Changes to Housing Benefit announced in the June 2010 Budget

House of Commons Work and Pensions Committee Changes to Housing Benefit announced in the June 2010 Budget Second Report of 2010 11 Volume I: Report, together with formal minutes, oral and written evidence Additional written evidence is contained in Volume II, available on the Committee website at www.parliament.uk/workpencom Ordered by the House of Commons to be printed 15 December 2010 HC 469 Published on 22 December 2010 by authority of the House of Commons London: The Stationery Office Limited

The Work and Pensions Committee The Work and Pensions Committee is appointed by the House of Commons to examine the expenditure, administration, and policy of the Department for Work and Pensions and its associated public bodies. Current membership Anne Begg MP (Labour, Aberdeen South) (Chair) Harriett Baldwin MP, (Conservative, West Worcestershire) Andrew Bingham MP, (Conservative, High Peak) Karen Bradley MP (Conservative, Staffordshire Moorlands) Alex Cunningham MP (Labour, Stockton North) Kate Green MP (Labour, Stretford and Urmston) Mr Oliver Heald MP (Conservative, North East Hertfordshire) Glenda Jackson MP (Labour, Hampstead and Kilburn) Brandon Lewis MP (Conservative, Great Yarmouth) Stephen Lloyd MP (Liberal Democrat, Eastbourne) Teresa Pearce MP (Labour, Erith and Thamesmead) The following Members were also members of the Committee during the Parliament: Ms Karen Buck MP (Labour, Westminster North), Margaret Curran MP (Labour, Glasgow East), Richard Graham MP (Conservative, Gloucester), Sajid Javid MP (Conservative, Bromsgrove) and Shabana Mahmood MP (Labour, Birmingham, Ladywood) Powers The Committee is one of the departmental select committees, the powers of which are set out in House of Commons Standing Orders, principally in SO No 152. These are available on the Internet via www.parliament.uk Publications The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) are on the Internet at www.parliament.uk/workpencom The Reports of the Committee, the formal minutes relating to that report, oral evidence taken and some or all written evidence are available in a printed volume. Additional written evidence may be published on the internet only. Committee staff The current staff of the Committee are Carol Oxborough (Clerk), Andrew Hudson (Second Clerk), Hanna Haas (Committee Specialist), Laura Humble (Committee Media Adviser), James Clarke (Inquiry Manager), Sonia Draper (Senior Committee Assistant), Dory Royle (Committee Assistant) and Stephen Price (Committee Support Assistant). Contacts All correspondence should be addressed to the Clerk of the Work and Pensions Committee, House of Commons, 7 Millbank, London SW1P 3JA. The telephone number for general enquiries is 020 7219 5833; the Committee's email address is workpencom@parliament.uk

1 Contents Report Summary Page 3 1 Introduction 5 Structure of the report 5 Housing Benefit and Local Housing Allowance 6 The June 2010 changes 8 The Government s impact assessment 9 2 Housing Benefit costs 11 The Government s objectives for reform 11 Possible reasons for rises in Housing Benefit costs 12 3 Potential for rent shortfalls 17 Estimating LHA losses 17 Impact of setting LHA rates at 30 th percentile of market rents 18 Impact of the maximum 4-bedroom rate and the maximum weekly caps 19 Change of up-rating mechanism from RPI to CPI 20 Differences by region and local authority 21 London 22 4 Impact on different household types 25 Impact on large families 25 Impact on disabled people 26 Impact on older people 28 Impact on young people 29 Overcrowding 32 5 Potential risk of evictions and homelessness 35 Estimated number likely to be pushed into severe housing difficulty 35 Estimates of number of households who may have to move 38 Estimates of costs of homelessness 39 The impact on local authorities 41 The impact on community cohesion 43 6 Transitional arrangements and Discretionary Housing Payments 47 Increase in Discretionary Housing Payments 47 Transitional arrangements 50 7 The Private Rental Sector and responses to the proposed reforms 53 Adjustment and substitution 53 The accessibility of the Private Rental Market to LHA claimants 54 Willingness of landlords to accept lower rents 57 Direct payments to landlords 59 8 Addressing barriers to work in the Housing Benefit system 64

2 Comparison between Low-Income Working Households and Housing Benefit recipients in the private rental sector 64 Access to employment 66 10% Housing Benefit cut for recipients on Jobseeker s Allowance 69 The claimant perspective 70 The effectiveness of sanctions 74 The provider perspective 75 The underlying purpose of Housing Benefit 76 Conclusion List of conclusions and recommendations 79 80 Formal Minutes Witnesses List of printed written evidence List of additional written evidence List of Reports from the Committee during the current Parliament 87 88 88 88 91

