Brian Wells – Written evidence (EHM0154)

 

HOUSING BENEFIT REFORMS AND THE LONDON LABOUR MARKET

 

Brian Wells former Department of Business, Innovation and Skills economist. This note was written in a personal capacity.

 

 

Worklessness is concentrated in London and the other great UK cities...

 

  1. At 70.5% (for ages 16-64) the UK has one of the highest employment rates in the world. By contrast, in common with the other great cities - such as Glasgow, Birmingham, Newcastle and Liverpool – the employment rate for residents in London is much lower at 68.3%. If the UK had London’s 16-64 employment rate employment would be nearly 900 thousand lower.

 

  1. Other parts of the country also suffer from relatively low employment rates – seaside and coastal towns, some ex-industrial areas particularly in the North East and Wales and also Northern Ireland. However, because of their size worklessness in the cities is the major problem. For example, if London had the UK 16-64 employment rate employment would be nearly 120 thousand higher.

 

...despite the fact that jobs are concentrated in London and other cities. However, they are taken up by commuters not Londoners.

 

  1. As a rule of thumb in cities there is just under one job per head of population in cities. For London (2008 relative to the 16-64 population) it was 0.9 jobs per head and in parts of inner London the ratios are much higher. The four local areas with the highest job densities are all in London - the City of London (36.6), Westminster (3.3), Camden (1.8) and Islington (1.4). And it is a similar story for cities outside London. For example, the highest density outside London was Belfast (1.3).

 

The problem, therefore, is not a lack of demand. It is a supply side issue - associated with getting local people into local jobs...

 

  1. The inner London boroughs with the highest job densities are also one with amongst the lowest employment rates – not just in London but in the whole of the country.

 

  1. The bigger problem is economic inactivity – people are not looking for work. London’s (16-64) inactivity rate is 24.5% compared to 23.3%. This inactivity is concentrated amongst those dependent on welfare – lone parents, the disabled and those in social housing.

 

  1. However, at 9.4% the ILO unemployment rate is also well above the national average of 8.0%. Within this there is some evidence that there is high frictional unemployment due to lack of information about how to match people with jobs in a very decentralised and diverse labour market.  

 

...and although there has been some relative improvement...

 

  1. The supply side improvement in the UK labour market has led to the greatest improvements being in the areas that started off in the worst position. For example, Scotland’s employment rate is now above the national average having well below it in the past.

 

  1. And in recent years Londoners have also benefited. For example, the welfare to work reforms for people on lone parent benefits – a particular problem in London – have contributed to a fall of over 20% in the three years to August 2010. Double the national fall of around 10% and happening during a period that included a very severe recession.

 

... there is still more to do - particularly in sorting out London’s housing market in order to improve incentives for people to look for work.

 

  1. The attached note concludes that the housing market is one of the least efficient markets in the UK and that there are particular problems in London - under-occupation of housing and a specific issue around single adult households (with or without children). These problems are compounded by a concentration of social housing in London – as in other cities. This provides an extra twist to labour market problems by fostering economic inactivity and welfare dependency.

 

The housing benefit reforms should make a some positive contribution to the London labour market as they will sharpen work incentives...

 

  1. The reforms start in April 2011 and are phased in over a year. The biggest national change is that the local housing allowance in the private rented sector will be set at the 30th percentile of local rents rather than the median (50th percentile). However, the changes that will disproportionately affect London – because of its high rents – is the introduction of absolute caps in both the private and public sectors. The maximum rent for four or more bedroom properties will be £400 per week. Reducing out of work benefits in this way will increase financial incentives to get a job.

 

  1. Rents in the social housing sector are to rise so that less money can be paid through rent subsidies and more money released so that the housing associations can build more houses. The rise in rents will again increase work incentives particularly if the Local Housing Allowance was brought in.

 

...and together with a range of other measures should improve the efficiency of the labour market by making the housing market work better.

 

  1. DWP is currently extending welfare to work policies to new groups – people who have been on sickness and disability or lone parent benefits for a long time. This together with the effect of equalising the state pension age at 65 will increase administrative incentives to look for work. And, under Universal Credit, bringing housing benefit into DWP from the local authority will also allow a greater focus on getting people back to work.

 

  1. Increasing rents in the social housing sector is also likely to provide greater incentives to fill houses with more people and, thus, reduce the overhead costs – including childcare costs – of going out to work. 

