Local Housing Allowance Final Evaluation:

Transcription

1 Local Housing Allowance Evaluation 16 Local Housing Allowance Final Evaluation: The housing and labour market impacts of the Local Housing Allowance

2 Local Housing Allowance Final Evaluation 16 The housing and labour market impacts of the Local Housing Allowance

3 Contents Acknowledgements... 1 Glossary of terms... 3 Executive summary... 5 Chapter 1: Introduction... 5 Chapter 2: National Housing and Labour Market Trends... 5 Chapter 3: Local Housing and Labour Market Trends... 6 Chapter 4: Housing Market Impacts of the Local Housing Allowance... 7 Chapter 5: Labour Market Impacts of the Local Housing Allowance... 8 Chapter 1: Introduction Chapter 2: National housing and labour market trends Housing market trends Labour market trends Summary Chapter 3: Local market characteristics and trends in Pathfinder and Control areas House prices Housing market characteristics The Private Rented Sector Housing Benefit sub-sectors Categorising the Local Housing Allowance and Control Areas Housing Benefit Dominant markets Labour market characteristics and trends Employment and unemployment Economic activity in the Private Rented Sector Earnings Summary... 51

4 Chapter 4: The housing market impacts Of The Local Housing Allowance The supply of private lettings to claimants The rents of private lettings supplied to Local Housing Allowance claimants Summary Chapter 5: The labour market impact of the Local Housing Allowance Private rents and Housing Benefit The potential impact of the Local Housing Allowance on labour market participation The evidence from the claimant surveys Summary Appendix A: Local house prices and earnings data Appendix B: Local Housing Allowance market stream vignettes References

5 Acknowledgements This report was written by Steve Wilcox with the assistance of David Rhodes and Julie Rugg at the Centre for Housing Policy. However, the market analysis in the report draws on all the streams of research undertaken for the Local Housing Allowance Evaluation together with analyses of administrative data collected by the Department for Work and Pensions (DWP). The authors must therefore thank all the members of the evaluation team at Birmingham and Loughborough Universities and the National Centre for Social Research as well as all the research team at the DWP. Particular thanks are due to Jacqueline Beckhelling and Kim Perren at Loughborough University for the additional analyses undertaken for this report of the survey of claimants and to Libby Cox and Saranna Fordyce at the DWP for the analyses of the Housing Benefit case data collected by the Department as part of the evaluation. Further thanks are due to Lynne Lonsdale at the University of York for her help in producing the final report, and to our liaison officers at DWP, Andy Brittan and Sonia Jemmotte, for their constructive support throughout the evaluation. Centre for Housing Policy, University of York Julie Rugg David Rhodes Steve Wilcox 1

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7 Glossary of terms In this report the following terminology is used: ACT (Automated Credit Transfer) A method of paying money directly from the Local Authority (LA) to the recipient s bank or building society account. Appropriately-occupy Claimants whose accommodation matches the Department for Work and Pensions (DWP) size criteria (see size criteria on page 4). Contractual rent The rent charged to the tenant by the landlord for a property. Deficit Claimants have a deficit if their Housing Benefit (HB) amount (i.e. the amount they receive after adjustments for income or non-dependants) is less than their contractual rent. Direct payments/paid direct Refers to payments made to the claimant (not the landlord). Discretionary Housing Payments (DHP) These are free-standing payments to be made at the discretion of the LA, subject to an annual cash limit, in cases where the LA considers that additional help with housing costs is needed. Eligible rent The maximum amount of Housing Benefit (see below) a claimant could receive based on the circumstances of the tenant, the locality in which they live and a range of restrictions applied by a Rent Officer (i.e. before adjustments for income or non-dependants). In the Pathfinders, the LHA is equal to maximum eligible rent. Excess When LHA (i.e. the maximum eligible rent before income and non-dependent based adjustments) is more than contractual rent, a claimant is said to have an excess. Housing Benefit Sometimes called rent rebate or rent allowance. It is a benefit that is paid by LAs to assist people to pay their rent. The amount that claimants receive depends on their financial and personal circumstances. Housing Benefit may not cover all their rent. In Pathfinder areas, claimants are paid the reformed benefit i.e. LHA. Housing Benefit amount Refers to the amount of LHA or HB that claimants receive after adjustments for income or non-dependants. Housing Benefit Concentrated Markets Where tenants in receipt of HB were one of a number of demand groups for properties in the Private Rented Sector (PRS), but where HB lets tended to be concentrated in particular areas, e.g Conwy, Edinburgh and Leeds. Housing Benefit Dispersed Markets Where demand was uniformly high from Housing Benefit tenants and a range of other competing demand groups, e.g. Brighton, Coventry, Lewisham and Teignbridge. Housing Benefit Dominant Markets where tenants in receipt of HB make up a substantial proportion of renters within the PRS, e.g Blackpool and North East Lincolnshire. 3

