WHILE these are very early days in the life of a new government, many sectors – and certainly our fellow CIH members in the council housing sector – are sitting on some longstanding and very pressing problems.

With sector specialists Savills, we have just finished a rigorous investigation of a key area of the current black hole in local authority finances – the Housing Revenue Account (HRA), where councils that own and manage social housing record their income and expenditure.

Back in 2012, the HRA debt settlement was agreed between central and local governments, setting out what level of debt was sustainable for each local authority.

However, the levels set by the 2012 settlement were based on assumptions about future rental income, inflation, and stock investment requirements that have since changed – as a result of the external financial and policy environment– beyond all recognition. And as the recent report from 20 council landlords and their partners makes clear, there is now simply not enough money in the system to run council housing properly. HRAs across the country are in a precarious position.

So where has all the money gone? The explanation lies in the six steps that we suggest must be taken by the new government to resolve the issue and make council housing finances sustainable again.

Step one: How many authorities have a Housing Revenue Account?

The original settlement covered 169 councils, but now fewer – 158 – have a Housing Revenue Account (HRA). The total debt under the original settlement now stands at £29.188 billion; a fairer calculation of the amount for which 11 fewer councils should be responsible would be £28.685 billion at 31 March 2024. This should be the revised “starting point” of current debt for refreshing the settlement.

Step two: Adjusting for imposed rent cuts

The second step would take account of changes in rent policy from 2012-2024. This is by far the biggest reduction in income visited on the HRA by government policy from 2016 to 2024 – £10.184 billion. Taking this amount off the original settlement reduces the starting point to £18.501 billion.

Step three: The cost of changes in standards

Savills’ analysis suggests it will cost approximately £5,000 perfor councils to make sure their stock meets a higher energy-efficiency standard (EPC band C) and complies with the new fire and building safety legislation and regulation. Their broad estimate is that this will equate to about 10 per cent of current HRA debt between 2020-2030. The cost of a revised Decent Homes Standard also has to be taken into account – again, a broad estimate is an additional 10 per cent, though we can’t be sure until the revised standard is published. A fair settlement would cut approximately £4.535 billion from the debt, distributed among authorities depending on the nature of their stock.

Step four: The unexpected burden of excess inflation

Excess inflation between 2020-2024 created an exceptional increase in capital repairs costs that could never have been foreseen in the 2012 settlement assumptions. A further reduction of £1.555 billion in the debt to account for this would again be distributed between councils depending on the nature of their stock.

Step five: The cost of additional regulatory pressures

Higher regulatory burdens and pressures over the last five years have increased management costs by an additional five per cent, and to this should be added the further five per cent increase in revenue repairs costs – suggesting a further reduction of £0.932 billion.

Step six: The loss of social housing

Finally, more homes have been lost to the sector between 2012 and 2024 than anticipated – there are around 40,000 fewer than the 2012 settlement assumed there would be by 2023-24. Yet income from this smaller number of properties still has to service the same level of debt. Deducting a further £228 million, after steps 1-5 above have been completed, would level out this anomaly.

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In all, we are suggesting a debt write-down of £17.434 billion, making £11.251 billion the updated starting point for the settlement. This is roughly where we estimate the HRA would stand now had the 2012 assumptions held good. While all these figures are a guide for discussion only, we would argue that the calculations for debt incurred by central government rent reductions and lost homes are based on robust national data; and these two factors alone account for close to £10.5 billion of the current debt.

Unburdening the HRA of unsustainable and unexpected debt is clearly the right place to start if councils with housing stock are to begin the journey back to sustainable finances.

It’s worth reiterating that this is only the beginning for the comprehensive raft of reforms needed for the council housing sector to play its full part in the new government’s promise of a monumental push to replenish and improve the national housing stock. In the near future, government policy will also have to address the need for more and new social rented homes, a more consistent approach to rent policy, reform of right to buy, and how a new Decent Homes Standard and net zero carbon will be funded.

But bringing Housing Revenue Accounts back from the brink of bankruptcy is an essential first step forward.