3 Summary The Government proposed wide-ranging reforms to the Housing Benefit system in the June 2010 Budget. The reforms are intended to slow the sharp rise in the cost of Housing Benefit, and in particular to reduce the amount paid to households securing accommodation in the private rented sector, and thereby to influence the private rental market. We support the Government s objective of managing the costs of Housing Benefit. We also agree that support for low income families towards their housing costs should represent value for money for the taxpayer and reflect the housing choices available to low-income working households. The effects are likely to vary across different households types and different areas. This report therefore focuses on the potential challenges and the steps which we believe the Government should take to mitigate potential adverse effects. We also highlight impacts on different categories of claimant. The Government has made clear that it does not expect a substantial increase in homelessness as a result of the reforms. It increased the level of funding for Discretionary Housing Payments (DHP) by 180 million in this Spending Review period to provide claimants with further financial assistance when a local authority considers that help with housing costs are needed. We would like to see further analysis of the anticipated demand for this funding, in order to understand the extent to which DHP is likely to be effective in supporting benefit claimants through the transition period and helping to avoid evictions. Some witnesses believed that an increase in evictions and homelessness was inevitable. Large families occupying bigger and more expensive properties are likely to be most seriously affected by the cap on the total amount of LHA that can be claimed. Many people are likely to struggle to meet the shortfalls between the reduced amount of benefit they receive and the rent they need to pay to secure appropriate homes. As a consequence of the Government s intention to apply downward pressure to rents charged to benefit claimants, many people are likely to have to move to cheaper properties and to cheaper areas. The Government should monitor the costs of the policy to local government and be prepared to consider additional funding if necessary in order to ensure that appropriate support and services can be provided to the new areas. We accept that some landlords will lower rents for claimant tenants in response to the caps on LHA rates. However, the extent of that response cannot be accurately predicted and is likely to vary between different areas, depending on local market conditions. Paying LHA direct to landlords rather than to claimants might increase landlord confidence by reducing the risk of arrears. The Government s recent decision to temporarily widen the discretion of local authorities to make direct payments to landlords is therefore welcome. However the principle of paying benefits direct to claimants is an important one. Local authority schemes which combine direct payments to claimants and rental guarantee for the landlord should therefore be promoted by the Government. We recognise that Housing Benefit has an important role to play in the decision to take a job and that the Government s plans to reduce Housing Benefit by 10% after a year on

4 Jobseeker s Allowance will ensure that a claimant is better off in employment, albeit from a lower base. However, a number of concerns have been expressed to us in relation to this proposal, including on its interaction with the Universal Credit and the Work Programme and the particular impact on people who face the greatest barriers to work, such as disabled people and lone parents, and on those who live in areas of high unemployment. The Government needs to explain how it plans to address these concerns.

5 1 Introduction 1. The Government put forward proposals for wide-ranging and radical reforms to the Housing Benefit system in the June 2010 Budget. The proposals are intended to slow the sharp rise in the costs of Housing Benefit, and in particular to reduce the amount paid to households securing accommodation in the private rented sector, and thereby to influence the private rental market. The impact of the changes was clearly going to be significant and we therefore decided to conduct an inquiry into the changes immediately after the Committee was established. In particular, we asked for evidence on the implications of the announced changes for: Incentives to work and access to low paid work Levels of rent, including regional variations Shortfalls in rent Levels of evictions and the impact on homelessness services Landlord confidence Community cohesion Disabled people, carers and specialist housing Older people, large families and overcrowding 2. We invited witnesses to submit written evidence by 6 September and received 79 submissions from a wide range of individuals and organisations. We took oral evidence from the Local Government Association, London Councils, Shelter, the Chartered Institute for Housing, the Cambridge Centre for Housing and Planning Research, the British Property Federation and the Residential Landlords Association; and from Lord Freud, the Minister for Welfare Reform and DWP officials. We also visited a Citizens Advice Bureau in Balham to discuss the impact of the changes with clients and held an informal briefing at the Royal Institution for Chartered Surveyors. We are grateful to everyone who contributed to our inquiry. 3. We would also like to thank Professor Steve Wilcox 1 from the Centre for Housing Policy, University of York, for assisting us as Specialist Adviser during the inquiry. We very much appreciate the contribution he made to our work. Structure of the report 4. In this introduction, we set out the background to Housing Benefit and the Local Housing Allowance scheme, which is the Housing Benefit paid to tenants renting in the 1 Relevant interests of the specialist adviser were made available to the Committee before the decision to appoint him on 26 July 2010.The Committee formally noted that Professor Wilcox declared an interest relevant to the Committee s work as an unpaid member of the Department for Work and Pensions Housing Benefit Strategy Committee.

6 private rented sector (PRS). This section also outlines the reform proposals, and summarises the Government s initial assessment of the impact of those proposals. Chapter 2 examines the causes behind the rising costs of Housing Benefit in the PRS in recent years, which have in part prompted the Government s reform proposals, and explores the other objectives of the reforms. In Chapter 3, we look at the potential for shortfalls between Housing Benefit and rents in the PRS, and how this may vary in different areas. In Chapter 4 we then look in greater detail at how these measures may impact on different household types. We highlight which groups are likely to be the most affected and examine the steps which the Government should take to protect them. In Chapters 5 and 6 we examine the extent to which transitional arrangements and Discretionary Housing Payments could help to ease the transition. In Chapter 7 we explore some of the behavioural responses the Government is expecting: from tenants in terms of moving to cheaper accommodation; and from landlords in terms of their willingness to lower rents. Finally, in Chapter 8 we explore how Housing Benefit claimants compare to low-income working families in terms of rent paid in the private rented sector, and whether the measures are appropriately designed to incentivise claimants to move off benefits entirely and into work. Housing Benefit and Local Housing Allowance 5. Housing Benefit is an income-related benefit providing support for rental housing costs for tenants on low incomes (both in and out of work). It is a scheme covering England, Scotland and Wales, with almost all benefit costs met by central government. Together with Council Tax Benefit, it is administered by 380 local authorities. If these provisions are mirrored in Northern Ireland, our colleagues on the Northern Ireland Affairs Committee may wish to investigate the implications there. 6. As at May 2010, there were 4.75 million family units in receipt of Housing Benefit. Of these 1.46 million (31%) were tenants in private rented sector accommodation and 3.29 million (69% ) were living in the social rented sector. Overall, Housing Benefit expenditure amounted to around 17 billion in 2008/09. 2 7. Local Housing Allowance (LHA) is the type of Housing Benefit available to claimants securing accommodation in the private rented sector. It was introduced in nine "Pathfinder" areas from November 2003 and was extended to a further nine areas from April 2005. The experience of the Pathfinder areas led the Government to legislate for the national roll-out of the LHA from 7 April 2008. It is means-tested and can be claimed by people in work as well as those who are disabled, retired, carers or unemployed. 8. LHA is administered by local authorities, to whom a tenant must apply for support. The LHA is a flat rate allowance for different sizes of properties within a Broad Rental Market Area (BRMA). Prior to the introduction of the LHA, these areas were known as "localities". The Rent Service is responsible for determining BRMAs. When determining BRMAs the rent officer takes account of the distance of travel, by public and private transport, to and from facilities and services of the same type and similar standard. 2 Ev 59

