
I have to agree - the number of bedrooms is immaterial. And actually Council properties (x or not) usually have good sized backgardens, so provided the kennelling is adequate to house that number of dogs, I don't think there's an outstanding problem.
However, if there's smell (flies/rats?) and noise during antisocial hours especially, that's another matter. And if they are breeding beyond the local rules covering that, again that would also need investigating. Environmental Health would be interested. Maybe.
It's up to you re whether or not you report this - bearing in mind you still, presumably, want to live there. Once you report people, then relationships will have deteriorated, and it may well become very difficult to continue to live there.
We rented an ex-council property, 2 bedrooms but with a very long garden and kept our hounds (without outside kennelling other than a puppy pen for use during the daytime, when fine) with no problem/complaints. And I know of at least one other who does the same.