IMPACT OF HOUSING BENEFIT REFORMS - November 2010

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1 IMPACT OF HOUSING BENEFIT REFORMS - November 2010 CIH has secured media coverage of the impact of two aspects of welfare reform during November this document explains CIH s workings and summarises the policy position. 1. Executive summary The Chartered Institute of Housing (CIH) has been campaigning for several years for reform of Housing Benefit so that it provides a stable basis for supporting people to get back into work and to plan for the future. CIH is opposed to the Housing Benefit reforms announced in the June Budget and Comprehensive Spending Review. We are supportive of the principle of Universal Credit and want to work with the government to get this long term reform right. CIH understands the need to control welfare expenditure but has concerns about the arbitrary nature of the local housing allowance caps which do not reflect what people pay and break the link over time between the level of support people receive and actual rents. Around 70% of the recent rise in the housing benefit bill is due to an increase in the caseload arising from the economic down turn. CIH is concerned that current welfare reforms will have unintended consequences, making many areas in London, the South East, the South West and the East of England unaffordable to working people on low pay who rely on Housing Benefit to supplement their income. The changes will also impact those people looking for work, as well as the long-term sick and disabled and pensioners. Taken in isolation the justification for each of the individual measures in the Budget package can appear reasonable. Collectively, however, they lack coherence and will have a damaging cumulative impact on lower income households. This document examines the impact of two reforms - caps on Local Housing Allowance and index linking LHA rates to the consumer prices index (CPI) rather than RPI. They will break the link between the support people receive and the rent they pay, and this could force a migration of people, by making some areas unaffordable. These two measures are expected to be replaced by the new Universal Credit for working age claimants from However, it is anticipated that either they will be incorporated as features in the new benefit or they will be replaced by system much more rough and ready based on broad average rents rather than the rents that people actually pay. If this is the case the displacement effects whereby claimants are either forced to move or make up the difference out of their benefit income will be further exaggerated. 1

2 DWP states that 30% of the rental market should be available to LHA claimants, but the inevitable consequence of the two measures (LHA caps and the CPI cap) is that over time the proportion of the market that is available will shrink below 30%. This analysis looks at two of the most important measures for the full set of changes read the CIH Housing Benefit briefing here. The possible consequences for the individual: They will have their choice of private rented properties limited They will have to find more of the rent from other incomes, if they have any They will be forced to move out of their home, because the rent is unaffordable They will be forced to give up their job, because they are no longer living in the area or commuting becomes too expensive People looking for work will be forced to move to areas where employment prospects could be worse Consequences for the sustainability of the economy: We still need people to do low paid jobs in higher priced areas. If the ability to live in or commute to an area is taken away who is going to do the jobs? People who are forced out of higher rent areas will move to areas which are cheaper but where there may be fewer job opportunities which could exacerbate the problems of worklessness. At a time when we need to engage people to find work to pay rent; we are in danger of requiring them to move to a place where it is harder to find work. What CIH would like to see: Build more affordable rented housing going further than government plans announced in the Comprehensive Spending Review. Housing Benefit is not the problem, poor availability of affordable housing is. Look at moving away from arbitrary caps and look at controlling costs based on actual housing markets. A sustainable approach to welfare reform which does not break the link between the support people receive and the actual rent they pay. Over time the move to freeze LHA rates and up-rate them in line with CPI will close the private rented sector for people on low incomes. 2

3 Useful information: Key facts about Housing Benefit Table: geographical analysis of the impact of caps on Local Housing Allowance Table: geographical analysis of the impact of linking Local Housing Allowance to CPI rather than RPI How the figures are worked out the basis of assumptions 2. Caps on Local Housing Allowance (LHA) - a form of Housing Benefit In April 2011 it is planned to introduce caps on the maximum LHA payable for each property size in the private rented sector: 250 for one-bed; 290 for two-bed; 340 for three-bed; 400 for four-bed and larger properties. The caps do not reflect local housing costs and there are no proposals to adjust them with inflation. In fact once they have been introduced there is nothing to stop the Government reducing the caps still further without there being any further Parliamentary scrutiny. CIH analysis shows that if the caps are not adjusted to take rental inflation into account they will narrow the choice of properties available to rent and will mean that over time people will need to pay more of their rent from their other income. If rental inflation is at 5% per year, within 20 years all rental market areas in London, almost all in the South East and half of those in the South West will be affected by the caps (See Appendix I). Within 30 years one and two bedroom properties in all areas in Great Britain will be affected by the caps. The change also affects three bedroom properties in all but two areas (See Appendix I). 3. Switch to linking Local Housing Allowance to CPI rather than RPI From 2013/14 it is planned to freeze existing LHA rates and only up-rate them by the consumer prices index (which does not include housing costs) rather than the rates being based on the real rental market evidence. The consequence will be that over time the 30 per cent of the market that is theoretically available to tenants will be squeezed as LHA fails to keep pace with rent inflation. Within a generation there will be towns and cities all over the country where there is no accommodation with a rent within the reach of 3

