Written evidence submitted by East Thames Group [RTB 107]

East Thames Group is a registered housing provider and social regeneration charity with more than 14,000 homes in East London and Essex. As well as being a landlord we: build new homes; provide care and support services and offer employment, training and community programmes. East Thames is part of the G15 group of the largest 15 housing associations in London and support the points made in their submission.

1. Summary:

• Housing associations are a key part of the solution to the affordable housing crisis and East Thames is actively engaged in building and managing affordable homes both rented and for sale across East London and Essex. We also play a key role in encouraging and supporting the aspiration of our residents, each year investing almost £1.5m into our Social and Economic Regeneration programme which provides volunteering opportunities, training and work placements and help around 250 people into jobs.
• Our submission welcomes the support the Government has committed to provide to help our residents to buy their own homes but highlights the importance of ensuring that this is managed in a way that does not undermine our ability to build new affordable homes both for sale and for rent.
• We recognise the Government’s desire to reduce the welfare bill and to encourage more people to move into work, and work that pays an adequate wage. However, the reduction in the benefit cap makes even social housing unaffordable for families who genuinely can’t work.
• The introduction of higher rents for high earners risks both increasing the housing benefit bill and reducing the ability of tenants on higher incomes to save in order to move into home ownership.

2.            Proposals on the Right to Buy

East Thames Group stock profile

2.1         The majority (68%) of East Thames properties are social and affordable rented homes, just over 7000 in London and almost 1000 in Essex. We are also committed to supporting people to buy their own home and have almost 2000 shared ownership homes. This makes up 13 per cent of our stock and we are looking to increase this proportion in future years. Last year we build 160 new homes 12 for outright sale and 148 for shared ownership. Current shared owners were also supported to buy a greater proportion of their property and 70 of the 111 staircasing in this way now own their property outright.

2.2         With an average length of tenancy of 11 years the large majority of our social rented homes are likely to be eligible for an extended Right to Buy. We think there are significant merits in rewarding the long term investment of a tenant in a property and that consideration should be given to greater tapering the discounts to recognise this length of time and to reduce the likelihood of a tenant receiving more in discount that they’ve paid in rent.

2.3         Over the last two years we have sold just ten properties through the Right to Acquire and Social Homebuy schemes. The extension of the Right to Buy will both increase both the properties eligible to be purchased and the significantly higher discounts (up to £104,000 from £16,000 in London) will increase the affordability.

2.4         Looking at just our social and affordable rented properties, the tables below show the location and size of our properties that might be affected by the right to buy extension. We have used non-housing benefit receipt to give us an indication of who might be able to afford their homes as we do not keep details of our tenant’s income. Given the value of our properties, many will still not be able to afford a mortgage though many tenants may be supported to purchase their property by family members, or release equity from their pension pots, so accurate predictions are difficult. There is also the risk that investors in areas of high property values such as London, will target social tenants and help them to purchase their property and it will end up as a buy to let property and no longer providing affordable housing.

Figure 1: Number of tenants who might be eligible to right to buy extension

Figure 2: Size of East Thames 6505 properties with tenants in over 3 years compared all properties

Replacing stock sold under Right to Buy

2.5         There is wide consensus that there is a lack of affordable housing in the UK today, particularly in London and the South East. This is both to rent and to buy. Potential buyers need higher and higher deposits to get onto the property ladder and people looking for affordable rented homes can wait for many years on Local Authority Housing lists. East Thames’ own Choice Based Lettings scheme for internal transfers has about 200 people in urgent need of moving but with only around 300 properties of all sizes coming up for let each year, despite their urgent needs they are likely to have to wait many years for a move.

2.6         Whilst we welcome the Government’s commitment to extend opportunities for shared ownership – and we are committed to continue to develop these homes, they must not be at the expense of new affordable homes for rent. Therefore, properties sold under the Right to Buy extension must therefore be replaced and must be replaced with rented properties as for many people in high cost housing areas, home ownership, even shared ownership will not be an affordable option, even when working full time. We are concerned that though the Government has made a commitment to replacing properties one for one, they have indicated that replacements could be shared ownership which would put further pressures on social housing waiting lists[i].