 

However, the lack of active management of social housing is likely to lead to some real and also specific headline making problems...

 

  1. There have been concerns that capping housing benefits in the private rented (but not the social housing) sector would reduce geographical mobility so people could not move to take up jobs. However, a lack of geographical mobility is not a major problem in the UK because:-

 

 

  1. Consequently, it is likely that there will be many different market ways of dealing with the housing benefit changes. These might include negotiating a reduction in rent; moving more people into the house; or moving to a smaller house. And in some cases the imposition of the new rules may reveal any under-occupation or fraud that has developed – for example, as children have moved out – making it easier to deal with the issue.

 

  1. This market flexibility is likely to mean that no general problem arises. However, there may be specific examples where, because there is not a well-functioning matching process in the rented sector – particularly for social housing – then a sudden change in the rules might make it difficult to deal with the specific individual problem immediately

 

...and the inherent problems in the housing market – in the private as well as the public sector – are likely to swamp any beneficial effects.

 

  1. DCLG has concluded that there is a housing shortage which will get worse. However, the attached note suggests that there is a good deal of misallocation of housing resources – government induced in many cases.

 

  1. Government policy seems to be focused on providing more houses rather than filling up existing houses with more people. Without a major shift in policy focus – applied to the private as well as the public and social sector – the housing benefit changes, although beneficial in their own right, are very unlikely to be big enough to resolve many of the problems.


ANNEX: HOUSING BENEFIT & SOCIAL HOUSING REFORM

 

AN INEFFICIENT HOUSING MARKET: MISALLOCATION NOT SHORTAGE

 

The housing market is one of the least efficient markets in the UK economy with demand feeding through into inflation…

 

  1. By 2009 house prices were over 3½ times as high as in 1991. Even adjusted for (RPI) inflation they were 2¼ times higher. The rise in London was even higher at over 3½ times and around 2 ½ times respectively.

 

…rather than a growth in the number of houses.

 

  1. Over the same period 1991-2009 the number of dwellings in the country (here England) rose by less than 15% and was even lower in London – 12 ½%.

 

  1. The composition of housing also changed with a move some move from public to private housing. In England as whole both owner occupation and rented accommodation grew by roughly the same amount whereas in London there was a larger growth amongst rented houses. There was a substantial rise at both England and London level in private renting whereas there was a 10-15% fall in public renting – social housing and local authorities combined.

 

What is more, there are signs of friction in the housing market. At the same time as there more houses than households in London – there is a vacancy rate of around 3% - ...

 

  1. The household vacancy rate in London - at 3% - is lower than in England – 4.9% - but in both areas there seems to have been greater mismatch developing over the period 2007-2009 – by around 2 percentage points.

 

…there are also people without houses – homeless people in London are also equal to 1.5% of the household population either permanently homeless or in temporary  accommodation.

 

  1. Nearly a quarter of all statutory homeless in England are in London and fully three quarters of people in temporary accommodation are in London. Thus, more than half of all statutory homeless and people in temporary accommodation are in London. In 2009-10 the combined total was nearly 50 thousand – around 1.5% of the London household population.

 

More importantly, there is also simultaneously over-crowding and serious under-occupation…

 

  1. In 2008-09 in England as a whole 3% of households were over-crowded and fully a 1/3 of households were under-occupied. As the table below shows the degree of over-crowding is greater in London and under-occupation – although still high - is lower.

 

     Overcrowded                                              Under-occupied  

     England   London                            England              London

 

Owner-Occupiers                            2%                              3%                              47%                            36%

Social Renters                            7%                            14%                              11%                            8%

Private Renters                            5%                            10%                               16%                              9%

 

…with the growth of single adult households – both with and without children – one of the primary determinants.

 

  1. A major component on the under-utilisation is the growth of single adult households which is also expected to continue. What is more, the problem - both currently and in the future – are much worse in London where by 2031 1 in every 4½ households is projected to be a single adult household.

 

Proportion of Households that are single adult:-

 

England                                          London

1991                                                           11.2%                                          13.3%

2008                                                           15.0%                                          17.6%

2031(Projection)                               19.6%                                          22.7%

 

However, increasing inefficiency in the housing market is not set in stone. In the past under-occupation was much less - particularly in London...