4 people whose income is supported by benefits. The impact is not restricted to expensive. The picture is different for different sizes of property - and is particularly acute for shared properties, where in some areas within two years of the change coming into force there are projected to be no properties available that can be fully paid for with LHA. For example in Ashford all 2-bed properties will be out of reach for private rented sector tenants in receipt of LHA within 10 years. In Barnsley all 1-bed properties will be out of reach within 9 years (See Appendix II). Over time the effect of the CPI cap will be to break the link between the help tenants receive with their housing costs and the actual rent they pay. At this point it can no longer be said that housing benefit will be meeting its central policy objective: to ensure that reasonably priced accommodation is available to all households regardless of their income. The effect of this measure in shrinking the affordable supply will be two fold. First for tenants the purchasing power of their LHA will diminish. Second long-term landlord investment in rental stock is likely to shrink because long-term investment is predicated on long-term rental income yields. Key statistics about Housing Benefit 4.8 million claimants in the UK* 1.3 million (27%) are aged million claimants (56%) are single with no dependent children all ages 1.1 million claimants (23%) are single with dependent children all ages 0.5 million claimants (10%) are couples with dependent children all ages *Source DWP Table 9a Housing Benefit recipients by Age Group and Family Type: June 2010) 3.29 million housing benefit claimants live in social housing 1.14 million housing benefit claimants live in the private rented sector 279,000 housing benefit claimants are working 570,000 housing benefit claimants are on JSA (Job Seekers Allowance) 4

5 How the figures are worked out the basis of assumptions Impact of caps on Local Housing Allowance With the exception of the four-bed limit, the DWP impact assessment shows that the caps as presently set will not have an impact outside London. However, importantly, if the caps are not up-rated in line with inflation (let alone in line with increases in rent levels) then this is likely to change and their effect may soon begin to spread to other areas. CIH has modelled the impact of freeze in the caps for different levels of rent inflation, based on the assumption that rent inflation will outstrip CPI (this is reasonable given that CPI excludes housing costs) and that the long-term CPI average is 2% (the Bank of England Target). The results are in table 3.2. Over the period rent inflation outstripped CPI by an average of 2.57% per year. Our analysis shows that if rent inflation exceeds CPI by 1% or more the caps will rapidly spread to other areas outside London. It also shows that they will spread more rapidly in 1 and 2 bed properties; this is very worrying because they account for the vast majority of the caseload (76% of all LHA cases). If the purpose of the 30th percentile reform is to ensure that claimants have access to at least the bottom 30 percent of the market, then the effect of the caps will be to reduce that proportion which is available. Overtime if the caps are not up-rated in line with inflation (and there is no mechanism for doing so) the rate at which the available market shrinks will accelerate. The four bed limit also hits hardest in London, but does have some effect outside of London. Although the numbers of households affected in each authority area are small, homelessness services will find the task of identifying suitable accommodation particularly challenging. The numbers are small partly because suitable accommodation for larger households is so scarce. Unlike smaller households where the shortfall created by the change to the 30th percentile may be small enough for households to manage, the losses are so large from the 4 bed cap that homelessness is almost inevitable. The average weekly losses from the caps for four and five bed properties are 137 and 74 respectively (or 90 and 63 if authorities that are wholly or partly within the Central London broad rental market area are excluded). 5