7 9. Central to the system are LHA rates which are the maximum amount of benefit that will be paid in different BRMAs. These rates are published, so that those seeking rented accommodation know in advance what they will be able to afford based on where they live and what size of dwelling they are entitled to. These LHA rates are currently the median (or 50th percentile) of a sample of rents in a local area. The rents data are gathered by the Valuation Office Agency (VOA), who also publicise the current rates for each size of dwelling in each area. 10. The actual benefit amount in a given case is worked out from detailed information that applicants provide about their rent, the property, whom they live with, and their own income and savings and that of others in the household. The number of bedrooms for which a household is entitled to claim benefit is based on the number and age of its members (size criteria). One bedroom is allowed for each of the following: a couple a person who is not a child (age 16 and over) two children of the same sex two children who are under 10 any other child 11. The previous Government amended the Housing Benefit regulations to cap the highest possible level of LHA at the 5-bedroom rate from 6 April 2009. It argued that the move followed concerns raised by rent officers in England, Scotland and Wales who reported difficulties in determining LHA rates for larger properties. It stated that where larger properties are available, they tend to be at the luxury end of the market. 3 12. LHA is paid to the tenant. It can only be paid to landlords in circumstances where: There are at least eight weeks rent arrears (compulsory); Deductions are being made from other benefits and are being paid to the landlords to pay rent arrears (compulsory); The authority considers the claimant is likely to have difficulty managing his/her financial affairs (often referred to as vulnerable claimants); The authority considers it improbable that the claimant will pay their rent ; Landlord payment has been made previously under either of the two compulsory grounds (1st or 2nd bullet point) (so for example, payment to the landlord can continue even where the arrears have reduced to below 8 weeks or have been cleared); For up to eight weeks where the authority suspects that the 3rd or 4th point above applies and it is considering making payments on those grounds; 3 Work and Pensions Committee, Fifth Report of Session 2009-10, Local Housing Allowance, HC 235, para 148

8 If the tenant leaves with arrears of rent owing. 4 The June 2010 changes 13. The programme of Housing Benefit reform measures announced in the June Budget will come into force between 2011 and 2013. The proposed reforms that relate exclusively to the private rented sector were as follows: Restricting the maximum benefit entitlement to the 4-bedroom rate, from April 2011; Capping maximum LHA weekly rates at 250 (for a shared room and 1 bedroom property), 290 (for a 2 bedroom property), 340 (3 bedrooms) and 400 (4 bedrooms), from April 2011. Setting LHA rates based on the 30th percentile of private sector rents (rather than the median or 50th percentile) from October 2011. Removing the provision for claimants to retain a maximum of up to 15 per week, in cases where their contractual rent is below the LHA rate, from April 2011 (as announced by the previous Government). From April 2013 LHA rates will be uprated based on the Consumer Price Index, rather than on the basis of local rents. In recognition of the potential transitional costs that will arise for some households as a result of all these changes the Government has also made provision for increased expenditure on Discretionary Housing Payments, of 10 million in 2011-12 and 40 million a year thereafter. 14. In addition, a number of measures have been proposed that will impact on social sector tenants, and claimants in all rented tenures. They are as follows: Provision for an additional bedroom allowance for a carer where there is an established need for overnight care, from April 2011. The rates of non-dependant deductions will be increased in three annual steps from April 2011, so that they reach levels reflecting increases in rents and council tax since 2001. 5 Size criteria will be applied to working age claimants in the social rented sector, from April 2013. Jobseeker s Allowance claimants will only receive full Housing Benefit entitlements for a period of 12 months. Thereafter their Housing Benefit entitlement will be reduced by 10%. This will apply from April 2013. 6 4 Housing Benefit Regulations 2006, Regulations 95(1), 96(1)(c),(2)(b),(3A),(3B) 5 A non-dependant is a person who resides with the claimant, and is not a partner or dependent child of the claimant and/or their partner. Children of 18 years or over are, as a general rule, treated as non-dependants. (Source: Regulation 3 of the Housing Benefit Regulations 2006)

