Affordable housing: welfare reform
26 July 2011
Will affordable housing still be affordable if the UK government sees through its programme of welfare reform? Alan Collett assesses the implications of far-reaching changes
The coalition government came to power with wide-ranging plans to revise the planning system, transfer responsibility for the provision of housing to local authorities and reform the financing of social and affordable housing. Major changes to the welfare system were headlined in the coalition agreement and both the Liberal Democrats and the Conservatives had commitments to localism in their manifestos, the latter with the express aim of returning more planning powers to local councils.
Provision of social and affordable housing has been restricted for many years, and, as reported in this issue’s cover story, the supply of new housing has also trailed far behind demand. The Barker Review in 2004 suggested that housing supply should be increased to between 250,000 and 300,000 units a year and that there should be more investment in social housing. By getting supply and demand more nearly in balance, we would also achieve the objective of reducing house price inflation in the UK to 1.1% p.a. in real terms, in line with the then EU average.
The intention of the changes is to reduce the affordability gap that has developed between the housing options of benefit claimants and those of non-claimants who fund their own housing
The Labour Government set targets for new housing supply, but these were never achieved. Indeed, the total number of housing starts in the UK, which peaked in 2005 at 233,890 units, had halved by 2010. The number of owner-occupiers as a percentage of the total number of households had reached a high in 2003 of 70.9%. Although surveys have shown that more than 80% of the population aspire to own their own homes, many commentators feel this is not only unlikely, but actually undesirable, as it would mean more and more of the nation’s capital being concentrated in housing, instead of being invested in business and industry.
The average age of the first-time buyer has risen, year on year, and now stands at 38 for those who do not have parental support to put down a deposit. This has the unfortunate side effect, in social terms, of widening the gap between young people from different backgrounds.
Overall lack of supply is the principal problem, but it has been made worse as lenders have had to significantly change the terms upon which they lend. Now they are constrained by their capital and by the new solvency rulings, especially when it comes to high loan to value mortgages – the kind most first-time buyers need. It is no surprise, therefore, that the size of the private rented sector (PRS) has continued to rise and now accounts for 15.6% of all households.
Since 2005, between 72% and 81% of additional affordable housing has been new build, with much of it provided through the planning system as a result of section 106 agreements on private housing sites. Consequently, as the number of private sector housing starts has plummeted, the number of affordable homes has fallen with it.
The benefits factor
Notable among the proposed reforms that will certainly have a significant effect on the housing market is the Welfare Reform Bill 2011, presented to Parliament in February and expected to become law before the end of the year. The Bill envisages a wide-ranging restructuring of the UK welfare system taking place over several years. The centrepiece is the introduction of a ‘universal credit’ as a replacement for six income-related work-based benefits. It will be phased in over four years from October 2013 and there are transitional arrangements to ensure that no claimant loses out in cash terms.
The impact statement says that it
“will restructure the benefit system, to create one single income-replacement benefit for working-age adults which unifies the current system of means-tested out-of-work benefits, tax credits and support for housing. It will improve work incentives by allowing individuals to keep more of their income as they move into work, and by introducing a smoother and more transparent reduction in benefits when they increase their earnings. It will reduce the number of benefits and the number of agencies that people have to interact with and smooth the transition to work.”
Many private landlords who let accommodation to claimants of housing benefit or local housing allowance (LHA) valued the ability to have rent paid directly to them. This had already been stopped for all except vulnerable tenants or those with a poor payment history. There is no suggestion that universal credit will be paid directly to landlords except in the same limited circumstances. The Bill makes no exception for registered providers of social and affordable housing, principally housing associations, which at present receive all rent direct.
The scale of the problem is expressed in the remorseless rise in the housing benefit bill from £11bn to £20bn
Direct payment of rent is likely to be allowed in cases where landlords have voluntarily reduced the rent and many commentators have criticised the concept of having to reduce the price of accommodation to ensure that a benefit paid to a claimant for housing is not diverted by them for other purposes.
The government is also seeking to reduce the total rental bill paid to the private sector on behalf of claimants. This will be done in three ways. Firstly, from April 2013, LHA will be linked to the Consumer Price Index (CPI) so that the maximum increase in LHA in any particular year will be equal to the increase in CPI for the previous year. The impact assessment admits that this will mean that, in some areas, LHA may rise more slowly than market rents. Where this is the case, landlords will have three choices open to them: end the tenancies of benefit claimants; accept the possibility of a level of arrears if tenants try to make up the shortfall from other income sources; or accept a below-market rent in order to minimise the risk of voids.
Secondly, the maximum rent payable to any claimant for rent was capped in the emergency budget in June last year and the new rates came into force in April. The five-bedroom LHA rate was removed, so that the new maximum rate relates to a four-bedroom property. There is also an absolute cap for each property size, so that LHA rates cannot exceed:
- £250 a week for a one-bedroom property
- £290 a week for a two-bedroom property
- £340 a week for a three-bedroom property
- £400 a week for a four-bedroom property.
In addition, the £15 weekly excess that could be received under the LHA arrangements was removed.
The third of the government’s ways of cutting its rental bill to the PRS is probably the most important one. From 30 October this year, LHA rates will be set at the 30th percentile of rents in each broad rental market area, rather than at the median. The government’s intention in making this change is to ensure that only 30% of all rental properties are available to benefit claimants. The intention of the changes collectively is to reduce the affordability gap that has developed between the housing options of benefit claimants and those of non-claimants who fund their own housing.
One other proposed restriction has been dropped: a proposed cut of 10% in benefit payments once a working-age claimant has been unemployed and claiming benefits for more than one year.
The impact on individuals
Without a doubt, the cumulative effect of all these new rules will be to reduce significantly the choices of those on benefit, and housing charities and lobbyists are naturally concerned about the impact on individuals. For landlords, the challenge will be to maintain the level of rents and occupancy they have enjoyed until now. In most areas of the country there may well be sufficient rental demand to allow landlords to end the tenancies of benefit claimants who can no longer afford the rent and find other tenants. However, as the impact of the financial strictures bite, many landlords may find their choices reduced, and may well have to accept lower rental values.
The continuing very low levels of housebuilding in both the public and private sectors mean that increased supply will not be available to help, with the result that the poorest tenants may be forced to seek assistance from their local authorities. However, housing departments will have no more homes to let, and so will be forced back into the private sector, creating a vicious circle. While it is proposed that local authorities will be able to discharge their duty to the homeless by finding them accommodation in the PRS, this will help only if there are landlords willing to let homes to them.
The scale of the problem is expressed in the remorseless rise in the housing benefit bill from £11bn in 1999/2000 to £20bn in 2009/10. Within that total increase is an increase in expenditure on working-age recipients from £7bn to more than £14bn. Given the current parlous state of the public finances, the government has been forced to take action. It expects total annual savings to the Exchequer in 2015/16 to be £2.1bn, or 9% of the expected total. Put simply, this cost will be borne by landlords in both the private and public sectors.
The government hopes that its proposed changes to the planning system and the mechanism of the New Homes Bonus, which will reward local authorities willing to allow new development, will have the effect of increasing supply. Even if this does happen (and many are sceptical) the long lead-in time will mean increasing pressure on housing of all tenures in the short term. It seems likely that those who already have the least choice – those who are economically inactive or on low wages, will suffer most.
The changes are also likely to restrict the number of new landlords entering the market and this may slightly restrict overall demand in the sales market in a small number of areas. However, where tenants in work, and not receiving benefits, dominate the rental market, the rise of the PRS seems set to continue.
Alan Collett is Chairman of Allsop Residential Investment Management Ltd and Senior Vice President of RICS