8 Local Housing Allowance rate (LHA) This is a flat-rate allowance towards rent costs that is calculated on the basis of the circumstances of the tenant and the broad area in which they live. It is the maximum amount of HB a claimant could receive, before any income or non-dependent based adjustments are made. In the Pathfinders, the allowance is set at the maximum eligible rent. Local Reference Rent (LRR) This one of the rent limits applied to define eligible rents for private tenancies under the mainstream HB scheme. The LRR is based on average rents in the locality, as assessed by The Rent Service. Over-occupy Claimants who live in property that is deemed to be smaller than their entitlement under the DWP size criteria (see size criteria, below). Shortfall When LHA (i.e. the maximum eligible rent before income and non-dependent based adjustments) is less than contractual rent, a claimant is said to have a shortfall. Single Room Rate This is the LHA rate set for single people aged under 25. The Single Room Rate is based on average rents in the locality for accommodation with at least one exclusive room, and where one or more of the facilities living room, kitchen, bathroom and toilet are shared. This is slightly more generous definition of rooms compared to the Single Room Rent set under the mainstream HB scheme (see below). Single Room Rent (SRR) This is one of the rents limits applied to define eligible rents for single people aged under 25 with private tenancies under the mainstream Housing Benefit scheme. The SRR is based on average rents in the locality for one room accommodation, with a shared living room, kitchen and toilet, as assessed by The Rent Service. Size criteria The size criteria are applied by the Rent Officers to calculate the number of bedrooms and living rooms to which a claimant is entitled. LHA rates are based on this entitlement. The conditions are as follows. One room is allowed as a bedroom, for: every adult couple; any other adult aged 16 or over; two children of the same sex under the age of 16; two children (of the same or opposite sex) under the age of 10; and any other child. In addition, living rooms are allocated as follows: one, if there are one to three occupiers; two, if there are four to six occupiers; and three, if there are seven or more occupiers. Surplus Claimants have a surplus if their HB amount is more than their rent. Top up A rent top up is paid by a claimant whose HB amount is less than their rent. Under-occupy Claimants who live in property that is deemed to be larger than their entitlement under the DWP size criteria (see size criteria, above). 4

9 Executive summary Chapter 1: Introduction The Department for Work and Pensions (DWP) has commissioned an evaluation of Local Housing Allowance (LHA) in nine local authorities, or Pathfinder areas. The evaluation design included extensive interviews with claimants and landlords, as well as the collection of administrative data by DWP. This report draws on all those sources to provide an overall assessment of the labour and housing market impacts of the LHA. LHA is designed to pay the same amount to private tenants with similar circumstances residing in the same area (the Broad Rental Market Area). In most cases, LHA will be paid to the tenant, instead of to the landlord. The overall aim of LHA is to empower tenants by enabling them to exercise more choice and take more responsibility over their housing decisions. The key objectives of LHA set out by DWP are: fairness; choice; transparency; personal responsibility; financial inclusion; and improved administration and reduced barriers to work. The LHA evaluation was conducted by a consortium of independent research organisations and involves quantitative and qualitative research with claimants, landlords and stakeholders directly concerned with the operational aspects of LHA. Chapter 2: National housing and labour market trends There were marked changes in the housing and labour markets in Britain over the years from 2003 to 2006; the LHA Pathfinders did not operate in an unchanging context. Both house prices and average mortgage costs rose rapidly over the period. While falling interest rates had reduced mortgage costs in the early years of the 1990s, by 2006 average first time buyer mortgage costs were almost as high as a proportion of average earnings as the peak of the housing market boom in While house prices rose sharply in all regions between 2003 and 2006 the increases were greater in the northern regions of England, Scotland and Wales, and there was a reduction in the extent of north south differentials in house price to income ratios. Affordability pressures grew in all areas. 5

10 Facilitated by the growth in the availability of buy to let mortgages from mainstream lenders the overall Private Rented Sector (PRS) grew rapidly between 2003 and 2006 in England, Scotland and Wales. At the same time there was a matching increase in the numbers of HB claimants securing accommodation in the PRS over those years, reversing the decline experienced since In the years preceding the LHA evaluation period, HB claimant numbers nationally fell as a proportion of all the households in the PRS. By 2002, they represented just 28 per cent of all households in the sector compared to 47 per cent in 1996, but there was no further fall between 2002 and The private sector grew rapidly between 2003 and 2006, but there was only limited increase in average rent levels. This increase was less than in the case of house prices. Nonetheless, the regional variations in private rents were just as pronounced as the house price variations, and far greater than the regional variations in earned incomes. Unemployment continued its decade-long downward trend until 2005 but rose in 2006 to levels a little higher than in 2003 prior to the commencement of the LHA Pathfinders. This increase was a result of a dip in levels of economic growth in 2005, which was also reflected in a reduction in the growth of earnings in that year. In 2005, gross earnings at the lower end of the labour market only rose in line with inflation, while more typically they have tended to increase at slightly more than one per cent above inflation each year. Chapter 3: Local housing and labour market trends The housing and labour markets in the Pathfinder and Control areas were subject to major changes over the LHA evaluation period. House prices rose substantially in all areas, but most rapidly in areas with relatively low values, and less rapidly in the areas with high values. By the end of the LHA evaluation period there were housing market pressures in all areas, and it was more difficult to distinguish between areas in terms of concepts such as high and low demand, although there were still some marked differences. There were distinct differences in the characteristics of the local housing markets in each Pathfinder and Control area, both in overall terms, and in terms of the PRS in particular. The PRS comprised from between ten per cent (Edinburgh) to 22 per cent (Brighton & Hove) of the local LHA housing markets, but less than ten per cent in two of the Control areas. In comparison with other tenures, the PRS in each area tended to include a higher proportion of smaller dwellings, and to accommodate smaller and younger households. Difference was also evident between areas with regard to the characteristics of the PRS both in terms of the type and size of dwellings, and the households residing in the sector. Dwellings with three or fewer rooms comprised a half of all the PRS dwellings in Brighton & Hove, but less than a fifth of the sector in Coventry, North East Lincolnshire and Wakefield. Households with a household representative person aged below 35 occupied more than half of all the PRS dwellings in Brighton & Hove, Coventry, Edinburgh, Leeds, Lewisham and Cardiff. 6