2.7         The current proposal assumes that Housing Associations will be fully compensated at market value for a home purchased under Right-to-Buy with the expectation of replacing the property with the proceeds. While theoretically this is possible there are a few practicalities that need to be considered:

1. Location. Our ability to replace properties in the same boroughs is limited. We work in boroughs where land values have increased significantly in recent years reflecting the demand for homes in the private sector in those areas. This increase in land value is not reflected in rents or housing grant and consequently the yield of social and affordable rented homes has reduced in these areas in order to make schemes viable. The alternatives are to build elsewhere, and for East Thames this likely to mean building replacement homes further east towards Essex to replace properties lost in Tower Hamlets & Newham or look at possibility of securing individual properties on a purchase and repair basis.

2. Purchase and Repair[1]. While it is possible to purchase single properties under what has historically been referred to as a purchase and repair programme, there are a number of issues with these properties in particular a typically higher maintenance cost than purpose built properties where we have been involved in the design and are more difficult to build in energy efficiency measures.

3. Time lag to replace homes. Building new homes takes time from identifying sites, securing planning, tendering contract and finally construction. The pace at which we would be able to replace all of the homes on a 1 for 1 basis would means that there would be a time lag with a reduction of the number of social homes available rent (albeit there is no impact on local authority’s waiting lists) until such time all associated development is replaced.

2.8         We would want to see some exclusion such as where a block is due for major re-development, or where properties have not been built with government grant. We would also like to see sheltered and supported housing excluded, the majority of these schemes are purpose built and provide short term accommodation and support. Enabling right to buy in schemes would mean that there were long term residents who may longer require support alongside short term residents requiring support, and it would also be impossible to replace these as single units elsewhere.

2.9         A potential solution to some of the issues raised above would be making the discount portable allowing the tenant to buy from the open market with the Government funding the discount on purchase (which it would be doing in any event). While this would mean the tenant would need to move, it does have a number of advantages:

• Discount is linked to the tenant not the property so maintains the logic that the discount is the capitalised rental subsidy to individual
• Tenant’s aspiration to be a home owner is still met
• Tenant is free to choose a property that that meets their aspirations/requirements thereby providing greater choice to the individual
• Avoids unnecessary costs associated with valuations verifying the value of property as property purchased on open market
• Social rented home becomes immediately available with no time lag
• Housing association developments will continue to add to social housing rather than replacing the properties lost to Right to Buy
• Would avoid the potential reduction of social rented homes in high value areas (e.g. Tower Hamlets)

3.            Proposals in the Budget

The effects of the reduction on rents on housing associations

3.1         The Government has set us a significant challenge in reducing rents by 1 per cent each year for the next four years whilst expecting us to continue to build. We are committed to meeting this challenge by thoroughly reviewing our efficiency plans but it is unlikely that we will be able to build the same number of properties as originally planned. We have estimated that the change in rent policy will reduce our expected borrowing capacity in 2020 by over £230m. Based on the current levels of debt financing for new social housing the changes effectively risk reducing our development capacity by c.1600 new homes.

3.2         We would also ask that again Supported housing be excluded from the rent reduction, developing supported housing is more costly, buildings need to be tailored to the client group’s needs, and those currently in development only work without the rent reduction. Including supported housing could halt the development programme.

3.3         The interaction of rents with the benefit system means that the rent cut will not benefit the majority of tenants who are on housing benefit. We have been reviewing our affordable rents policy with the aim of identifying whether we could adjust our rents to enable some households to come out of housing benefit dependence when working full time at lower income levels. However, our analysis shows that in order for families to afford their housing without the need for housing benefit, they have to be earning well above average incomes. Figure 3 below shows that with a rent of £176 a week single parent with two children would have to earn around £32,000 in order to no longer need help from housing benefit. Affinity Sutton Housing Association[ii] calculated how low the rent must be in relation to the market in order to be affordable without housing benefit. They found it needed to be 48% of market in Southwark for single people on a London Living Wage and 28% for a lone parent with one child on London living wage.

Young people and housing benefit entitlement

3.4         We only have around 20 tenants under 21 in our general needs properties but as a provider of care and support to young people we are extremely concerned that the proposals to remove entitlement to housing benefit for young people under 21. Although the desire to support young people into work including through apprenticeships is a good one, there are thousands of young people who will need significant support to access and maintain employment due to their histories. Not all young people have had a secure stable upbringing, not all have families they can live with, and without the safety net of housing benefit will have no means to secure accommodation.