9 15. Since these changes were announced in the June 2010 Budget, the Government decided as part of the Spending Review to extend the shared room rate (the rate of benefit paid to single people who are aged under 25) to adults aged up to 35. 7 The rate is calculated on the basis of average cost of a single room in a shared house. 16. On 30 November 2010, the Government laid the Housing Benefit (Amendment) Regulations 2010 and amendments to the Rent Officers (Housing Benefit Functions) Order 1997 that will bring the Budget measures into effect. At that point it announced that the timetable for making the changes would be amended as follows: All changes that will adjust the way Local Housing Allowance rates are calculated will come into force from April 2011 for new claims. Existing claimants will continue at their current rate of benefit until their claim is reviewed by their local authority; they will then have a further period of transitional protection at their current Local Housing Allowance rate of up to nine months if there has not been a relevant change of circumstances. At the same time, the Government also announced a further allocation to the Discretionary Housing Payment fund, which local authorities draw on to assist people who face particularly acute problems with housing costs. A further 50 million will be provided over the Spending Review period to support the implementation of the new measures. 8 The Government s impact assessment 17. DWP s initial assessment of the impact of the Housing Benefit reforms was set out in a paper issued in July. 9 While this went into some detail, it was essentially limited to an assessment of the first round impacts on existing Housing Benefit recipients, and did not make any assessment of the potential behavioural responses to the reforms, either by landlords or tenants. 18. The initial assessment found that virtually all private tenants claiming LHA would receive less benefit, with an average loss per claimant of 12 per week. The losses would be greater for tenants entitled to larger dwellings. Claimants entitled to the 5-bedroom rate, which is to be abolished, will lose on average 57 a week. Reflecting this, the impact assessment shows that families with dependent children would lose on average more 14 per week than those without. LHA is claimed by those in work and retired people as well as those who rely on state unemployment or disability benefits. The measures will cut LHA to all those groups, with the largest number affected being those on other or no benefits many of them low-income employees followed by those on long-term sickness benefits. 10 6 HM Treasury, Budget 2010, HC 61, June 2010, pp 33-34, 48 7 HM Treasury, Spending Review 2010, October 2010, p 69 8 HC Deb, 30 November 2010, Col 72WS 9 Department for Work and Pensions, Impacts of Housing Benefit proposals: Changes to the Local Housing Allowance to be introduced in 2011-12, July 2010 10 DWP Impact assessment, Table B1, p16f

10 19. In November, the Government published a second impact assessment of the changes which recognises that there are a number of risks as follows: an increase in the numbers of households with rent arrears, evictions and households presenting themselves as homeless; disruption to children s education and reduced attainment; disruption to support services for people with disabilities and other households with care and support needs; an increase in the number of households living in overcrowded conditions; and a decrease in the number and quality of private rented sector properties available to Housing Benefit tenants. It added that the overall economic impact of the measures cannot be quantified with any degree of certainty as it is not possible to predict the behavioural effects of tenants or their landlords. 11 11 DWP, Impact Assessment, Housing Benefit: Changes to the Local Housing Allowance Arrangements, 24 November 2010

11 2 Housing Benefit costs 20. The Department told us that the costs of Housing Benefit have almost doubled over the last decade, rising from 11 billion in 1999-2000 to 20 billion in 2009-10 and are forecast to reach 25 billion by 2015-16. 12 Figure 1 shows the cost of Housing Benefit, broken down by tenure, from1998 to 2010. It demonstrates that overall expenditure has risen by almost 50% in real terms and that the cost of Housing Benefit in the private rented sector more than doubled in that period. Figure 1: Housing Benefit Expenditure 1998-2010 We examine the reasons for the rises in costs in detail in the sub-section below. The Government s objectives for reform 21. The rises are an understandable cause for concern at a time when the Government is making substantial and widespread reductions in public spending in order to contain the levels of government budget deficits. The Department states that it needed to act quickly to take steps to curb increases in expenditure, particularly given the wider need to tackle the budget deficit. 13 The Government has explained that it does not want to be a passive observer paying out blank cheques to private landlords, but rather to allow taxpayers on low earnings to have a voice in the debate about the proper level of housing benefit. 14 22. The proposed Housing Benefit reforms have also been shaped by a policy focus on how benefit claimants compare to low-income working households in terms of access to affordable accommodation. That focus particularly relates to the proposals to cap the levels of Local Housing Allowances (LHA) available to claimants securing accommodation in the private rented sector (PRS). The Department states that Local Housing Allowance 12 Ev 59 13 Ev 59 14 HC Deb 13 July 2010, col 223WH