 

  1. Between 1939 and its trough in 1991 the population in Greater London fell by more than 2 million from 8.6 to 6.4 million – down by a quarter – with most of the fall in Inner London where the population virtually halved.

 

  1. There were even larger falls in the City of London and the boroughs of Westminster, Newham, Southwark, Hackney, Islington and particularly Tower Hamlets. Most of the fall occurred in the post-war period and came despite the fact that these central areas – as in most other great cities – were also the places where large scale manufacturing and production industries closed down potentially releasing land for housing.

 

...and, even now, there are areas of the housing market – usually where the public sector is (deliberately) excluded – which seem to work better and more efficiently.

 

  1. Since the early 1960s the number of people in higher education has risen by around 2 million to 2.4 million. Many will have remained at home but many more would have moved into housing away from their family homes.
  2. Similarly, since 2004 when the 8 new members acceded to the EU around 1½ million adults from those countries have registered for National Insurance numbers so that they could work (and live) in the UK. This contrasts with the experience recounted below by Kate Gavron setting out some of the results of Young Foundation research into East London housing in 2006 where both indigenous and immigrants suffer from an inefficient allocation of housing services based on ‘need’.

 

‘The Bangladeshis – who made up one-third of all people and just under two-thirds of the school population in Tower Hamlets by 2001 – are the first community [of immigrants] whose settlement was assisted by the public sector. Previous groups had to find their feet in a disorganised working environment and chaotic privately rented housing market.’

 

  1. Globalisation, cheap travel and mass leisure and business tourism also seems to have been accommodated relatively easily even in the supposedly over-crowded cities such as London. There are, therefore, elements that suggest that housing - even social housing is not in shortage.

 

  1. Rather I think that we need to question this fundamentally anti-economic concept that there is a shortage of housing. This seems to me to be the equivalent of believing the lump of labour fallacy and it might be called the ‘lump of housing fallacy’. This might suggest the problem is largely misallocation rather than shortage.


GOVERNMENT’S ROLE IN THE MISALLOCATION OF RESOURCES.

 

The misallocation of housing resources would seem to be partly because Government policy focuses on providing more houses rather than filling up existing houses with people…

 

  1. In contrast to the conclusion of the previous section the view of DCLG is that: ‘There is a large gap between the supply of, and demand for, new homes.’ and so their aim in terms of housing supply is to increase the number of houses rather than the number of people and/or households per house:-

 

‘For decades, the housing market hasn't kept up with the needs of our growing population so there aren't enough homes being built. We are committed to meet Britain's housing need by increasing housing supply and providing more homes that people want in the places where they want them.’

 

...and this aim tends to promote under-occupation and inefficiency in the housing market…

 

  1. This aim has led to a series of policies that tend to promote both under-occupation and inefficiency because these policies take no account of their effect on the behavior and expectations of individuals.

 

  1. So, policies are set up under the assumption that there will be no behavioral response to the incentives that the policies introduce. In addition, policies tend not to take full account of interactions with other parts of the economy and/or society. This can lead to the distortion of economic activity as some people try to take advantage of the relative benefits of one set of policies rather than the inherent benefits of the economic activity itself (for example, arranging what and when to purchase in order to maximise tax avoidance).

 

…leading to housing being under-taxed and over-subsidised both in terms of buying and selling houses…

 

  1. The chief marginal tax rate for both sales (VAT) and income taxes is 20% whereas the maximum sales (Stamp Duty) tax rate associated with house purchases is 4%. Again this is likely to inefficient resource allocation caused by too much demand for houses both because taxes are lower on houses and because there are inefficiencies because the taxes are levied in different ways and also the form of Stamp Duty is inefficient. Lower tax rates for first-time buyers are also likely to promote under-occupation.

 

  1. The main tax rate on income received from selling a house (Capital Gains Tax) is 18%. This is not dissimilar to the main income tax rate. However, the main tax break for capital gains tax is on your home. Again, therefore, this is likely to lead to inefficient resource allocation caused by too much demand.

…and in terms of paying for local authority services – currently through the council tax.

 

  1. Council tax subsidises under-occupation. There are discounts for empty homes and second homes. There are also discounts for single adult households – with or without children - and ‘granny’ flats can also benefit.

