Councils built 100,000 homes a year in the 1970s; last year they built 3,000. Housing associations have filled the gap a bit but the overall result is a terrible shortage of supply and a rise in prices to the point where homes cost up to eight times earnings in the UK. Meanwhile, more than a million people are on the waiting list for social housing. As May said, “Solving the housing crisis is the biggest domestic policy challenge of our generation.”
Capital markets could have a role to play here. While councils have traditionally borrowed from the government’s Public Works Loan Board, currently at a cost of 80bp over Gilts, there are questions over its future role and what its funds can be used for. For example, a private member’s bill in the UK parliament proposes that “no local authority in England may borrow from the PWLB for the purposes of commercial property acquisition or other purposes beyond the scope of the statutory duties of that local authority”.
The bill could get nowhere and it doesn't concern houses — but equally it may be the beginning of a revision of where public finance can come from. One obvious solution would be the UK Municipal Bonds Agency. But having been set up in 2015 with £6m of cash from the Local Government Authority and 56 councils, it has yet to issue a penny. The PWLB remains a compelling alternative, while it has apparently been difficult to co-ordinate between councils and persuade them of the advantages of the bond market. Theresa May’s housing drive might just be the right song to get the UKMBA finally dancing.
Beyond the UKMBA, councils will find a ready and willing bond market, whether in the form of public securities or private placements. Housing associations and universities have proved adept users of these markets in recent years — there is no reason to think local authorities could not do the same. They might even qualify as SRI. It’s just a shame May's initiative did not come a couple of years ago when UK interest rates were at rock bottom.