Let’s assume the Government does manage to find the 100,000 extra council house tenants it hopes will be willing and able to buy their homes over the next three years under a revved up right-to-buy scheme.

How much money would that raise, and how would that money be spent to develop the 100,000 new affordable rent homes the Prime Minister has promised?

Naturally to the sensible lay person, the idea of selling a property at a huge discount to raise money to build another property must seem a bit bizarre.

Surely the new build home would cost more to build than the discounted market value of the old house? Well yes that’s very true. But the answer to the conundrum lies in basic financial engineering – the use of leverage.

Anyway, the first place to start on our exploration is to take a punt at how much the Government might raise by flogging off 100,000 council homes. Clearly there are huge uncertainties. But we know that the relatively few (fewer than 3,000 a year) council homes sold in England over the past four years have been made at average market valuations of a shade over £100,000.

It is dangerous as I keep saying to make assumptions on averages when there is so much regional variation, but assuming £100,000 (which is convenient for mental sums) remains the approximate average market value for homes sold, that would suggest sales of homes worth £10 billion.

The second punt we have to make is to guess what level of discount will be on offer. I have a gut feeling that the sums running around the heads of the policy makers (and let’s hope they have some sums in their heads) would be based on discounts of about 50%.

And I wouldn’t be surprised if there were larger discounts for London. But let’s assume an average of 50%, which would put the rate back to where it was in the late 1990s. This would mean the scheme would generate capital receipts of £5 billion.

The other £5 billion of market value goes to the buyers in discount. Some of the capital receipts would be used to pay back debt owed on the properties. This is where you get into voodoo accounting and the weird world of local government housing finance.

When the previous Labour administration decided to end the Housing Revenue Account subsidy system (a policy continued by the current Government) a prospectus was produced by the communities department called “Council housing: a real future” (pdf). This document put the overall debt for council housing at £25 billion.

So I’ll risk it and use that, in the full knowledge that someone will inevitably put me right. But even then we have to work out what proportion this is of the total housing stock. Well the stock of council housing is valued on the Government books at £100 billion in 2009.

This compares with about £111 billion put as the value for the stock of housing association homes. However, research by the housing information business Hometrack puts the value of the social housing stock at more like £440 billion if sold at market prices.

This suggests that the value of council housing may be about double the value in written into The Blue Book which lays out the UK national accounts. Adding support to the Hometrack estimate is the fact that the average market valuation of recent right-to-buy sales of local authority housing stands at more than £100,000 and we are in the ball park of 2 million homes. So let’s estimate the asset value of the council stock at £200 billion.

This would put the historic debt at somewhere between 10% and 15%. Assuming the worst, that would put the cash left to pump into building a new affordable rent home derived by an average sale of a council home at £35,000, which certainly will not buy a new house even if the land was given away.

But across 100,000 homes that would produce a pot of £3.5 billion over, say, three years. That’s roughly the size of the National Affordable Housing Programme budget for those years – the budget for the period 2011 to 2015 being £4.5 billion.

So let’s look at how affordable rent is actually funded, bearing in mind the leverage effect, and dig into the detail of the existing allocations of funding from the Homes and Communities Agency pot. Allocations have been made for an investment programme launched in February worth almost £1.8 billion. That programme is aimed at delivering 63,000 affordable rent homes and 17,000 affordable home ownership homes.

The bulk of that funding will go on the affordable rent. The average cost to HCA to fund that programme will be £22,000 a home, with average costs per home in London of almost £29,000. The affordable rent will be taking a bigger share than the average, but we can reasonably assume an average cost of less than £26,000 per home.

How can this be, where does the rest of the money come from? Well under the new funding model within which affordable rent operates there are four broad funding streams:



  • the additional borrowing capacity that can be generated from the conversion of social rent properties to Affordable Rent (or other tenures) at re-let, as well as borrowing capacity generated by the net rental income stream of the new properties developed;
  • existing sources of cross subsidy, including provider surpluses, income from developing new properties for outright sale, Recycled Capital Grant Funding (RCGF) and Disposals Proceeds Fund (DPF) and s106 cross subsidy;
  • HCA funding where required for development to be viable; and
  • other sources of funding or means of reducing costs such as free or discounted public land, including local authority land, and local authority contributions for example from the New Homes Bonus.
  • The HCA contribution is stream three. The larger future revenue stream derived from higher rents increases the borrowing capacity to help fund the project, while the HCA is looking for partners in projects to pull cash from other sources, reduce costs and contribute assets where available.
What makes the HCA funding so important is that it can turn unviable projects across the country into viable projects.

And as I type there will be a huge number of large and small projects that would be viable if there were a contribution made by the HCA. Assuming these are less viable than those already within the programme we might reckon on spending a bit more for each home than we see in the current spend.

But with £35,000 taken from the £100,000 average market value of each council house sold, in theory at least, there is enough to lever the construction of at least one new affordable rent home, even though it is not paying for the whole thing.

This mixed-funding project-based structure is, I suggest, broadly the way in which the money will be fed into the construction of new affordable homes. And with so much expertise in brokering deals it might seem extraordinary if the HCA was sidelined from a major role.

Localism be damned, the Government knows very well that potentially this centralised approach is more controllable, probably more efficient and very likely more effective at getting to where there is greatest need for affordable housing than a system that pumps funds back to the local authority that feel they have been wrested of social homes.

So when Grant Shapps suggests, as he did on BBC’s You and Yours (@24 mins) that among the options the money could be rechanneled through the HCA, it sounds to me like a dead cert. I may be wrong and there may be sops to localism, but I’d be very surprised if councils hold onto all the capital receipts generated from the sale of their council homes.

The overall goal, according to Shapps, is that the homes end up where they are required. A quick glimpse at the waiting list figures as a proxy gives a clue (a bad one maybe) as to where affordable homes might be required.

Topping the list are Yorkshire and Humberside and London in terms of the percentage of households in the region on a waiting list in 2009. If the policy is to be judged on funding affordable rent where it is needed then we should expect a regional drift of capital receipts.

What however may be more important for the Government and indeed the house building industry than simply funding affordable rent homes, is that the partnership approach to funding opens up sites that would otherwise remain unviable.

The major private house builders are currently focused on delivering improved profit margins to their shareholders, partly to restore faith, but also to provide comfort in case the market turns sour again. The result of this is that they are far more cautious than in the past about starting new schemes.

This means that  any leverage funding that brings a scheme into viability generates not just affordable rent homes, but also open the way for the development of open market homes.

Furthermore the flexibility over tenure being built into the system means that the developer can phase the affordable rent, affordable sale and open market delivery to suit fluctuations in market conditions.

This can help to reduce risk and provide for a more steady production. Being able to rephrase the delivery of affordable and open market homes can be particularly helpful on phased flatted schemes, which are pretty common in London.

So on the face of it this idea might just work to generate the building of more homes. It will be interesting to see how it pans out. As for whether it is fair, whether it is the best way to fund housing and whether it is the best use of a £200 billion asset, I will leave to others to argue over.

For me one thing this notion illustrates is how we are moving ever more into the arena of financial engineering as we seek to deliver construction in a time of austerity.