Labour has pledged to get Britain building again, starting with one and a half million new homes across the country in the next five years. What has the Autumn 2024 Budget told us about how that will be achieved and what is the scale of the problem that needs to be fixed?
The fact that there is a housing crisis in the UK is not new, but the scale of it is increasing. London Councils, the group that represents all local authorities in the capital, has said that councils are spending £4 million a day on temporary accommodation, housing more than 180,000 people half of whom are children. That is a staggering number of people who don't have a permanent home in our capital and the need is clearly urgent.
Direct government funding has been the dominant tool used to supply affordable housing. However, injecting capital directly into developments is only an effective strategy where there is enough cash to support it. Until the late 1990's government funding typically covered the entire cost of an affordable housing scheme. This is no longer the case and grant levels have decreased significantly following the financial crisis. Ahead of the Budget the government announced an increase of £500 million to the 2021- 2026 Affordable Homes Programme bringing it up to £3.1 billion which is of course a welcome step, but the Chancellor has also in the Budget announced a further £3 billion of additional support to be provided by way of government backed guarantees to help unlock development.
Loan guarantees
Loan guarantees allow public bodies to indirectly fund businesses. The public body takes responsibility for specific liabilities of another party which lowers the cost of borrowing. Loan guarantees can be particularly effective in mitigating some risks associated with housing projects, stimulating growth and addressing any market failures.
The guarantees can offer an incentive for institutional investment and taxpayer money does not have to be utilised at the outset. This is particularly useful where the government no longer has the same cash resources to support housing projects as it used to. That said, the public body providing the guarantee will still have to account for a guarantee as a contingent liability on its balance sheet and would therefore be restricted in terms of the liabilities that they are allowed to take on.
The use of loan guarantees to assist delivery of housing projects is not new, for example through the Affordable Homes Guarantee Scheme. The scheme allows housing providers to access low-cost loans to build new affordable homes. Funding for the scheme was increased by £3 billion in February 2024 with the aim of delivering 20,000 affordable homes and we expect following the Budget announcements that there will be more to come, either through the parameters of this scheme or another.
Loan guarantees have also been used to assist the private rented sector through the Private Rented Sector Housing Guarantee Scheme. Again, this was to encourage institutional investment into the sector with the aim of increasing the supply of purpose-built and professionally managed homes.
More recently, the government's National Wealth Fund (previously the UK Infrastructure Bank) has also announced that it will provide guarantees to support funding for the retrofit of social housing.
Using loan guarantees will, of course, come with risks that will need to be monitored. If economic pressures on the sector increased, it is possible that multiple guarantees could be enforced at the same time. It is therefore likely that public bodies will want some certainty about the extent of their liability. Following the Budget, the government seems to have assessed that the risks associated with using loan guarantees can be managed and they are a useful tool in the provision of housing which will of course boost economic growth more broadly.
Overall, guarantees provided by public bodies are likely to have wide appeal, particularly as guarantees can limit the amount of taxpayer money that is used while also offering specific protections for institutional investors. A guarantee that is essentially "backed by Government" is a powerful tool, especially where cash is not readily available to the government.