12 measures will provide a more sustainable Housing Benefit scheme by ensuring that people on benefit are not living in accommodation that would be out of the reach of most people in work, creating a fairer system for low-income working families and for the taxpayer. 15 The Government asserts that low-paid earners typically choose a rent around the 30th percentile. Steve Webb MP, the Minister for Pensions said: If someone takes a low-paid job, they do not have an unlimited choice about where to live. They cannot live in as big a house as they would like. They are constrained in where they live. Why should our constituents who take a low-paid job with all the associated uncertainties and have to restrict their housing choice be in a worse position than those [...] who are, for example, unemployed? 16 The Minister also said that: Some of the figures that have been quoted for losers assume that nothing changes and that people will go on living exactly where they are living and making the same choices, but the whole point of the reform is to have an influence on the housing market, and to try to do something about escalating rents. 17 23. The Department also argued that the measures will improve incentives for customers to enter work. It suggested that: Providing some customers, mainly in London, with the ability to live in very high cost rented properties makes it extremely unlikely they would ever move completely off Housing Benefit because of the very high income levels required. Moving to more affordable accommodation could therefore encourage households to take up employment and move completely off benefit. 18 24. We agree with the Government s objective of managing the costs of Housing Benefit. We also agree that support for low-income families towards housing costs should represent value for money for the taxpayer. We hope that the Government will be able to influence the rent levels of properties in the private rental sector available to Housing Benefit tenants. Further detailed research should be undertaken on this issue as the policy is implemented Possible reasons for rises in Housing Benefit costs 25. Brighton & Hove City Council said that it welcomed the changes to Housing Benefits and the savings they should deliver. 19 The Mayor of London agreed that a thorough overhaul is necessary to bring down the escalating benefits bill, to remove the perverse disincentives to work and to tackle the current excesses that undermine public confidence in the scheme. 20 15 Ev 59 16 HC Deb 13 July 2010, col 223WH 17 HC Deb 13 July 2010, col 223WH 18 Ev 62 19 Ev w62 20 Ev w135

13 26. The Building and Social Housing Foundation argued that it is incorrect to portray Housing Benefit as a system that is out of control. In fact, as a proportion of the overall benefits bill it is striking that Housing Benefit has remained remarkably constant at around 14% of total expenditure for many years. 21 This point is illustrated by Figure 2. The proportion of total welfare payments made up by Housing Benefit expenditure largely reflects the large share that housing costs represent in average household budgets. In 2007-08, for example, net housing costs represented 21% of disposable incomes for all households. 22 Figure 2: Help with Housing Costs as a percentage of total benefits expenditure (including tax credits) 1994-2010 millions (Real) 25,000 20,000 15,000 10,000 5,000 0 1995 2000 2005 2010 HB Expenditure HB as % of All Benefits Expenditure at constant 2010/11 Prices. Years are financial years. 16 14 12 10 8 6 4 2 0 Percentage of Total Benefits Source: DWP and HMRC statistics 27. The Chartered Institute of Housing (CIH) also emphasised the need to consider the causes of the rise in HB costs. It argued that: This should be a starting point in looking at Housing Benefit reform, not an afterthought. Housing costs for all households, whether renting or owning, have increased as we have failed to supply enough housing to meet the changing needs of our population and economy. 23 Shelter acknowledged that the very recent sharp increase in the cost of Housing Benefit in the PRS [private rented sector] is a cause for concern. It believed, however, that: It has been caused by a combination of increasing numbers of claimants, due to the recession and Government policy to make greater use of the PRS; and, rapidly rising private rents. [...] Housing more claimants in social rented housing, would be more cost-effective in the long run but requires significant up-front public investment. [...] A further trend underlying the nominal increases in the overall cost of HB has been the huge shift of claimants from Local Authority owned housing to Registered Social 21 Ev w13 22 Family Spending, Expenditure and Food Survey 2007-08, Office for National Statistics 23 Ev 44

14 Landlords, where rents and the proportion of tenants claiming are slightly higher, over the past decade. 24 28. Part of the increase in costs has also been attributed by the Government to rent levels for claimants in the private rented sector increasing more rapidly than average market rents in the overall private sector. In oral evidence, the Minister quoted pre-lha figures for 2000-2007 which showed an overall increase in the private rented market of around 15% in real terms; while rents paid by LHA claimants went up by 25%. 25 However, the greater rise in Housing Benefit rents over the period to 2007 reflects a number of factors. The overall rental market rise figures quoted relate exclusively to assured tenancies set at market rents. The Housing Benefit rents also include those fixed by rent officers for regulated tenancies at below market levels, and the proportion of claimants with regulated tenancies with lower rents declined from 14% in 2000 to just 7% in 2007. 29. The Minister also cited more recent evidence of Housing Benefit rents rising while wider market rents have been falling: [...] from November 2008, for the next 15 months, the property index declined by 5% and our HB claimants payments went up 3%, which shows the disconnect there is between what is happening in the marketplace and what we are paying.[ ] That is a very, very good example of what has been going wrong in the marketplace as a result of us being pretty un-smart buyers of private rented accommodation. 26 However the source for these figures is a web-based index of asking rather than achieved rents, which was identified as the Find a Property private rental index. The Secretary of State for Work and Pensions issued a Written Ministerial Statement on 25 November correcting the source of similar figures which he used in an Opposition Day debate on Housing Benefit on 9 November. 27 30. According to the Valuation Office Agency, claimant rents moved in line with changes in the LHA rates in the first three quarters of the period from November 2008. It is only in the last two quarters that average rents for claimants rose ahead of LHA rates. In a period of rapid market change, and a sharp rise in the numbers of claimants in the sector, it is important to ensure that the Department obtains value for money in the Housing Benefit budget. We recommend that the Department undertake further research into the reasons for the increased rent levels and the methodologies used to measure them. 31. The Minister also presented evidence that rents are increasingly clustering around LHA rates. 28 The Department suggested that: 24 Ev 112 25 Q 103. The Minister provided the Committee with an analytical supplement which gave the background to these figures. This is available on the DWP website at http://research.dwp.gov.uk/asd/index.php?page=recent 26 Q 131 27 HC Deb, 25 November 2010, col 54WS. 28 Q 103

