Changes to Housing Benefit announced in the June 2010 Budget - Work and Pensions Committee Contents

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 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]

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

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 after-thought. 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 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:

    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 2629 3031
+ £10 to £15 2123 2525
+ £5 to £10 1416 1717
+ £0 to £5 67 88
Equal to LHA rate 78 89
- £0 to £5 78 78
- £5 to £10 1416 1515
- £10 to £15 2123 2323
- £15 to £20 2527 2726

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 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.

12   Ev 59 Back

13   Ev 59 Back

14   HC Deb 13 July 2010, col 223WH Back

15   Ev 59 Back

16   HC Deb 13 July 2010, col 223WH Back

17   HC Deb 13 July 2010, col 223WH Back

18   Ev 62 Back

19   Ev w62 Back

20   Ev w135 Back

21   Ev w13 Back

22   Family Spending, Expenditure and Food Survey 2007-08, Office for National Statistics Back

23   Ev 44 Back

24   Ev 112 Back

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  Back

26   Q 131 Back

27   HC Deb, 25 November 2010, col 54WS.  Back

28   Q 103 Back

29   Ev 62 Back

30   Ev 38 Back

31   Ev w216 Back

32   Ev w142 Back

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2010
Prepared 22 December 2010