11 There were also marked differences in the size of the HB sub-sector within the PRS in each area. The HB sub-sector in Blackpool and North East Lincolnshire comprised over 70 per cent of the total PRS, excluding dwellings provided rent free and based on 2001 Census stock figures. These were characterised as HB Dominant Markets. In all other Pathfinder and Control areas the HB sub-sector represented less than a half of the total local PRS, but geographically that sub-sector tended to be concentrated in specific localities within the wider local authority areas. This pattern applied in the cases of Conwy, Edinburgh and Leeds and these were characterised as HB Concentrated Markets. In the other Pathfinder areas demand from HB was more dispersed across the local authority, and those areas (Brighton & Hove, Coventry, Lewisham and Teignbridge) were characterised as HB Dispersed Markets. Economic activity rates varied quite widely between individual Pathfinder areas, with the lowest economic activity rates in Blackpool and the highest in Teignbridge. Economic activity rates also tended to be rather lower in the Control areas, compared to the LHA areas. Between 1999/00 and 2005/06, unemployment rates fell more or less substantially across all the LHA and Control areas. However, there was no overall reduction in unemployment rates across all the Pathfinder areas during the evaluation period 2003/04 and 2005/06 and only a marginal average fall during that time in the Control areas. Brighton & Hove and Leeds were exceptional in seeing some increase in unemployment rates. Against the wider local labour market position, households in the PRS were less likely to be economically active. Economic activity rates were particularly lower in Blackpool, Coventry, North East Lincolnshire and Cardiff. Earnings levels varied substantially between the Pathfinder and Control areas, and were significantly higher in Brighton & Hove, Edinburgh and Lewisham. Variations in earnings were, however, far less marked than the variations in house prices. Earnings were lowest in Blackpool and North East Lincolnshire the two areas with HB dominant markets. Chapter 4: Housing market impacts of the Local Housing Allowance The number of claimants in the PRS in the LHA Pathfinder areas grew over the evaluation period, in line with a similar level of growth in PRS claimant numbers across the rest of the country under the mainstream HB regime. Thus, while the landlord surveys showed a small proportion of landlords suggesting that they would be less likely to let to LHA claimants, largely because of the arrangements for the LHA to be paid to the claimant, this did not have any overall impact on the ability of claimants to access accommodation in the PRS in the LHA areas. 7

12 The landlord survey did suggest that a very small proportion of the landlords did reduce their lettings to LHA claimants, but the available evidence suggests that any such impact was primarily offset by the availability of lettings from landlords entering the sector following the introduction of the LHA. There were also signs of an emerging trend for cases to flow off of the LHA at a slower rate, which might be expected given the greater generosity of the LHA regime, but is not sufficient to suggest that this could have had a discernable impact on caseload numbers by the end of the two-year evaluation period. Over the two-year evaluation period there was a modest tendency for contractual rents to converge towards the LHA levels, and this tendency was strongest in the HB dominant markets. However that tendency was not sufficient to outweigh the impact of broader market changes in three of the Pathfinder areas. However, while there was only a modest degree of rental convergence towards LHA levels in the Pathfinder areas, there is evidence from the comparator areas of wider market changes over the evaluation period that were at the same time leading to a small increase in the distribution of contractual rents relative to LRR/ SRR levels. This trend would suggest that the underlying tendency for the LHA regime to result in rental convergence around LHA levels is slightly greater than that seen over the evaluation period. Reflecting wider market changes, LHA/Local Reference Rent (LRR) levels rose relative to contractual rents in both LHA and comparator areas. The contrast between the growth in the proportion of cases with small shortfalls, as opposed to small excesses, can also be more plausibly explained by modest changes in claimant, rather than landlord, behaviour. Finally, it should be noted that the evaluation only covered a two-year period, and over a longer period the LHA regime could potentially have a rather greater impact on both claimant and landlord housing market behaviour. Chapter 5: Labour market impacts of the Local Housing Allowance The factors influencing a claimant s decision about labour market participation are complex, and the HB scheme has a very limited role in those decisions. There is a low take-up rate of HB by working households, and even when households are aware of its availability as an in-work benefit, there is a limited understanding of the impact of earnings on entitlement. These factors limit the extent to which individuals can take inwork HB into account when making decisions about whether or not they would be better off in work. One aspect of the LHA regime is the encouragement given to claimants to open bank accounts. The introduction of the LHA, in this case linked to similar encouragement being given in respect of payments of Jobseeker s Allowance (JSA), was largely successful in this respect, and very few claimants receiving LHA payments at the end of the evaluation period did so without having a bank account. A claimant having an operating bank account is taken as one of the dimensions of their taking responsibility for their financial affairs, and in that sense is an indication of work readiness. 8