15 Some landlords may raise their rents to the rate that they know will be met by benefit levels. Research undertaken by the Department for the two year review of Local Housing Allowance found that local authority Housing Benefit managers feel that more landlords are raising their rents to Local Housing Allowance levels. They believe landlords see this as the going rate in the absence of other rent setting methods. 29 This evidence was supported by the British Property Federation: The new Government inherited a local housing allowance system that was always going to cost more in comparison with what had gone before. It is true that rents in some areas have adjusted towards the local housing allowance rates and in markets where there are significant claimants this is seen as the going rate. 30 The National Housing Federation told us that: Private sector landlords increased rents with the introduction of Local Housing Allowance [...] the average housing benefit award for Local Housing Allowance is over 9 per week more than for people still on the previous scheme [...] The Local Authority Omnibus Survey [...] finds that Housing Benefit managers say that some landlords are using the transparency of the arrangements to raise rents to the Local Housing Allowance level. 31 Paddington CAB said that: we understand the need to place a cap on rents paid by the taxpayer, especially in central London where the LHA is spiralling out of control. 32 32. Table 1 below shows a degree of convergence of claimants contractual rents around the LHA rate. Table 1 Distribution of claimants contractual rents relative to LHA rates Difference between rent and LHA Apr 2009 Aug 2009 Apr 2010 Aug 2010 + 15 to 20 26 29 30 31 + 10 to 15 21 23 25 25 + 5 to 10 14 16 17 17 + 0 to 5 6 7 8 8 Equal to LHA rate 7 8 8 9-0 to 5 7 8 7 8-5 to 10 14 16 15 15-10 to 15 21 23 23 23-15 to 20 25 27 27 26 Source : DWP analysis of the Single Housing Benefit Extract. 33. However, two points should be noted. The first is that there is more downward convergence of rents that are above the LHA rate, than there is upward convergence of 29 Ev 62 30 Ev 38 31 Ev w216 32 Ev w142

16 rents below the LHA rate. There is a 3% increase in the proportion of above LHA rate rents that are no more than 10 above the rate (from 14% to 17%). In contrast there is only a 1% increase in the proportion of below LHA rate rents that are within 10 of the rate (from 14% to 15%). 34. The second point is that downward convergence of rents towards the LHA rate could be just as readily explained in terms of tenants choices in the light of the more transparent information the LHA rate provided on the level of benefit available, as it could in terms of any decisions of landlords to reduce rents towards LHA levels. The rising costs of Housing Benefit can therefore be partly explained in terms of economic conditions and Government policies. 35. There is some evidence that the introduction of the Local Housing Allowance has led to a convergence of rents around the level of the LHA. This has involved both upward and downward revisions and has varied between areas, but it is clearly a factor in the rising costs of Housing Benefit.

17 3 Potential for rent shortfalls 36. As we have said, the initial DWP assessment of the impact of the Housing Benefit reforms to the LHA regime was set out in a note issued in July. While this went into some detail, it was essentially limited to an assessment of the first round impacts on existing Housing Benefit recipients, and did not make any assessment of the potential behavioural responses to the reforms, either by landlords or tenants. 33 Key findings from the initial assessment are set out in the following paragraphs. A wider discussion of all the evidence we received on the likely impacts of the reforms, including a discussion of the potential behavioural responses, is presented in Chapter 7 below. Estimating LHA losses 37. Table 2 shows the overall impact of the changes by size of dwelling, and for households with and without dependants. 34 The Table clearly shows the greater cash impact of the overall changes on households with dependants, and particularly those requiring larger accommodation. Table 2: Overall impact of LHA package by size of dwelling and household type Impact Group LHA Caseload Average maximum HB pw Estimated number of losers Estimated percentage of losers Average loss per loser pw Shared Room 74,690 69 73,610 99-7 1 Bedroom 387,740 107 386,560 100-11 2 bedroom 328,250 139 328,250 100-12 3 Bedroom 112,550 164 112,550 100-15 4 Bedroom 27,900 201 27,900 100-22 5 Bedroom 8,100 260 8,100 100-57 With dependants 450,650 151 450,650 100-14 No dependants 488,570 103 486,310 100-10 Total impact 939,220 126 936,960 100-12 Table 3 shows that the cash impact is relatively uniform across the country, but with a much greater impact in London, partly as a result of the particular impact of the national caps in central London. Both tables shows that virtually all households face losses as a result of one or more of the measures in the LHA package. Within that overall impact 414,000 (44%) households face losses of up to 10 per week, 469,000 (50%) face losses of between 10 and 20 per week, while 44,000 (5%) face losses of over 20 per week. 33 DWP, Impacts of Housing Benefit proposals: Changes to the Local Housing Allowance to be introduced in 2011-12, July 2010 34 It should be noted that all tables slightly underestimate the numbers of households affected, as the DWP analysis is based on the 939,220 cases for which full data was available, out of the total 1,015,330 LHA claimants in March 2010.