 

  1. These discounts, together with discounts for the disabled, carers, students, student nurses, unemployed on training etc may contribute to the establishment of unbalanced communities with disproportionate number of workless households dependent on welfare. Providing support through council tax as well the main benefit system also makes it more difficult and complicated to move off welfare dependency if they get a job.

 

  1. In addition to subsidising under-occupation and possibly promoting single adult households and welfare dependency the current council tax regime does not reward efficient or full use of houses. Thus, it is levied on the price of the house rather than adding an element, for example, that charges more the greater the number of bedrooms there are.

 

  1. And the inordinately long period of time since the last revaluation of houses for council tax purposes may also provide an incentive for under-occupation as it may implicitly subsidise newer, more costly (and smaller?) houses. Also, house price inflation across the country has varied enormously since the revaluation in 1993. In London prices have risen more than threefold, in the southern regions (and Northern Ireland) they more than doubled whilst in the northern regions, Wales and Scotland by 1½ to 2 times.  

 

Also, perhaps more could be done on tax and regulation to promote more people from outside the family filling up the houses – particularly lodgers.

 

  1. People that let rooms in their own home – whether owned or rented - or jointly occupy houses are treated more favorably in terms of tax breaks and less onerous regulation. However, the favorable tax and regulation treatment is complicated and the tenants that elicit the more favorable treatment for their landlord – students, grannies and lodgers for example – are not groups that spring to mind as priorities. Also, without the consent of the participants, it is unlikely that tax evasion could be identified or regulations enforced.

 

  1. One approach – which is in line with Big Society principles - would be for the state to ignore completely what consenting adults do in the privacy of their own home. In effect to treat non-family members of a household the same as family members. All transactions and agreements would be the responsibility of the people involved not the state. Such an approach is likely to help reduce under-occupation and also might help to address some of the economic, social and labour market problems associated with single adult households.

Housing benefit obviously increases house prices and its current design adds to this inflationary pressure...

 

  1. Given that the supply of housing does not increase quickly the extra demand created by the spending on housing benefits will feed through mostly into higher house prices. Whatever the reason the average housing benefit payment has grown significantly faster than the general price level.

 

  1. This price inelasticity is worsened because of the hypothecated nature of housing benefit.  It can only be spent on housing payments – usually rents – and the benefit recipient has little or no choice over either the house they rent or the rent they pay. Therefore, there is no incentive to shop around or bear down on the rent that the landlord charges.

 

…the introduction of the local housing allowance in the private sector will help. But it should be extended to social housing where the big problem is.

 

  1. The introduction of local housing allowances – a flat rate benefit related to the average rent in an area – has increased the incentive to shop around and bear down on house prices.

 

  1. However, at present local housing allowances are restricted to private renting and social housing remains on the old system. This is a problem because around 70% (69%) of all people on housing benefit are in social housing with more in Inner London (75%) and somewhat less (59%) in Outer London. In addition, the old form of housing benefit and its combination with social housing is likely to increase the feeling of welfare dependency and deny personal responsibility promoting economic inactivity.

 

Housing benefit also provides incentives to under-occupy and resist moving to houses that better match their circumstances...

 

  1. For a claimant moving into a new house when they move onto benefits the incentive is to choose the biggest and best house as it is free to them. Therefore, to prevent under occupation the state needs to remove the tenant’s choice of house and ensure that they get the appropriately sized house. This is true not only for the old styled housing benefit but also local housing allowances.

 

  1. One way of providing incentives to achieve the household having the appropriately sized house would be to divorce housing benefits from the house altogether and relate them completely to the size of the household. Thus, the local housing allowance would be related to the size of the household not the house. This principle might also be applied to people who are already in a house when they move on to benefits. However, if there is already under-occupation then unless a rent reduction can be negotiated then either the household will need to move or they will need to use other non-housing benefit income to pay the rent. Otherwise the under-occupation will be ossified and made permanent.

 

  1. Perhaps more importantly if the claimant’s household circumstances change then so should their housing benefit. Otherwise there is an incentive to remain in an under-occupied house. [Or even, as housing tenure is an asset, to retain the rent book and illegally rent out the house to someone else.]

 

  1. For example, if a parent’s children grow up move out and/or their spouse dies then maintaining the same level of housing benefit will reduce the incentive to reduce the under-occupation. It also suggests that where there is under-occupation – either at the start of or into the benefit claim – there needs to be active management of the housing for people on benefits – particularly in respect of single adult households such as widow(er)s and lone parents whose children have grown up and left. Obviously this is easier if people are in social housing. However, given the difficulty of finding a new house, it may also be necessary to set up a system for people/claimants in private rented accommodation.  