3.5         Young people who have been homeless do not at present appear to qualify for exemption; those at risk of homelessness also don't appear to be exempt.  So removing this safety net is likely to lead to rent arrears and eviction.  Young people without families willing to house them will have no alternatives.

The effects on housing associations of other proposals in the Budget

Charging higher rents to tenants with higher incomes

3.6         The Chancellor’s Budget proposed requiring social housing tenants earning over £40,000 in London and £30,000 out of London, to pay near market rents from 2017/18. The IFS estimate that this is likely to affect 10% of social tenants. We have key concerns about:

1. The affordability of these rents at these income levels – the risk of increasing the housing benefit bill

Recent analysis by Savills found that all one bedroomed market rents in central London are unaffordable with a household income of £45,000, yet the majority of social housing tenants earning £40,000 will need more than a one bedroomed property. A family with two or more children paying market rent would still be entitled to significant help with housing benefit. Increasing rents for families in receipt of housing benefit will not have an impact on the household themselves as the increase will simply be met by more housing benefit. It is therefore highly questionable whether this is a good use of tax payers’ money. From a household’s point of view, raising rents will keep them dependent on housing benefit for longer which would also make it difficult for those that might otherwise have been in a position to, to save for a deposit to buy their own home, even with a right to buy discount.

Figure 3 shows the amount of housing benefit a family would be entitled to given different levels of rent and income. A couple with three children living in an East Thames affordable rented 3 bedroomed property at £206 a week which is around 65 per cent of market rate, would still be entitled to £55 housing benefit. If rents were increased to 80 per cent of the market, their housing benefit entitlement would go up to around £100 a week and they would remain entitled to around £30 a week when earning £50,000.

Given how far up the income scales housing benefit entitlement goes, it is perhaps surprising that one third of our households are not in receipt of housing benefit. This could be explained in part by the still low take-up of housing benefit by households in work[iii] rather than the high earnings. A rise in rent for families earning over £40,000 could also lead to higher housing benefit take-up as well as higher entitlement for those already claiming.

2. The practicality of administering the policy

The Government is yet to set out details about how it proposes this to work in practice but it is difficult to see how it cannot fail to add complexity and administrative costs. The introduction of Universal Credit aimed to simplify and reduce the number of places people had to report income changes. For tenants still entitled to help with housing costs this will add complexity and undermine the principles of Universal Credit. The most straight forward way to administer this policy would be for data sharing to be agreed with HMRC - an obligation for tenants to advise their landlords of their income would be problematic and administratively expensive which would create risks of fraud and error and legal challenge.

3. Creating disincentives to increase earnings.

The aim of replacing the current benefits system with one Universal Credit was to smooth work incentives so that gains from earning an extra pound were consistent across different hours or earnings points, thereby avoiding people earning an extra £1 and losing most of it in reduced benefits. This policy risks creating cliff edges whereby a family receiving a small increase in earnings loses more than they gain as a result of a significant rent increase.

Figure 3: Housing benefit entitlement for a family of 2 adults, 3 children in a 3 bedroomed home at different rent levels

4.            Welfare reform proposals

The effects on housing associations of changes to the welfare system in the last

Parliament

4.1         There is no doubt that in efforts to support tenants manage the housing benefit cuts brought in by the 2012 Welfare Reform Act, Housing Associations and Local Authorities got to know their tenants better than ever before and many tenants benefited from support previously unavailable to them. East Thames doubled the size of its welfare benefits team from two to four, created a dedicated role for a lettings officer to help people to downsize and made some policies changes to support and prioritise downsizing in its internal transfers. Priority support was given by the employment team to tenants affected by the benefit cap. Overall rent arrears have been contained, in a large part due to the high success rate of securing discretionary housing payments.

4.2         In April 2013, East Thames identified almost 700 households believed to be affected by the social sector size criteria. 520 households were found to be under occupying by one bedroom and 174 by two or more. There are now fewer at 567 households. We currently have 23 tenants affected by the benefit cap.

