The introduction of Local Housing Allowance increased rents and helped push up the cost of Housing Benefit by nearly 50% in just three years. This was largely due to a flawed design and a lack of incentives for tenants to seek tenancies at lower rents.
Three simple changes could, within the framework of lower allowances and overall caps announced by George Osborne, work to support tenants affected by the new limits, encourage landlords to offer properties to tenants supported by Housing Benefit and to provide an inherent control of increases in rents in the future.
There is no doubt that the introduction of Local Housing Allowances led to landlords increasing the rents they charged, where the LHA rates exceeded local market rents. By adopting maximum “allowances” which gave tenants the same budget, irrespective of where they rented in the Broad Market Rental Assessment Area covering them, the effect was to drag rents in lower value areas up to levels closer to the
maximum allowance. So moving from LHA rates set at the 50th percentile level of rents in the BMRAs to the 30th percentile will actually not have too much impact as many of those lower rents have increased because of the “pull” effect that LHA rates have already had.
This is not surprising. If rents in Fulham are part of the calculation affecting the allowance applied to Brentford and North Acton, the impact will be to raise rents in those less valuable areas. But other impacts have been perverse. It is now 50% more expensive to rent a shared room in Barnsley, because the BMRA takes in an area where there is student demand and students rents have raised the allowance level in areas where no such demand exists.
This has certainly contributed to the increase in the Housing Benefit bill, which was £13bn in 2006/07, but which reached £15.77 billion in 2008/09 and is expected to reach £21 billion this year. The average payment to a household renting privately, supported by Housing Benefit, was £79 in 2006/07. It had risen to £99 in 2008/09, the last year for which figures are available.
In fairness to the last Government, they did include a provision in the legislation which gave tenants some incentive to look for cheaper accommodation, allowing tenants to keep up to £15 a week of the allowance if they secured a rent below the LHA rate. The effect of this was simply to lower slightly the “floor” that the LHA placed under rents across the BMRAs. This was estimated to cost £160 million in 2008/09 and Labour proposed to scrap it, cue much howling from the social housing lobby about how this would impoverish people. In fact, it would be far better to retain a similar provision, but remove the £15 limit.
Instead of the small and limited amount of “cash-back” on offer, we should introduce a “shared saving” provision, where tenants who secure a tenancy below the LHA maximum get to keep 50% of the difference, irrespective of how large the saving. This would provide a much better incentive to tenants to shop around and it would allow them to do what everybody does when choosing where to live, ie, trade off between cost, distance to work, travel time and local facilities. It would also keep a constant downward pressure on rents as a large part of the market would have a financial incentive in seeking and/or negotiating lower rates.
Now, one argument made for LHA rates which exceeded local market rates was that landlords needed an incentive to let to people on Housing Benefit. I agree that there is a stigma associated with this, with many landlords were unwilling to let to benefit claimants, and that this was made worse by parallel provisions to pay LHA to tenants who were then responsible for paying their landlords. Some landlords refused to continue letting on this basis, fearing they would not get paid, but we should not reverse this as it would do nothing to address the stigma effect or to build a sense of personal responsibility amongst tenants. In fact, the number of private tenants has risen by 250,000 in the last two years, though I accept that it is hard to strip out the effects of recession from those figures.
A better approach would be to change the current system by which the Government offers to pay rent deposits for tenants. If the state explicitly offered, say, a deposit equivalent to three months rent, landlords would be much less wary of letting to benefit claiming tenants. The quid pro quo for this would be that landlords and tenants were required to complete a simple registration document, with their names, addresses and NI numbers and the rent. This would not require any sort of qualification to be a landlord, but it could have three very beneficial effects.
Firstly, included with that registration could be a very simple schedule of rights and responsibilities so tenant and landlord were clear as to who was responsible for what. Secondly, it could provide landlords with references for tenants, at least in so far as the government could confirm whether the tenant had previously misbehaved and the guarantee had been called. This would give landlords confidence to let to good tenants and act as an incentive for tenants not to misbehave, because they would be unlikely to find a landlord willing to let to them if they had. Finally, it would provide a record of a tenancy granted and the rent charged, helpful to both the Inland Revenue in ensuring landlords were paying the correct taxes, but also in building up the data on tenancies so future reviews of LHA rates were based on real values.
The final change I would advocate would be to phase the introduction of the lower LHA thresholds – not the overall caps, which in truth only affect the very expensive properties in the very expensive BMRAs – but the reduction of all allowances to the 30th percentile level, which is due to be applied from May 2011. I would advocate phasing this in over two years, with a reduction to the 40th percentile in 2011 and to the 30th percentile in 2012. This will soften the impact of the change to the lower rates, deflecting some of the criticism of the policy and lessening the prospect of real hardship cases arising. It will have a cost implication, but if there is no CPI up-rating of the figures during those two years and this is implemented alongside the other two changes suggested, I am confident the additional cost would be largely off-set by the benefit of the “shared saving” scheme as tenants sought to secure better deals, which they were more easily able to negotiate because they had a government backed deposit behind them.
I am also confident that tenants supported by housing benefit are, like most private tenants, trustworthy and likely to pay their rent on time, whilst not smashing up their property. With a sensible system of supporting those tenants and protecting landlords against the few bad apples which exist, I see no reason why more landlords would not come to see benefit claiming tenants as just as sound a prospect as those who do not receive benefits. That will go a long way towards meeting the need of those households who are currently inadequately housed, without them languishing on waiting lists for council or social landlord homes.
The changes announced by George Osborne go some way to addressing the basic flaws in the system he inherited from Labour, but we must go further in the future in moving away from the distortions inherent in the “social ownership” model and more towards one which, in the long term, supports households who cannot afford what they need in the market, just as cash welfare supports those who cannot afford to buy food or clothes, without resorting to the building of “social supermarkets”. These changes would help to move us a little further along that road.