member for homes and Gateway services, said: ‘This rise in borrowing costs is not good for councils, and is yet another government obstacle to delivering the new homes this country needs.

‘This decision does not affect money that Croydon Council has already borrowed to facilitate around 2,000 new homes through Brick by Brick, but it does mean that all councils will have to be more innovative when borrowing in future if they are to boost supply and provide value for money.’

An Essex County Council spokesperson said: ‘The council funds a significant proportion of its annual capital programme from borrowing and has largely satisfied its borrowing requirement by securing loans from the PWLB.

‘It remains to be seen whether, as a consequence of the action taken by the PWLB to increase its lending rates, the council will need to reconsider its future capital programme aspirations, or whether other lenders will step into the local authority market to offer viable alternatives to borrowing from the PWLB.’

But Steve Sanham, former managing director of developer HUB, disagreed. ’My view is that the business rate was a bit silly, encouraging local authorities to get involved in things – like shopping centres and office buildings – that they’re not best placed to do.’

By increasing the rate, the government would ‘calm people down’ without jeopardising important housing projects, he said. ‘I don’t think it will have a huge effect on housing delivery. This (1.8 per cent) is still very cheap money; significantly cheaper than anything you would get in the private world.’

A Treasury spokesperson said: ‘Even with this change, the PWLB rates offer very good value to local authorities. We have also legislated to increase the lending limit of the PWLB to £95 billion as part of the government’s commitment that local authorities can access financing to support their capital spending plans.’

Alton Estate

Alton Estate

Source: John Donat / RIBA Library Photographs Collection

Alton Estate

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Readers' comments (5)

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  • This from a government professing to spearhead a drive to build more homes, and pressuring cash-squeezed local authorities to fulfill some knee-jerk driven norms for residential zoning and planning approvals - it couldn't be anything to do with the quality of our current government, could it?

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    All is fine, the interest rate on my 7-year student loan is much, much higher than that. Fortunately, the pay for architecture grads makes all that cost worthwhile....

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  • And should local authorities be building housing anyway, as apart from one or two exceptions they do it badly and inefficiently? And what are they doing buying shopping centres? Just as the Internet is changing the world, and they have put up the rates to make them financially unviable. A great investment.

    Leave us alone and we will solve the housing crisis. Demand and supply. Government wanted a fighter and a bomber to defeat the Nazis; we designed, built, flew and then revered the Spitfire and Lancaster, and we also built the semis that when taxed paid for them! What government needs to do now is allow for the urban design to provide a sustainable and inspiring environment. Properly trained planners rather than development control box tickers?

    Brexit first on Saturday, then watch us help change the world for the benefit of all, especially Africa and South America. Even the US of A might learn a thing or two?? Is that “crashing out”, old pissimists and craptologists Hilary and Dominic.

    We can do it.

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  • My apologies for my somewhat intemperate remarks earlier about local authority housing. There have been some great schemes, and well done to all those involved, but it seems a bit old fashioned now? The world is moving on, and as a way of procuring accommodation it seems a little ponderous and inappropriate. The private sector has not covered itself in glory for all sorts of reasons either.

    From all sides the Brexit stuff is getting in the way. As soon as it is over people will be happier and closer, and we can work together to help solve the major problems facing us, as well as share in the rewards?

    2020 will be another great year?!

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