13 While there was a broad consensus among the professionals that the LHA was more transparent and made it easier to make claimants aware of the benefit levels they would receive in and out of work, the claimant surveys clearly showed that there were limitations to the extent of that transparency, even in respect of the narrow issue of the maximum level of the LHA and how that related to their contractual rent. The claimant interviews for the LHA study also found that most claimants either thought that they would get no HB if they took up a job, or knew they might get a lower level of benefit but had no idea how much. There was no change in this finding from the claimant surveys over the course of the LHA evaluation. In broad terms, the claimant surveys found no indication of trend towards higher levels of labour market participation in the Pathfinder areas relative to the Control areas. The higher levels of employment at Wave 3 of the interviews in both the LHA and Control areas was seen primarily as a reflection of the changing composition of the interview samples over time, as they increasing comprised more stable longer term claimants. There was, however, a significantly higher proportion of working claimants in the high-rent LHA areas (Brighton & Hove and Lewisham), compared both to the low- rent LHA areas and the Control areas, which all had relatively low rents. In large part this trend simply reflected the greater likelihood that a low-income household in a high-rent area would still need to rely on HB to help them with their rent, and the Wave 2 claimant survey showed that a higher proportion of claimants moving into work also moved off of HB. While the data were limited, and there are too many unknown factors to reach any definitive conclusions, the higher level of new working claimants in the high-rent areas found by the claimant survey undertaken towards the end of the LHA evaluation would be consistent with the LHA having had a positive impact in those areas. However, wider labour market trends over the evaluation period do not appear to have had a differential impact across high and low-rent areas, nor do the claimant surveys provide any indication that claimants understanding of the availability of HB as an in-work benefit improved over the course of the evaluation, or that there was any change in their attitudes to labour market participation. 9

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15 Chapter 1: Introduction As part of its reform of Housing Benefit (HB), the Government introduced, in nine local authority or Pathfinder areas, a Local Housing Allowance (LHA) which is payable to low-income tenants in the Private Rented Sector (PRS). An evaluation of the LHA was commission by the Department for Work and Pensions (DWP). The evaluation included extensive interviews with claimants and landlords over the course of the two year long evaluation, as well as the collection of administrative data by DWP. This report draws on all these sources to provide an overall assessment of the labour and housing market impacts of the LHA. HB is a payment that provides help to low-income families with their rent. Local Authorities administer the benefit. However, the HB scheme has been criticised for a number of reasons, including being too complex; having wide variations in administration of the benefit; limiting claimants choice of housing; and undermining work incentives. The LHA is designed to pay the same amount to private tenants with similar circumstances residing in the same area (the Broad Rental Market Area). In most cases, LHA will be paid to the tenant, instead of to the landlord. Only when tenants are deemed to be vulnerable - in that they have difficulty managing their money, or have fallen into arrears of at least eight weeks - is their LHA paid directly to the landlord. The Government outlined its intention to reform HB in the April 2000 Housing Green Paper, Quality and Choice: A Decent Home for All. This intention was followed up with detailed proposals in October 2002 with Building Choice and Responsibility: a Radical Agenda for HB in which the Government announced its intention to introduce the LHA in the de-regulated PRS in the nine local authority Pathfinders and also introduce a wide range of other measures aimed at improving the administration of HB and Council Tax Benefit (CTB). The rollout of these measures took place between 2002 and 2006 and included the following key changes to the administration of HB, which, in the Pathfinders, were implemented alongside the introduction of LHA. Benefit Periods were abolished for Pensioners from October 2003 and for working age people from April This change meant that these HB (and subsequently LHA) claimants no longer needed to reapply for HB yearly regardless of whether or not their circumstances had changed. Prior to this change, HB could generally be awarded for a maximum of 60 weeks only, and then a new claim had to be submitted. The change was expected to remove unnecessary form-filling for claimants and reduce the amount of HB administration necessary. From April 2004, entering work was treated as a change of circumstances. The change meant that a new benefit claim was not required for the many of the claimants moving into work so entailing a much shorter and less complex administrative process. The Council Tax Benefit (CTB) rule which restricted the benefit paid to people in property in bands F, G and H to the same amount of benefit paid to band E claimants was abolished in April Alongside the end of review periods for those claiming Pension Credit, people who had reached the qualifying age for Pension Credit (60 years old) could have their HB/CTB backdated for one year, or to the date at which they reached the age of 60 if that is less than one year, without having to demonstrate good cause for backdating. 11