 

Housing benefits are also likely to lead to lower employment. This is because of the level of the benefit...

 

  1. As with any out of work benefit the level of housing benefits not only reduces the range of jobs where people are better off in work leading to it taking longer to find work – frictional unemployment is higher – but also increases the possibility that the tenant decides not to look for work – economic inactivity and structural worklessness are higher. And the higher the level of benefit the greater will be these incentives.

 

  1. Housing benefit is related to rents and house prices which have risen faster than the general price level and so the adverse effect on employment is likely to be greater.

 

  1. The lack of housing benefit for owner occupation at the start of the benefit claim in theory increases the incentive to look for work. However, the design of this aspect of housing benefit tends to increase complexity by relating work incentives to housing tenure rather than the characteristics of the individual. Extending the principle of housing allowances to all forms of housing tenure would remove this problem and increase the efficiency of the housing benefit system from a labour market perspective.

 

...the design...

 

  1. The design of housing benefits tends to promote under-occupation and single adult households. This raises the overhead costs of moving into work and, hence, again reduces the range of jobs that the tenant might consider taking for financial reasons.

 

  1. A specific example of this relates to single adult households where there are also children (or other caring responsibilities). The lack of other adults in the household reduces the possibility of other people helping with the caring responsibilities on an informal basis. They, therefore, have to rely upon – expensive – formal childcare if they go out to work. Again this reduces the range of jobs available to lone parents and other single adult carers and increases the adverse effect on employment.

 

  1. One other adverse feature of the design is the fact that housing benefit is generally a ‘passported’ benefit at the start of the claim  - you become eligible for the benefit because you move on to another benefit – unemployment benefit etc. Yet, if people move into work they cease to be eligible for the main benefits and some move onto tax credits. However, housing benefit continues if people move into work as there is not the housing equivalent to tax credits.

 

  1. Therefore, at the very least, welfare dependency is increased because people remain on housing benefit rather than move completely into the tax system. But, more importantly, work incentives for people who have not been on a main benefit are reduced because they do not have access to the in-work benefits that housing benefits provide.

 

  1. The issue of people on Housing Benefit who are not on a passported benefit is a substantial one. Both nationally and in London around a third of people on housing benefit are not on a passported benefit. Experience from divorcing Jobcentres from Benefit Offices suggests that there will be a sizeable proportion that should not be on housing benefit as they have moved off the passported benefit. More importantly, as housing benefit does not have administrative incentives – the rights and responsibility regime – that the passported benefits do then there is no push to get people to look for work. An audit of the people on housing benefit who are not on passported benefit might, therefore, not only save public money and improve incentives but also allow this element of the benefit to be focused on the group that it is aimed at.

 

...and the delivery.

 

  1. Housing benefits are administered by another authority – the local authority – to the one that delivers the main benefit – the DWP and Jobcentre Plus. Again this may reduce the incentive to look for work as when they got a job they would need to co-ordinate disengaging from two agencies. And if they believe that one or other of the agencies are inefficient and will take time to get them back on benefits they may not risk taking up a job. [Alternatively it provides an incentive not to notify one or both of the authorities when they get a job.] These incentives are greater the higher is the level of housing benefits relative to the main benefit.

 

  1. More importantly, a key part of the UK’s welfare to work’s success is due to the administrative incentives provided by the rights & responsibility or conditionality regime. This offsets  the financial disincentive associated with out of work benefits and gets people to behave as if they are not receiving benefits and so they continue to look for work and take up (sometimes imperfect) jobs. However, this conditionality relates to the main benefit and not housing benefit. Therefore, the divorce of delivery methods reduces the potency of the administrative incentives. And this reduction is greater the larger are housing benefit payments relative to the main benefit.

 

  1. The introduction of Universal Credit should help to solve some of these design and delivery faults as it brings together housing benefit into the main benefits and, thus, theoretically can increase the focus and effectiveness of the conditionality. However, it will be important to consider carefully the design and the delivery of the new benefit so that new design and delivery faults are not introduced. For example, the design of the new conditionality making the housing benefit element an automatic and universal part of the new benefit is likely to increase benefit levels for many people and, hence to increase the adverse employment effects associated with benefit levels. Similarly, it will be important to consider how workers who are already in low- paid and short hour jobs when tax credits are removed.

