It came as a bolt from the blue. In early October, the Treasury raised the cost of borrowing through the Public Works Loan Board, creating doubts over the feasibility of housing developments and other capital schemes.
The change means the PWLB now charges 1.8% on top of normal government rates instead of 0.8%. The new figure makes borrowing no more expensive than in early 2018, before the PWLB cuts its rate. But the recent increase comes as councils were hoping to build significantly more homes following last year’s decision to scrap caps on how much they can borrow through the housing revenue account.
In effect, the rate rise means councils are now paying 2.8% for loans, as the PWLB charges a mark-up on top of the rate for Government bonds or gilts, which currently stands at about one per cent.
Since the Treasury’s decision, finance officers have been mulling over 30-year business plans to see how it may affect house building. Sharon Taylor, finance spokesperson at the District Councils Network, says the one percentage point rise represents a ‘massive hike’ that will have a major impact in some areas.
In Stevenage, where Ms Taylor is council leader, the rise creates a £38m hole that could mean the authority builds just 100 homes over the next three years instead of 300. ‘It’s 200 homes that we could build if the interest rate rise had not hit us,’ she says. ‘We need stability in interest rates.’
Other options include stretching the programme over a longer period or reducing the sums spent on repairs and maintenance, something a responsible landlord would not contemplate, adds Ms Taylor.
In London, council leaders are calling on the Treasury to review the rate rise or offer authorities a cheaper rate if they borrow to build housing.
A letter sent to chancellor Sajid Javid in November by mayors and other senior councillors claimed the extra costs ‘will undoubtedly mean that fewer homes get built in all local authorities across the capital’.
Darren Rodwell, leader of Barking and Dagenham and housing spokesperson for London Councils, said the rate rise would make it harder for his and other councils to build for social rent. ‘We are trying to get the base line as low as possible for working families,’ he says.
Barking and Dagenham has already borrowed £390m from the PWLB and plans to borrow a further £500m, predominantly for housing and energy projects.
By 2024, it hopes to build about 3,000 homes through its regeneration company Be First. ‘All this has done is made our job more difficult. It’s too early to say if we can find a way around it,’ adds Mr Rodwell.
The reason for the one-point rise is that, in Treasury eyes, too many councils were borrowing sizeable sums at relatively low cost compared with commercial rates. In 2018/19, the PWLB advanced 1,308 new loans worth £9.1bn, compared with 780 loans worth £5.2bn the previous year.
Blame for October’s rate rise is being pointed at councils that undertook largescale borrowing, notably Spelthorne, a district in Surrey, that borrowed just over £1bn in the past three years to buy property and use the rental income to fund services.
More than half (58%) of the property bought by Spelthorne is outside the district, much of it near Heathrow Airport where tenants, including oil giant BP, pay the council about £50m per year in rent. Last year, Spelthorne raised £7.7m through such investments (after interest and other costs).
According to Mr Rodwell, the Government has ‘used a sledgehammer to crack a nut’ and should distinguish between commercial borrowing and loans taken out for housing that benefit local communities.
Another high borrower is Woking, a neighbouring council to Spelthorne, which took out loans totalling almost £1.2bn to buy the town’s main shopping centre and carry out other improvements. Money was also borrowed on behalf of Thamesway, a housing company set up by the council.
Council leader David Bittleston points out that virtually all the property bought by the council is within the borough and says PWLB loans should be used to directly benefit residents. ‘There are a lot of councils that just chased income,’ he says.
The recent rate rise is not a major blow to Woking, adds Mr Bittleston, as the interest charged by the PWLB prior to October was a ‘fictitious rate’. Woking had always anticipated paying closer to 2.8%, he says.
Others also doubt whether the rate rise need have a major impact. Christian Wall, a financial consultant and former local authority officer, says interest rates are bound to fluctuate and there is no reason why projects that were viable a year ago should not still be viable. ‘Some of the hysteria around the PWLB is misplaced,’ he adds.
But Joe Anderson, mayor of Liverpool, says the PWLB decision is a ‘shot in the foot’ for councils starting to build homes for the first time in years. Liverpool was told by former housing minister Kit Malthouse that £734m worth of debt would be written off so the council could restart its housing revenue account. In the first instance, Liverpool planned to borrow £50m, increasing to about £300m. Instead, the council is likely to apply to Homes England for more grant. According to Mr Anderson, the Treasury is not working in tandem with other departments. ‘It’s the economics of the madhouse,’ he says.
John Bibby, chief executive of the Association of Retained Council Housing (Arch), says the PWLB’s rate rise took everyone by surprise. It remains to be seen whether councils with housing companies pass on the extra borrowing cost to the companies, he says, but there is a strong case for HRA borrowing to be made an exception.
So, will councils continue to borrow extensively from the PWLB? Clare Hardy, a senior associate at law firm Geldards, says it is possible councils will look at other options if a better borrowing rate is available, along with terms that suit the public sector. But that may mean providing lenders with more detailed information. ‘The PWLB does not question what loans are for,’ she says.