16 The HB run-on for people starting work was widened in 2004 to include Incapacity Benefit (IB) and Severe Disability Allowance (SDA) claimants. Broadly, the run-on meant that people who qualified continued to get their out of work HB/CTB for the first four weeks in a new job. Previously only those on Income Support or on both Jobseeker s Allowance (JSA) and IB qualified for run-on after starting work. Any Tax Credit arrears were treated as capital for benefit purposes from April Tax Credit awards from April 2005 were taken into account much more simply for HB/CTB purposes, by being treated as current income rather than using complicated attribution/retrospection rules. From October 2002, rapid re-claim procedures were introduced for people returning to HB/CTB after twelve weeks or less, which means that a full new claim was no longer required. In addition, over the same period, other changes were made to the operation of Jobcentre Plus and a number of DWP initiatives took place between 2002 and 2006 to improve local authorities performance in HB administration. These included offers of support to local authorities from the DWP Help Team and from the Benefit Fraud Inspectorate s Improvement Team. The overall aim of LHA is to empower tenants by enabling them to exercise more choice and take more responsibility over their housing decisions. The current key objectives of LHA set out by DWP (2006) are 1 : Fairness The LHA bases the maximum amount paid to tenants on the size, composition and location of household. Therefore, two households in similar circumstances in the same area will be entitled to similar amounts of benefit. Choice Under the LHA, tenants should be able to choose how to spend the allowance. For example, they could chose to rent a larger property and pay the excess, or spend less on housing and increase their available income. Transparency A clear and transparent set of allowances helps tenants and landlords know how much financial help is available from the State. Tenants are able to compare how much support is available towards their housing costs in different areas and for different property sizes. Personal responsibility The Government believes that, wherever possible, LHA should be paid to tenants, so empowering people to budget for and to pay their rent themselves rather than have it paid for them. Taking this responsibility helps to develop the skills unemployed tenants will need as they move into work. Financial inclusion The Government wants people to have their housing payments paid into a bank account and to set up a standing order to pay their rent to their landlord. This arrangement has the advantage of being a safe and secure method of payment and provides certainty for landlords that rent will be paid. Improved administration and reduced barriers to work For working-age tenants, LHA aims to provide greater certainty about what help is available in and out of work. A simpler system also helps speed up administration of housing payments, giving tenants more confidence when starting a job that any in-work benefit will be paid quickly. A more transparent system may also improve the ability of individuals to move between areas and to take advantage of employment opportunities. 1 The LHA Pathfinders were meant to help inform the design of the National LHA scheme and objectives have changed since the beginning of the evaluation. The original objectives can be found in the LHA Evaluation Report No 1 at 12

17 The LHA was implemented in the nine Pathfinder local authorities between 17th November 2003 and 9th February 2004, and could be introduced using either a phased or a big bang approach (Table 1.1). The phased approach involved putting all new claimants directly onto LHA after the go live date and transferring existing claimants when there was a change in their circumstances or, prior to a change of regulations in April 2004, when their claim would have been routinely reviewed after 52 weeks. Under the big bang approach, all existing claimants were transferred onto LHA at the start date. Local authorities who decided to use the big bang approach had up to six months to transfer the existing claimants whose benefit was paid to their landlord to direct payments. The transfer happened about four months after LHA went live in Brighton & Hove and at six months in Edinburgh and North East Lincolnshire. Table 1.1 Start Date and method of introduction of Local Housing Allowance Start Date Pathfinder Method 17 November 2003 Blackpool Phased 1 December 2003 Lewisham Phased 12 January 2004 Coventry Phased 12 January 2004 Teignbridge Phased 2 February 2004 Brighton & Hove Big Bang 9 February 2004 Edinburgh Big Bang 9 February 2004 North East Lincolnshire Big Bang 9 February 2004 Conwy Phased 9 February 2004 Leeds Phased A consortium consisting of the Centre for Research in Social Policy (Loughborough University), the Centre for Urban and Regional Studies (Birmingham University), the Centre for Housing Policy (University of York) and the National Centre for Social Research conducted the evaluation. A range of reports based on the landlord and claimant survey interviews and the evaluation of the operational aspects of the LHA have already been published by the Department for Work and Pensions. All publications are available on line at The overall evaluation has three main aims: to test the extent to which LHA fulfils its objectives; to identify any unintended consequences of LHA; and to identify any major operational issues and so inform the design of any national scheme. The market analysis sets out the evidence on the housing and labour market impacts of the LHA, drawing on the results of the successive waves of landlord and claimant interviews over the course of the two year 13

18 long evaluation, as well as the analyses of administrative data collected by DWP. Those results are set in the context of the changing housing and labour markets in the Pathfinder and Control areas over that period. The central questions addressed by the market analysis are: What impact did the LHA have on the supply of lettings to claimants? What impact did the LHA have on claimants choices in securing lettings? What impact did the LHA have on local rents? What impact did the LHA have on claimants attitudes to work, and their participation in the labour market? More wide ranging and comprehensive accounts of the multi-faceted issues arising from the introduction of the LHA can be found in the claimant, landlord and operational reports. Chapter 2 sets out the national housing and labour market trends over the course of the LHA evaluation period. Chapter 3 sets out the local housing and labour market trends in the Pathfinder and Control areas over the course of the LHA evaluation period. Chapter 4 examines the evidence on the housing market impacts of the LHA. Chapter 5 examines the evidence on the housing market impacts of the LHA. Conclusions are set out at the end of each chapter. 14