 

Housing benefit also combines with the financing of social housing to increase demand and house prices in the private sector...

 

  1. Over time subsidies to public sector bricks and mortar – social housing - have been reduced relative to direct help for individuals and households - housing benefit. However, bricks and mortar subsidies still exist. Also rents in social housing are not related to demand and supply in the markets. Despite the fact that they are called ‘market rents’ the rents in the social sector actually relate to the cost of building these houses. And the costs of newer, sometimes more unpopular, social housing tend to be higher as there are still paying the costs of financing these new houses.

 

  1. Therefore, both because of the continued subsidies to social housing and the lack of responsiveness to demand and supply conditions the allocation of housing resources in the public sector is inefficient relative to one where any housing subsidies are paid direct only to the people that need them. Also it is inefficient relative to one where the choice of people demanding social houses is better reflected in its price – the rent. As a result, there is an excess demand for social housing that spills over into demand in the private sector leading to higher house prices there.

 

…although plans to raise social housing rents should improve things.

 

  1. The Government has announced that the subsidy to social housing rents will be reduced substantially and for new tenants the rent will rise to 80% of market rents. Although this change is partly to release funds so that housing associations can build more houses it will also sharpen incentives to look for work in order to cover the increased rents.

 

However, it would be necessary to introduce local housing allowances in the social housing sector to get the full benefit.

 

  1. As the social housing sector still remains under the old housing benefit system any increased incentives arising from reforms that affect the housing or the labour market will be removed. Therefore, this is another reason to introduce the Local Housing Allowance into the social sector.

 

  1. If the Local Housing Allowance were to be introduced then, combined with the increased rents, t will also provide incentives to increase the numbers of people in the house and the rent paid by them and to use other sources of their income. This may help reduce under-occupation and help the housing market as a whole to function more efficiently.

 

  1. This together with the fact that benefits are more targeted than bricks and mortar subsidies means that less government resources will be wasted. However, rent rises in the social housing sector is likely to have knock-on effects to the housing benefit bill as not everyone will be able to find a job. Also, the new system would not be as efficient as extending the local housing allowance to the social housing sector.

 

In addition, the administration of social housing focuses too much on the start of someone’s tenure…

 

  1. Rather than trying to promote turnover through the establishment of an efficient matching system the allocation of social housing tends to be on the basis of ‘need’. This tends to lead to a concentration of specific groups being assigned social housing and unbalanced communities developing.

 

  1. They groups that tend to be assigned to social housing tend to be people who are already dependent on the state – usually on out of work and housing benefits. And, because ‘need’ tends to be associated with worklessness this tends to lead to single adult households – with or without children – being assigned to social housing. There is, therefore, the risk of under-occupation and high overhead costs of taking up a job. And it is one factor that helps to explain how social housing can have an adverse effect on employment over and above the characteristics of the individuals in the social housing. There are greater incentives to remain inactive and dependent on welfare.

 

…and there is not enough efficient active management of social housing during the tenure…

 

  1. There has been some movement towards ‘choice based’ lettings. However, in some cases this means that the prospective tenant has a choice of three houses rather than one. Even where prospective tenants are given more genuine choice the infrastructure that would lead to efficient house matching is missing. There is no equivalent to an estate agent with a list of properties but which relate to rented property – both public and private. The list of properties available to the local authority tends to be restricted to those in social housing and also in their area.

 

  1. Thus, someone who wants to make a positive move – either to get a job or be close to loved ones does not have the information or the access. The lack of a nationwide house-matching system for rented accommodation – both public and private – would seem to be a major market failure.

 

  1. Also, even when the implicit in the engagement with the public sector tenant is the presumption that the characteristics of the household that began a tenancy will continue in perpetuity. Yet, single adult households with children will inevitably change as the children become adults and probably move away. And divorce and death are also likely to turn couples into singletons. So one trend that is likely to develop over time is that both single adult and couple households will become single person households. 