18 Table 3: Overall impact of LHA package by region Region LHA Caseload Average maximum HB pw Estimated number of losers Estimated percentage of losers Average loss per loser pw North East 45,160 96 45,160 100-9 North West 131,180 102 130,900 100-10 Yorkshire and the 87,310 93 87,310 100-9 Humber East Midlands 59,100 99 58,680 99-10 West Midlands 80,140 107 80,140 100-10 East of England 71,010 124 70970 100-10 London 159,370 204 159,370 100-22 South East 123,000 138 123,000 100-12 South West 83,180 117 83,180 100-10 Scotland 51,060 106 49,370 97-10 Wales 48,710 95 48,530 100-10 Impact of setting LHA rates at 30 th percentile of market rents 38. Table 4 shows the impact of setting LHA rates based on 30th percentile market rents, by size of dwelling, and for households with and without dependants. It again demonstrates the greater cash impact of this specific measure on households with dependants, and those requiring larger accommodation. Table 4: Impact of 30 th percentile LHA rates by size of dwelling and household type Impact Group LHA Caseload Average maximum HB pw Estimated number of losers Estimated percentage of losers Average loss per loser pw Shared Room 74,690 69 70,430 83-6 1 Bedroom 387,740 107 298,700 94-7 2 bedroom 328,250 139 294,490 77-10 3 Bedroom 112,550 164 94,680 90-12 4 Bedroom 27,900 201 13,500 84-20 5 Bedroom 8,100 260 8,100 48-36 With dependants 450,650 151 384,860 39-14 No dependants 488,570 103 390,110 85-11 Total impact 939,220 126 774,970 80-7 39. Table 5 shows that while the cash impact is greatest in London, a slightly lower proportion of households are affected by this specific measure. More generally, both tables show the widespread national impact of this measure on its own, with five out of six households seeing a reduction in the level of their LHA rate. 40. The overall impact of the 30th percentile rates measure is that 512,000 (55%) households face losses of up to 10 per week, 223,000 (24%) face losses of between 10 and 20 per week, while 40,000 (4%) face losses of over 20 per week. This measure accounts for the greatest part of the reductions in expenditure within the total package of measures.

19 Table 5: Impact of 30 th percentile LHA rates by region Region LHA Caseload Average maximum HB pw Estimated number of losers Estimated percentage of losers Average loss per loser pw North East 45,160 96 38,890 88-7 North West 131,180 102 114,180 87-7 Yorkshire and the 87,310 93 78,280 90-7 Humber East Midlands 59,100 99 51,920 88-8 West Midlands 80,140 107 67,490 84-8 East of England 71,010 124 59,460 84-8 London 159,370 204 113,300 71-17 South East 123,000 138 96,300 78-9 South West 83,180 117 70,430 85-8 Scotland 51,060 106 40,420 79-7 Wales 48,710 95 43,270 89-8 Impact of the maximum 4-bedroom rate and the maximum weekly caps 41. Table 6 shows the impact of the maximum 4-bedroom rate and the maximum weekly caps by size of dwelling, and for households with and without dependants. It demonstrates the very substantial impact of these changes for households affected by these two measures, although it affects relatively small numbers of households. Table 6: Impact of 4-bedroom rate and maximum caps by size of dwelling and household type Impact Group LHA Caseload Average maximum HB pw Estimated number of losers Estimated percentage of losers Average loss per loser pw Shared Room 74,690 69 - - - 1 Bedroom 387,740 107 3,230 1-83 2 bedroom 328,250 139 8,290 3-52 3 Bedroom 112,550 164 2,900 3-103 4 Bedroom 27,900 201 1,080 4-135 5 Bedroom 8,100 260 5,570 69-75 With dependants 450,650 151 16,970 4-72 No dependants 488,570 103 4,100 1-83 Total impact 939,220 126 21,600 2-74 42. Table 7 shows that the greatest impact of these measures will be in London, with the national maximum caps impacting on far more households than the maximum 4-bedroom rate. Altogether only 3,650 households outside London are affected by the maximum 4- bedroom rate. 43. Within the overall impact of these two measures 5,000 (0.5%) households face losses of up to 10 per week, 1,170 (0.1%) face losses of between 10 and 20 per week, while 14,890 (1.6%) face losses of over 20 per week.

20 Table 7: Impact of 4-bedroom rate and maximum caps by region Region LHA Caseload Average maximum HB pw Estimated number of losers Estimated percentage of losers Average loss per loser pw North East 45,160 96 240 0.5% - 37 North West 131,180 102 700 0.5% - 36 Yorkshire and the 87,310 93 400 0.5% - 25 Humber East Midlands 59,100 99 310 0.5% - 36 West Midlands 80,140 107 520 0.6% - 30 East of England 71,010 124 340 0.5% - 56 London 159,370 204 17,410 10.9% - 81 South East 123,000 138 520 0.4% - 75 South West 83,180 117 310 0.4% - 47 Scotland 51,060 106 110 0.2% - 51 Wales 48,710 95 200 0.4% - 34 Change of up-rating mechanism from RPI to CPI 44. The measures discussed so far, particularly the change to using the 30th percentile rather than the median to set the maximum allowable rent, will reduce the proportion of private lettings which are affordable to LHA claimants in each area. We have not looked so far at one of the measures which is expected to bring large savings in expenditure on HB/LHA: the switch to using the Consumer Price Index (CPI) as the basis for increasing allowable rents for an initial two-year period from 2013 to 2015. 45. The Minister explained that: [...] the CPI figure will come in in the year 2013 and effectively it is set for the next two years, because we are talking about a settlement for this spending review, the SR10. So what we are doing is breaking the link into the market as a whole for two years, in order to keep downward pressure. 35 However, he also acknowledged that at a point in the future the Government would need to review the operation and impact of using CPI to annually uprate LHA rates. 46. At present, the rates permitted for different bedroom sizes in different rental markets are set by reference to actual rents, which are collected by the Valuation Office Agency (VOA). From 2013, the current rates will simply be uprated by CPI as one measure of general price inflation in the economy one that excludes homeowners housing costs from the basket of goods whose market prices are tracked to produce the index. 47. A recent study by the Cambridge Centre for Housing and Planning Research (CCHPR) highlights that if rents increase faster than general prices, then the proportion of rental properties in each market that can be afforded using LHA will diminish as time passes. Such an effect will be progressive and cumulative. 36 The Chartered Institute of Housing (CIH) has produced a spreadsheet which explores how long it might be until LHA tenants' purchasing power, increased by CPI, can no longer meet the cost of the cheapest properties 35 Q 145 36 Alex Fenton, How will changes to Local Housing Allowance affect low-income tenants in private rented housing?, Cambridge Centre for Housing and Planning Research, September 2010, p 28