19 Chapter 2: National housing and labour market trends The first round of Local Housing Allowance (LHA) Pathfinders was introduced, on a staggered basis, from November The Pathfinder evaluation period of two years concluded in March This chapter outlines the national housing and market contexts in which the LHA Pathfinders operated, and the changes in those markets over the two-year evaluation period. The housing and labour market trends over the period were set in the context of a prolonged period of low inflation and economic growth. The key housing trends were sharp house prices rises in all parts of the country, and rising levels of investment in private rented housing. The key labour market trend over the twoyear period was a small rise in levels of unemployment, following a decade during which unemployment had fallen to the lowest levels for over thirty years. Figure 2.1 shows that, while the sustained period of low inflation and economic growth continued throughout the Pathfinder evaluation, the rate of economic growth dipped in 2005, before recovering in Figure 2.1 Fifteen years of low inflation and sustained economic growth 15

20 Housing market trends The combination of economic growth and low inflation underpinned the substantial rise in house prices in the years from 1997, as shown in Figure 2.2. The low inflation rates over the last fifteen years also saw interest rates fall sharply from the levels experienced at the end of the 1980s, with a consequent fall in mortgage costs relative to house prices. Indeed, in part the house price rises over the period were a response to the reduced levels of interest rates and mortgage costs. It is also notable that there was a particularly sharp rise in house prices in 2004, the first full year of the Pathfinder period, and a further rise in While house prices had been rising for six years by 2003, in part this represented a recovery from the housing market recession in the early years of the 1990s, and there was only a limited increase in average mortgage cost-to-income ratios for first-time buyers over that period. However, there was a further surge in house prices in 2003 and 2004, and a corresponding rise in mortgage cost-to-income ratios, to levels close to those experienced at the peak of the last housing market boom in Figure 2.2 Housing market affordability in Great Britain 16

21 Figure 2.3 shows that mortgage cost-to-income ratios also rose sharply in all regions of the UK after 2003, and that the north south gap in those ratios also fell during those years. Indeed the mortgage cost-toincome ratio in the lowest region of the UK in 2006 (Scotland) was above that for the highest region in 1996 (London). In other words, while housing market pressures were being experienced in some parts of the country at the beginning of the Pathfinder period, by the end of the period those pressures had become more universal. As will be seen in the following chapter, this change led to a revised approach to conceptualising the differences between the nine pathfinder areas. Figure 2.3 Regional trends in home owner affordability Other factors have also contributed to the rise in house prices over the period from The Barker Reports, and subsequent related work, have focused attention on the shortfalls in housing supply relative to household growth, and the impact that this has on house prices. However, over the years from 1991 to 2001 there was no national shortfall in the level of house building relative to household formation. There was a substantial shortfall in London and the south east, but this was offset by surpluses in other parts of Britain over the same period. Thus, while the London and south east shortfall in house building may have contributed to the widening north south affordability gap between 1997 and 2001, this cannot be argued to have been a factor underlying the national rise in house prices over those years. 17

22 However, the latest estimates suggest that in more recent years household numbers have grown more rapidly, partly as a result of increased net inward migration and that, post-2001, national house building rates have not kept pace with household growth. Over the five years to 2006 household numbers in England grew on average by some 199,000 a year. In contrast the average level of new dwellings completed over the same period was just 151,000 per year. Similarly in Wales, household numbers over the same period grew on average by 13,000 a year, while only some 8,000 dwellings were completed each year. In Scotland, new dwelling completions over the period from 2000 to 2005 continued to be higher than levels of household growth. For the period as a whole, net additions to the housing stock (after taking account of changes as a result of demolitions and conversions) also exceeded net household growth. However, while net additions to the stock were greater than levels of household growth in 2001 and 2002, from 2003 onwards household growth began increasingly to outstrip net additions to the stock. The limited available data suggests that for England and Wales the gains to the housing stock through changes of use and conversions of existing dwellings were roughly offset by losses through demolitions. Thus, in the years since 2001, and over the period of the LHA evaluation, there was some tightening of the overall housing markets in England and Wales, and regional data suggests that this tightening occurred, albeit to different degrees, in all the regions of England. In Scotland, the overall housing market also began to tighten over the years of the LHA evaluation. This tightening of the market is also likely to have contributed to the rise in house prices in England and Wales over that period. However, this effect should not be exaggerated. The detailed modelling undertaken in response to the Barker Report suggested that an increase in house building levels in England of 50,000 additional dwellings per annum would only reduce prices by some seven to eight per cent after ten years of year-on-year additions (1). Private Rented Sector The other key housing market change over the years since 1997 has been the growth of the Private Rented Sector (PRS) following the deregulation of rents in 1989, and the entry of mainstream mortgage lenders into the market to provide mortgages for buy to let landlords on an increasing scale in the years from 1998, as shown in Figure