 

  1. This trend is likely to be reinforced if people are receiving housing benefits as it reduces the, already weak, incentives to notify the housing authorities of under-occupation. What is more, the lack of choice of desirable (smaller) public sector alternatives open to the tenants is likely to reduce the chances of notification still further. For example, a widow in London whose children have moved to Kent or Essex to buy a house is unlikely to notify the authorities even though her preferred option would be to move to a smaller place close to her children and grandchildren. And, there are incentives for her to move and sublet the illegally whilst still receiving housing benefits.  Under such circumstances the chances of taking up a job are small.

 

  1. In the analogous case of Jobcentre Plus there would be regular pro-active contact to check whether the household circumstances had changed and also whether the individual’s/household’s behaviour could be steered towards making a more appropriate match – here in housing terms – than their current situation and the range of potential matches would be nationwide.


…and although there are proposals to time limit the tenancy it would be better if it was rooted in an active management system.

 

  1. There are proposals to time limit new tenancies with the current proposals being to end the tenancy if the person has prospered sufficiently ‘to go into the private sector’ [David Cameron August 2010]. However, this is not the same as actively managing the social housing stock and is likely to lead to further ‘residualisation’ (as it is called) or unbalanced communities.

 

  1. Having a single review at the end of the tenancy is unlikely to be as efficient as regular contact (with or without a fundamental review at the end of the tenancy). At the very least it will mean that the under-occupation will last longer than it need do.  Also, it is more likely to cause conflict at the end of the tenancy.

 

  1. There is also a question about what the objective of social housing should be. Is it about the efficiency of the housing market? In which case who is in social housing should not really matter. Or is it about restricting access to social housing to a certain group of people? In which case it is likely that (a) the housing market will not work as efficiently and (b) it is more likely to lead to unbalanced communities.

 

  1. Also, by focusing on means testing council tenants rather than considering whether the size of the household is appropriate for the house it is possible if not likely that employment will be adversely affected because the cost to the tenant of taking a job would be that they lose their house. So they may not look for a job.

 


THE REFORMS TO HOUSING BENEFITS

 

The reforms are limited to the private rented sector and will lower Local Housing Allowance levels nationally and particularly on London…

 

  1. The reforms start in April 2011 and are restricted to the Local Housing Allowance (LHA). Therefore, this exempts around 70% of all housing benefit payments as the LHA does not apply in the social housing sector.

 

  1. The biggest national change is that the Local Housing Allowance in the private rented sector will be set at the 30th percentile of local rents rather than the median (50th percentile). However, the change that will disproportionately affect London – because of its high rents – is the introduction of absolute rent caps. The maximum rent for four or more bedroom properties will be £400 per week (and the 5 or more bedroom property is removed). The new rates are:-

 

 

…and if, improbably, there was no behavioural response then around 800 thousand people would get less benefit – around 135 thousand in London – and fewer private rented properties would be accessible…  

 

  1. DWP’s estimate of the full package is that all 939 thousand housing benefit claimants will lose out. However, just under half of these claimants lose out because of the removal of the £15 excess (see below). Around 800 thousand lose out because of the rent reductions and capping with the vast majority – around 775 thousand affected by the reduction to the 30th percentile and only 21 thousand due the high rent caps.

 

  1. Over two thirds of the rent reductions are in 1- or 2-bedroom properties suggesting that many of them are single adult households. The bulk of the losses are in the range £5-£15 per week and the vast majority of the claimants who lose more than £20 per week are in London.

 

  1. Of the 21 thousand affected by the high rent caps over 17 thousand are in London. Perhaps surprisingly still more than half are 1- or 2-bedroom properties suggesting that even here many of them are single adult households. However, nearly 6 thousand are also 5-bedroom properties. Less surprisingly  around three quarters of the claimants who lose will lose more than £30 per week.

 

  1. Outside London the reduction of LHA from the 50th percentile to the 30th percentile of private sector rents means, not surprisingly, that only around 30% of private rented accommodation (with no behavioural changes) would be available after the reforms. In Central London, however, only 7% would be available because of the additional effect of the caps on high rents. Inner North & West London and Inner South West London were the only other areas where availability were (a little) below the national average.

 

…however, it is very likely that there will be behavioural changes so the real and also headline-grabbing problems may not be too large…

 

  1. It is very unlikely, however, that there won’t be a behavioural response to this policy change. There are many options that may be used singly or in combination. Those involving the tenant include:-

 

 

  1. Secondly, involving the government:-

 

 

…although some of the changes may make such adjustments less likely…

 

  1. If possible, the government would probably want most of the adjustment to be concentrated on behavioural change by the tenant rather than the problem being solved by the government. This would be in line with Big Society principles and individual responsibility.