4.3         Some of the reduction is due to people downsizing, with around 55 tenants downsizing in the first year and 10 in the second year. There are a further 60 registered to downsize but facing a shortage of smaller properties. Rent arrears initially went up considerably as local authorities appeared to be very cautious with allocating discretionary housing payments but since the first six months the benefits team has had an 80 per cent success rate when applying for DHPs for tenants and secured 450 payments. In 2014/15 the Employment and Inclusion team helped 15 residents to secure employment and 50 to engage in training. In total the Employment team helped 91 residents into work last year and a further 172 non-residents from the communities in which we work.

4.4         Tenants affected by these reforms are currently no more likely to be in rent arrears than those not affected, which we know is to a large extent as a result of a high receipt of discretionary housing payments. We are about to start some tenant interviews which will help us to understand the impacts on tenants finances as we are aware that tenants who are paying the extra rent with no help from DHPs may be accruing other debts or cutting back on essentials.

4.5         We expect that the introduction of Universal Credit will have the biggest impact on the business as a result of tenants having their housing costs paid to them. We are currently surveying our tenants on their Universal Credit ‘readiness’, looking at banking, budgeting and digital awareness. We have appointed a digital inclusion officer to help people to get online and our welfare benefits team is providing more help to people to open bank accounts.

The effects on housing associations of the proposed changes to the welfare

system

Freezing of benefits and the reduction in working tax credit

4.6         These cuts will hit low income working households already struggling to make ends meet. The latest research from the IFS shows that two thirds of children in poverty now live in working households and these cuts will only push these families further into poverty. We welcome the Government’s commitment to increase the minimum wage and further raise the income tax threshold, but the cuts to benefits and tax credits will far outweigh gains from these measures for working families. Over 1,100 East Thames tenants with children are in low paid work with housing benefit helping them to pay their rent. These further cuts to benefits and tax credits will make paying their rent and other essentials much harder. We are currently undertaking some qualitative research to help us to understand more about the financial resilience of our tenants and what support we may need to put in place to ensure that they will be able to pay their rent in the future. 

The reduction in the benefit cap

4.7         The reduction in the benefit cap will make three bedroomed social rented properties unaffordable to families across large swathes of the country[2]. A couple on JSA with three children have a housing need of a three bedroomed property. With a maximum benefit entitlement of £442 a week, they will have only £108.03 a week for their housing costs. Outside of London the benefit cap will be reduced to £20,000 a year or £385 a week which will only leave £51.03 a week to cover this family’s housing costs. East Thames’ social rents are only 40% of market rents yet even taking account of the 1 per cent rent cut, 3 bedroomed properties are higher than £108.03 in London and £51.03 in Essex, making them unaffordable to all couples on JSA with three children.

4.8         Whilst it might be argued that a family could prioritise their rent and spend some of the money from their children’s benefits or Jobseeker’s allowance, there would be a significant impact on poverty and hardship. Recent research with families affected by the under occupation penalty found that one third reported spending less on food, a quarter cut back on heating and electricity and over half were regularly running out of money[iv]. The loss in income for families affected by the benefit cap are much higher than for those affected by the under occupation penalty. Using other benefit income to pay rent will force families to choose between feeding and clothing their children, paying the fuel bills or risking rent arrears and homelessness.

4.9         Although the vast number of our three bedroomed properties will be unaffordable to families on out of work benefits, because of the numbers in work, only 200 families are likely to be affected by the lower benefit caps. This is because the majority of working age households are in part or full time work. This, however, is significantly higher than the current 23 East Thames families affected by the benefit cap. Half of the current families affected are in rent arrears and most of those who are not are in receipt are in receipt of discretionary housing payments.

4.10     If social rents at around 40% of market rates are too expensive, then moving to cheaper property will not be an option. This means that employment may appear to be the only option, but for many households affected by the cap this simply won’t be feasible. DWP analysis of the families who have been affected by the benefit cap since 2013 shows that only 40% have escaped the cap by moving into work – something that should not be surprising given that three quarters of those capped were on sickness benefits or were lone parents with children under five.

4.11     If work isn’t the answer for everybody then arguably the pot of discretionary housing payments will need to increase in order to prevent an increase in homelessness of families that the local authority has a statutory duty to house.

August 2015