23 Figure 2.4 Growth in new buy to let mortgages The growth of this market in such a short period of time is quite remarkable. While in 1998 buy to let mortgages represented only some two per cent of all housing market transactions, by 2006 they accounted for more than one in six of all transactions. Nonetheless, it should be recognised that in part these figures represent an increase in the market share by mainstream mortgage lenders in the overall investment market for private landlords. The numbers of private lettings accessible to the public by non-resident landlords in England has grown substantially since 1989, and grew most strongly between 1990 and 1993/94, and then again after 2001 as the buy to let market expanded. This is shown in Figure 2.5. There was very little change in the numbers of lettings either not accessible to the public, such as lettings tied to employment, or by resident landlords over the period (the other lettings in Figure 2.5). The growth in investment in private rented dwellings in the years since 2001 is thus clearly another factor underpinning the more rapid increase in house prices in those years. 19

24 Figure 2.5 Growth in private rented sector in England More directly, it should be noted that the LHA evaluation covers a period of strong growth in the size of the PRS in England as a whole. New data for Wales shows the overall private sector growing from 110,000 in 2001/02 to 125,000 in 2003/04 and 137,000 in 2005/06. Survey data from the Scottish Household Survey also shows a substantial growth in the PRS in Scotland between 1999 and 2005, although this growth is not reflected in the Scottish Executive tenure statistics as these are not currently adjusted between Censuses to take account of any increases arising from private landlords purchasing previously owner occupied dwellings. Figure 2.6 shows the overall growth in the PRS in Great Britain over the last fifteen years. It also shows that the numbers of Housing Benefit claimants in the PRS has also risen over the last three years, having previously declined in the years between 1996 and In 1996 HB claimants represented 47 per cent of all households in the PRS but by 2005 the proportion had fallen to 28 per cent. However, over the subsequent years to including the LHA evaluation period - there was no further decline in this proportion, as the rise in the numbers of HB claimants in the PRS between 2002 and 2005 rose in line with the overall the rate of growth of the sector as a whole. 20

25 Figure 2.6 Upturn in wider Private Rented Sector and lettings to Housing Benefit claimants There is only limited data available on private sector rents at the national level. Data from the Survey of English Housing suggests that average rents for assured tenancies that were available to the public rose from 101 per week in 2000 to 126 per week in 2005, with the rate of rent increases slowing to just three per cent per annum between 2003 and National and regional data on private sector rents is also available from The Rent Service in respect of lettings to claimants in the PRS. In principle the figures on Local Reference Rent (LRRs) provide an indication of Rent Officers views on market rents in the wider PRS, but the published LRR figures by size of dwelling for recent years include a substantial minority of cases subject to a size related determination, which limits their usefulness. The Rent Service data do provide an accurate record of the contractual rents for HB claimants, but in this case it must be recognised that claimants comprise a distinctive sub-sector of the wider rented sector, and that sub-sector varies in its relative size and composition in different parts of the country. Figure 2.7 shows the national trends in rents in both the wider PRS, and also those in the HB sub-sector. The figure shows that the average rents for HB claimants are some per cent lower than the average for the sector as a whole. It also shows that there have only been very limited rent increases in the three years since 2002/03, both for the sector as a whole and for the HB sub sector. 21

26 Figure 2.7 Limited rent rises in private rented sector in England after 2002 Rents, like house prices, also vary widely across the country. Figure 2.8 shows the contractual rents for HB cases for the regions of England in 2004/05, for two and four bedroom dwellings respectively. As can be seen, the rents in London in 2004/05 were roughly double those found in the northern regions of England, and roughly 50 per cent higher than those in the south east of England. In broad terms, these regional variations are just as pronounced as those for house prices in the owner occupied sector, and are far greater than the regional variations in household incomes and individual earnings. 22

27 Figure 2.8 Private rents in the housing benefit sector in 2004/05 Labour market trends Employment numbers in the UK grew continuously in the years from 1993 through to 2005, but dipped at the end of Similarly unemployment on the ILO measure fell continuously in the years from 1993 through to 2005, but has risen since the second quarter of Claimant unemployed numbers also declined over the same period, but have subsequently risen since the first quarter of 2005 on a seasonally adjusted basis. 23

28 Figure 2.9 Downward trend in unemployment halted All these trends reflect the dip in levels of economic growth in 2005 (see Figure 2.1) that occurred during the second year of the LHA evaluation period, and as Figure 2.10 shows, the upturn in claimant unemployment numbers during the course of 2005 occurred in all regions of Britain, albeit with some minor variations in degree and timing. 24

29 Figure 2.10 Regional trends in claimant unemployment However, if employment numbers were higher by the close of the LHA evaluation period than at the commencement, the reverse is the case for the employment rate for those of working age, which fell from 74.7 per cent in the last quarter of 2003 to 74.4 per cent by the second quarter of 2006, despite having risen to 75.2 per cent in the third quarter of The context for the LHA evaluation period was thus a continuation of a long term decline in unemployment numbers during the first year of the evaluation period, followed by increases during 2005 and the first quarters of However, while in some regions claimant unemployment was still lower at the end of the LHA evaluation period than was the case at its beginning, in other regions the reverse was true. Earnings The annual rate of earnings growth in the UK grew a little in 2004, but then fell back quite sharply in 2005, as in shown in Figure While over the whole period from 1997 to 2006 lowest decile full-time earnings grew marginally more rapidly than median full-time earnings, the reverse was the case in both 2003 and Over the two main years of the LHA evaluation (2004 and 2005) lowest decile full-time earnings rose at the rate of just 0.6 per cent per annum in real terms, compared to an average rate of 1.4 per cent per annum over the year period from 1997 to