6 Linking LHA to CPI rather than RPI The effect of this particular measure is difficult to model because actual local rent inflation is so difficult to predict. The picture is further complicated by the fact that even if local rent inflation can be identified for a particular area it may well not be even across the whole market. For example, rents may well rise at a faster rate in the top 70% of the market than at the bottom 30% of the market. The areas most adversely affected are generally those where median 30th percentile rents are closest together because these are normally the markets where the gap between the lowest rent and the 30th percentile rent are also closest. In other words, in markets where the 30th percentile is already close to the lowest rent the gap will close more quickly. However, it is reasonable to assume that broadly over time rent inflation will outstrip CPI inflation. Indeed government appears to be making this assumption if the policy is to make the savings that have been built into the June budget policy costings. The logical consequence of this is that over time the 30 per cent of the market that is available to tenants will be squeezed. In theory, working on the assumption of uniform rent inflation and that rent inflation will outstrip CPI, there will come a point at which the current lowest rent that is available has overtaken the 30th percentile rent up-rated in line with CPI. At that point there will be no properties available at the LHA rate. CIH modelled this reform using the overall average rates for rent inflation and CPI over the period 1991 to 2009 (from the bottom of the previous recession to the current one). Over this period rent inflation outstripped CPI by an average of 2.57% per year (in fact it was higher in every single year with the sole exception of 2009). We inflated the current lowest rents available from the rent officer data set at CPI plus 2.57% (using the CPI average ) and compared them with the rent officer figures for the 30th percentile up-rated in line CPI. 6

7 Appendix I Spread of LHA caps Housing rental market areas affected (Based on rent inflation at 4% pa) * Total for Wales includes West Cheshire ** Total for West Cheshire counted only once 1 bedroom: NE NW YH EM WM East London SE SW Scotland Wales 23* Total 193** bedrooms: NE NW YH EM WM East London SE SW Scotland Wales 23* Total 193**

8 3 bedrooms: NE NW YH EM WM East London SE SW Scotland Wales 23* Total 193** bedrooms: NE NW YH EM WM East London SE SW Scotland Wales 23* Total 193** Spread of LHA caps Housing rental market areas affected (Based on rent inflation at 5% pa) * Total for Wales includes West Cheshire ** Total for West Cheshire counted only once 1 bedroom: NE NW YH EM WM East London SE SW Scotland Wales 23* Total 193**

9 2 bedrooms: NE NW YH EM WM East London SE SW Scotland Wales 23* Total 193** bedrooms: NE NW YH EM WM East London SE SW Scotland Wales 23* Total 193** bedrooms: NE NW YH EM WM East London SE SW Scotland Wales 23* Total 193**

10 Appendix II Geographical analysis of the impact of linking Local Housing Allowance to CPI rather than RPI Time in years for LHA to fall behind the lowest rent Shared room: BRMA Time (years) West Cumbria NW 1.13 Chesterfield EM 1.72 Richmond & Hambleton YH 3.26 Mid Dorset SW 3.39 Barrow-in-Furness NW 6.64 Harrogate YH 7.23 Herefordshire WM 7.42 Winchester SE 7.43 Kendal NW 7.55 Northumberland NE 7.64 Southampton SE 7.65 Worcester North WM 8.06 Sunderland NE 8.38 Darlington NE 8.72 Teesside NE 8.86 Worcester South WM bedroom: BRMA Time (years) Barnsley YH 8.22 Oldham & Rochdale NW 9.09 St Helens NW 9.1 Aylesbury SE 9.66 Chilterns SE 10.5 Swindon SW Solihull WM Isle of Wight SE 11.2 Worcester North WM 11.2 Milton Keynes SE North Nottingham EM East Cheshire NW Kendal NW Darlington NE East Thames Valley SE Walton SE

11 2 bedrooms: BRMA Time (years) Ashford SE 9.99 East Thames Valley SE East Cheshire NW West Wiltshire SW Mid Dorset SW Winchester SE Basingstoke SE Chichester SE Aylesbury SE Maidstone SE Stevenage & North Herts East Warwickshire South WM 13.7 Swindon SW 13.7 Milton Keynes SE Southend East Darlington NE bedrooms: BRMA Time (years) Newbury SE 8.46 Maidstone SE Outer East London London Worthing SE West Wiltshire SW Chilterns SE Harlow & Stortford East Lancaster NW Richmond & Hambleton YH West Pennine NW Cherwell Valley EM Salisbury SE Darlington NE Crawley & Reigate SE West Cumbria NW Mendip SW

12 4 bedrooms: BRMA Time (years) Eastbourne SE 6.09 Newbury SE 8.61 St Helens NW 8.7 Worcester South WM 9.09 Richmond & Hambleton YH 9.53 Blackwater Valley SE Huntingdon East Salisbury SE Oldham & Rochdale NW Herefordshire WM Milton Keynes SE Taunton & West Somerset SW Southport NW Ashford SE North Cornwall & Devon SW 12.5 Borders Stevenage & North Herts East