 

  1. However, one of the (supposed) money saving reforms is to remove the excess of up to £15 per week that LHA recipients can currently keep if their rent is below the LHA rate. The existence of such a limit contravenes one of the key aims of the LHA which is to provide incentives for people to shop around for bargains. The proposed removal of the limit will tend to shift the new system back even more towards the old system where the state decides the rent with the landlord and the individual has no incentive to bargain.

 

  1. In addition the government has recently announced discretionary powers for local authorities to make direct payments to landlords in return for reducing their rents. They have also announced a total of £180 million over the next five years to help with the transition. All of this is likely to increase welfare dependency and, to some extent, undermine the principles behind the LHA. It is also an empirical question as to whether local authorities can negotiate better deals than the individual. Whatever happens it is likely that the will be deadweight spending (and divided up between the claimant and landlord?).

 

…and the lack of an active management system for social housing makes it unlikely that many of these real problems will be solved by moving them into the social housing sector.

 

  1. Nationally the number of claimants who lose out because of the rent reductions and caps is a sizeable proportion of all private rented dwellings – just under a ¼. However, it is only 3% of all dwellings. If the housing market was not so sclerotic then part of the adjustment to this policy change could be through incorporating these claimants in other parts of the housing stock.  

 

  1. And even if we ignore owner-occupiers the claimants who lose out represent only 1 in 6 (16%) of all rented accommodation. However, if anything the social housing sector is even more sclerotic than the private rented sector – as the large waiting lists testify. This is partly because the sector is not actively managed and there is no knowledge or action about the degree of under-occupation or the tenant’s desire to move.

 

In London claimants who lose out are a smaller proportion of private rented dwellings than nationally. But, as there is a lot of private renting, they are a slightly higher proportion of all dwellings and of all rented accommodation. 

 

  1. In London the claimants who lose out as a proportion of private rented dwelling is below the national average – one in five compared to just under one in four.

 

  1. However, because private renting makes up 20% of all dwellings compared to 12% nationally the claimants who lose out are a marginally larger proportion of all dwellings (4% compared to 3% nationally) and of all rented accommodation (9.7% compared to 9.4%). Therefore, in terms of numbers, responding to this policy change does not seem to be any more of a problem in London than elsewhere. However, given the inefficiency of the housing market it is unlikely to adjust quickly and easily in every case so some major problems may emerge.

 

 

 

Therefore, in numerical terms dealing with this policy change does not seem to be a bigger issue in London - except for the few thousand with very large, very expensive rents.

 

  1. Of the 21 thousand who suffer losses because of the rent caps their average loss per week is £74 per week and, for the majority (17 thousand) of them in London it is £81. And 6 thousand of them are in 5 bedroom or more houses.

 

  1. This group is a small proportion even of the private rented dwellings – less than 1% nationally and around 2.5% in London. However, even if there are substantial behavioural changes the specific and unusual nature of the group means it is unlikely that complete adjustment will occur.

 

In terms of the labour market effects of the housing benefit changes they should improve work incentives and, therefore, be beneficial…

 

  1. The major consequence of the reforms is to reduce the levels of housing benefits – an out of work benefit that is paid for by the state. Consequently, it will increase the incentive to work.

 

…and on balance it might also improve the functioning of the housing market which might also benefit the labour market marginally.

 

  1. It is possible that the changes will lead to a reduction in under-occupation. This, in turn will mean that the overhead costs of getting a job will be reduced and so increase the range of jobs where people will be better off in work.

 

However, the reforms are largely restricted to the private rented sector so any effect is likely to be relatively small…

 

  1. Most housing benefit recipients are in the social housing sector and although there are reforms there they are unlikely to be as beneficial as they might be if the local housing allowance was extended to the social housing sector. And any improvements in the functioning of the housing and labour markets are likely to be made up of a large number of marginal adjustments. Thus, even if they were actually a large improvement it is unlikely to be discernible.

 

…and the continuing inefficiency of the housing market combined with some specific issues that are concentrated in London is likely to mean that there are a few – but major – housing and labour market problems.

 

  1. More noticeable are likely to be a small number of cases where either the housing or labour market or both is not able to adjust. And most of those are likely to be in London.

 

3 February 2016