21 in different areas. CIH projects that within 15 years, all two-bedroom properties in 42 of 154 rental market areas will be at rents above LHA rates. This study assumes supply and demand are unaffected. 48. To explore these cumulative effects further, the CCHPR study took inner Greater Manchester as an example rental market. It found that by 2018, only the bottom 5% of 2- bedroom properties might be available at or below the LHA rate. The study suggests this holds true for many other areas, and thus the pool of adequate properties affordable to LHA claimants will inevitably shrink. 37 CIH emphasised that: It is critical to understand that this means that over time the effect of the CPI cap will be to break the link between what 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 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. 38 This study assumes no new building to meet demand, and that rent increases will in future be faster than general increases in prices. 49. Sam Lister of CIH said that if there was one measure that we would pick as one that we would get rid of, that would be the one". 39 The British Property Federation argued that this is the most severe aspect of the current proposals for reform. 40 50. We recommend that the Government fully evaluate the impact of the changes to Housing Benefit introduced in 2011, including on rent levels, before introducing the change to using the Consumer Price Index (CPI) for uprating LHA. If uprating using CPI is introduced in 2013, it should be accompanied by an undertaking that the Secretary of State will review the Local Housing Allowance rates in relation to prices in the wider private rental market prior to 2015. Differences by region and local authority 51. As shown in the Tables above, the measures do not affect all parts of the country to the same degree. This is partly because there are more LHA claimants in some regions than others, and especially in London, where housing costs are highest relative to incomes. The greatest reductions in LHA payments are forecast in parts of London, in some rural areas, in metropolitan districts in Lancashire and in some coastal areas. In many places, a district where many tenants will face large reductions directly neighbours a district much less affected. This may stimulate migration of LHA claimants into the cheapest districts of cities and cheapest settlements in rural areas, since the broad rental market areas (BRMAs) used 37 CCHPR Study, September 2010, p 30 38 Ev 55 39 Q 81 40 Ev 41

22 to administer LHA do not correspond with local authority district boundaries. A more distinctive pattern emerges for losses for larger dwellings. These losses are concentrated in the rural areas of the South and East of England, and in most parts of the capital. 41 52. Citizens Advice Scotland highlights that the City of Edinburgh is in the top 10 cities in the UK that will be affected by Housing Benefit changes and estimated that 9,660 households would be worse off as a result. It argues that these cuts will leave tenants falling into rent arrears and increasing debt or being forced to leave their homes and at worst becoming homeless. 42 London 53. The impact of the LHA reforms will be particularly acute in London. This is partly because the maximum caps will affect more households in central London, but also because of the high number of properties with more bedrooms in many parts of outer London. Only six London boroughs (out of 33) are not affected by the national cap for any size of dwelling. 43 Another significant factor is that the private rental sector is a much larger part of the overall housing market in London. Rents are therefore higher and consequently average cash reductions in LHA rates will be much larger than in other parts of the country, even in cases where the national caps will not apply (see Table 7 above). 54. The deep impact of the national caps in central London (City of London, Kensington and Chelsea, and parts of Camden, Hackney, Hammersmith & Fulham, Islington, Tower Hamlets and Westminster) may result in unsustainable shortfalls. The proportion of lettings available at or below LHA rates is estimated by DWP to fall from 52% to just 7% in that area. 44 55. Evidence from the Mayor of London stated that the package of cuts (the caps, the change from the median to the 30th percentile and the loss of the 15 excess), will mean that London LHA claimants will lose an average of 22 per week compared with 12 in the South East and 10 or less elsewhere. It pointed out that London is the only region of the country where over 20,000 households (12% of claimants) will have weekly losses of more than 30. Almost a quarter of London claimants will lose 20 per week or more, compared with 2% in two regions, 1% in two regions and none in the rest. Overall, all of the capital s LHA claimants will face losses as a result of the changes. 56. The Mayor also emphasised that the move from the median to the 30th percentile in setting LHA rates will have a much more serious effect in London than the rest of the country. London will have average weekly losses of 17 for each claimant as a result of this 41 Alex Fenton, How will changes to Local Housing Allowance affect low-income tenants in private rented housing?, Cambridge Centre for Housing and Planning Research, September 2010, p 10. The map set out in the report indicates the impact in different areas of the country. 42 Ev w249 43 DWP, Impacts of Housing Benefits Proposals: Changes to the Local Housing Allowance to be introduced in 2011-12, 23 July 2010 44 DWP, Impacts of Housing Benefits Proposals: Changes to the Local Housing Allowance to be introduced in 2011-12, 23 July 2010