30 Similarly, lower quartile full-time earnings rose at the rate of just 0.7 per cent per annum in real terms over the two-year period, compared to an average rate of 1.2 per cent per annum over the longer period. Median full-time earnings rose by 0.85 per cent per annum in real terms over the two-year period, compared to an average rate of 1.3 per cent per annum over the longer period. While over the period from 1997 to 2006 as a whole, part-time earnings grew a little more rapidly than full-time earnings, over the two main years of the LHA evaluation both lowest decile and lower quartile part-time earnings both fell in real terms with the rise in 2004 more than cancelled out by the sharp fall in Indeed, part-time earnings at the lower end of the earnings distribution fell in cash as well as real terms in Figure 2.11 Growth of full-time earnings slows in 2005 These limited changes in earnings at the lower end of the labour market over the LHA evaluation period will not, in themselves, have improved the incentives for claimant households to move into employment, any more than the slight decline in the employment rate will have improved the opportunities for claimants to move into employment over the evaluation period. 26

31 Summary There were marked changes in the housing and labour markets in Britain over the years from 2003 to 2006: the LHA Pathfinders did not operate in an unchanging context. Both house prices and average mortgage costs rose rapidly over the period. While falling interest rates had reduced mortgage costs in the early years of the 1990s, by 2006 average first time buyer mortgage costs were almost as high, as a proportion of average earnings, as in 1990 which was the peak of the housing market boom. While house prices rose sharply in all regions between 2003 and 2006, the increases were greater in the northern regions of England, Scotland and Wales and there was a reduction in the extent of north south differentials in house price- to-income ratios. Affordability pressures grew in all areas. Facilitated by the growth in the availability of buy to let mortgages from mainstream lenders, the overall PRS grew rapidly between 2003 and 2006 in England, Scotland and Wales. At the same time there was a matching increase in the numbers of HB claimants securing accommodation in the PRS over those years, so reversing the decline experienced since In the years preceding the LHA evaluation period HB claimant numbers nationally fell as a proportion of all the households in the PRS. By 2002, they represented just 28 per cent of all households in the sector, compared to 47 per cent in However, there was no further fall between 2002 and While the private sector grew rapidly between 2003 and 2006 there was only a very limited rise in average rent levels; far less so than in the case of house prices. Nonetheless, the regional variations in private rents were just as pronounced as the house price variations, and far greater than the regional variations in earned incomes. Unemployment continued its decade-long downward trend until 2005 but rose in 2006 to levels a little higher than in 2003, prior to the commencement of the LHA Pathfinders. This increase was a result of a dip in levels of economic growth in 2005, which was also reflected in a reduction in the growth of earnings in that year. In 2005, gross earnings at the lower end of the labour market only rose in line with inflation, while more typically they have tended to increase at slightly more than one per cent above inflation each year. 27

32 28

33 Chapter 3: Local market characteristics and trends in Pathfinder and Control areas This chapter outlines the housing and labour market characteristics of the nine Local Housing Allowance (LHA) Pathfinder areas, and the three control areas where a wide range of administrative and survey data was collected as part of the LHA evaluation. The chapter also examines the housing and labour market trends over time, as they affected the Pathfinder and Control areas. This chapter also sets out the rationale for distinguishing between the Housing Benefit (HB) dominant, concentrated and dispersed markets within the Pathfinder and Control areas. House prices The LHA Pathfinders were initially selected to cover a diverse range of local housing markets, including those with higher and lower levels of demand and prices. At one end of the scale, average house prices for two-bedroom dwellings in North East Lincolnshire were under 60,000 in 2003, while at the other end of the scale they were over 170,000 in Brighton & Hove. Those local variations in prices were not just at the top end of the market they impacted across the whole range of the market the lowest decile prices for two- bedroom dwellings in North East Lincolnshire were just some 33,000 in 2003; while they were over 120,000 in Brighton & Hove. The full range of house prices of two-bedroom dwellings in the LHA and Control areas in 2003 are set out in Table 3.1. Table 3.1 House prices for two bedroom dwellings in 2003 Area House prices Lowest decile Lower quartile Mean average Pathfinders Blackpool 46,545 54,687 68,770 Brighton & Hove 122, , ,858 Conwy 49,970 62,750 85,523 Coventry 54,000 65,563 79,083 Edinburgh 65,000 85, ,477 Leeds 47,500 64,000 93,417 Lewisham 100, , ,857 N E Lincolnshire 33,400 42,042 59,425 Teignbridge 89,100 99, ,252 Controls Cardiff 68,140 81, ,581 Wakefield 39,700 53,000 72,340 Wolverhampton 32,275 47,875 69,636 Source: Survey of Mortgage Lenders/Regulated Mortgage Survey 29