It’s not a lot, but the government has made £100m available for councils to start building homes again. So is this the start of a glorious return to a golden age?

You could be forgiven for thinking that Britain had returned to the seventies. The nation is in recession, unemployment is rising, the stock market is in turmoil and some of our largest manufacturers have shortened their working week.

The growing sense of déjà vu has been heightened by the somewhat implausible return of council housebuilding. At the start of May, the housing quango, the Homes and Communities Agency (HCA), launched a £100m scheme that should enable councils to build about 900 homes. It’s a far cry from the 116,300 built by English councils in 1975, but is nevertheles double the number they produced in 2008.

One good side to the seventies – aside from the fact that they are over – is that our recollection of them is now pretty hazy. So in case you need a refresher on council housebuilding, here’s a guide to everything you need to know about the HCA initiative.

What is the fund?

The £100m fund is made up of £50m of grant and £50m of prudential borrowing permissions, which mean councils can borrow money and repay it from the rents generated by the new homes. Councils must put forward schemes that do not already have funding but are ready to start on site in March 2010 and be completed by March 2011. They must submit their bids in two rounds by 31 July and 30 October 2009 and the winners will be announced in September and December. The homes must be built to Code for Sustainable Homes level three, although four is preferred. Councils must contribute the land for free and the schemes should maximise local employment and apprenticeships.

At least eight councils are understood to be thinking of bidding for the fund. Six confirmed they are seriously considering applying (see map below).

Will it make much of a difference?

“Obviously £50m is not a lot; it is 0.5% of the total package of funding announced for supporting housing in the Budget,” says Caroline Green, senior policy consultant at the Local Government Association, which represents councils in England. The timescales for bids of just a few months are also strict.

I view it as a trial for local authorities to show they can do it and, if it is successful, it might open the door to further funding

Steve Warran, Exeter Council

Some local authorities question whether the scheme works out for them financially. Councils will have to repay grants used to build any homes that are subsequently sold to residents through the right to buy. “When they consider the right to buy, they may think that putting in free land is not the best use of the site,” says Green. She adds that local authorities should be allowed to reinvest the money in affordable housing just as housing associations do.

One council considering the financial implications of the HCA scheme against its normal method of funding small housing developments is Wandsworth. Although still likely to bid, the council knows it would have to repay prudential borrowing raised through the HCA’s fund. But it often pays for small schemes on its sites by selling the properties to a housing association while retaining the right to nominate tenants to the homes. “Selling to a housing association works out at zero cost to us, but that would not be the case if we had grant and borrowing,” says a council spokesperson. “The finance people are looking at the smallprint and what prudential borrowing means in cash terms.” It will also look at what incurring debt will mean for the council’s business plan.

Why is the government doing this?

The fund will not produce large numbers of homes, so the obvious question is, why bother? Most see it as a test of councils’ ability to build. “I view it as a trial for local authorities to show they can do it and, if it is successful, it might open the door to further funding,” says Steve Warran, head of housing services at Exeter council.

One souce close to the situation expressed concern that the tight timescales could be a way of setting councils up to fail and thereby ending calls for councils to build again, although this is a minority view. The HCA says the timescales are tight because there is a pressing need to maintain housebuilding and the funding was allocated for this year and next.

An HCA spokesperson says that the fund was launched to get another type of organisation involved in development. “£100m is not a small sum and delivery could represent a significant increase on the 200 to 300 homes currently built by local authorities annually,” he says. “It would suit nobody to see any potential source of additional housing fail.”

Could it lead to further reforms?

Some see the scheme as an opportunity to test out a relaxation of the complex council finance rules that have contributed to the death of council housebuilding.

Several councils are enthusiastic about the idea of building more, but there is also a feeling there will be no return to council housebuilding on a grand scale

Since 1989, councils have collected their rental income in their housing revenue accounts (HRA). They give this money to Whitehall, which then gives them allowances to run their homes. About 156 councils contribute more to the pot than they get in return; only 50 are net gainers. Whitehall retains the rest of the money – £200m last year – and is not obliged to spend it on housing. Under the system, councils lose surplus rental income which they could spend on building more homes and have little incentive to build since they would not get to keep all of the extra rent.

As far as the new £100m fund goes, the HCA has partially addressed this problem by allowing councils to keep all the rent from the homes built under the scheme. But the housing revenue accounts system would have to be overhauled for councils to build homes in significant numbers in future. The LGA’s Green says councils would need to be able to retain income from rents and property sales to put back into more affordable housing. She adds that if the HCA’s scheme is a success, it will be “an incredibly forceful argument for reform of the housing revenue accounts”.

For its part, the HCA denies that the scheme is a way of trialling changes to housing revenue rules, but simply a way of providing more affordable housing.

Some councils add that they would also need some additional capital – perhaps the ability to bid for social housing grant – in order to build homes in future. Peter John, director of partnerships and housing at Sandwell council, says: “We need a capital injection, a lump sum to do the building with, rather than just having permission to do prudential borrowing.”

A long-running review of the HRA system is due to report this summer. Several councils, particularly those that give more than they get, hope it will allow them to become self-funding. In some cases, this could provide them with cash to build homes.

Several councils are enthusiastic about the idea of building more than they do now, but there is also a feeling there will be no return to council housebuilding on a grand scale. As well as doubts about the financial practicalities of big building programmes, many councils have seen their housing departments shrink as properties and management were given to housing associations or arm’s length organisations.

Housing associations, with their ability to raise finance from banks without public borrowing restrictions, have assumed the mantle of affordable housebuilders and some councils work jointly with them on schemes. As Warran at Exeter puts it: “The world has moved on from building 300-home estates, but where there are problems we are happy to step in.”