Priced out

Housing Benefit was introduced in 1988 as a subsidy to both social-rented and private-rented tenants as a way of increasing access to affordable housing for those on low or no incomes. HB arose in response to the shrinkage of the social housing sector caused by a reduction in new social housing construction and the sale of social houses through the Right to Buy. Since its introduction, the government bill for HB has increased from £2.5 billion in 2001 to £20 billion in 2010, leading to efforts by successive governments to bring HB spending down. In April 2011 the coalition government introduced a number of reforms to HB with the aim of saving £1.8bn in expenditure by 2014/15. The two main measures in the package of reforms were a reduction in the basis for setting the Local Housing Allowance from the median of local market rents to the 30th percentile of local market rents, and the introduction of nationwide caps on LHA, with specific caps for each size of dwelling.

The Local Housing Allowance is used to calculate how much Housing Benefit someone can claim. LHA rates vary across the country according the level of local market rents, and are calculated by Broad Rental Market Areas. Before April 2011, LHA was set at the median of market rents in a given BRMA; since April 2011 LHA is set at the 30th percentile. Setting LHA in accordance with the 30th percentile of market rents as opposed to their median means that, in theory, in any given local housing market, an individual claiming Housing Benefit is restricted to the bottom third of the rental market, as opposed to the bottom half (unless they’re able to top up from their own funds). In real terms, the recalculation of LHA based on the 30th percentile of local rents translates into an average loss of £9 a week for someone in a 2-bed property, £12 a week for someone in a 3-bed property and £18 a week for someone in a 4-bed property. These losses are substantially greater in London, where market rents are higher across the board: the recalculation of LHA equates to weekly losses of £37, £56, £72 for 2-bed, 3-bed and 4-bed properties respectively in Islington and £58, £91 and £161 in Kensington and Chelsea.

The 2011 reforms also introduced a nationwide cap on LHA rates of £250 a week for 1-bed properties, £290 a week for 2-bed properties, £340 a week for 3-bed properties and £400 a week for properties with four or more bedrooms. In BRMAs with market rents below the national average these caps are less significant, as the level of LHA in these areas will likely come out below the level of the cap for each size of dwelling. However, in places like London with high market rents the LHA caps are significant. Indeed, capping the level of LHA was specifically intended to deal with the problem of very high Housing Benefit claims in places like inner London, and this much becomes clear when we map the data.

Since April 2011 LHA data from the Valuation Office Agency have only been available in capped form, so it’s possible to see where 30th percentile market rents are equal to or greater than the new capped LHA rates, but it’s not possible to see by how much. In other words, we can see which areas are subject to the cap but not to what extent they’re subject to the cap. This data is shown in the map below, and what’s clear is that the impact of the new LHA caps is currently only felt in London. In theory, in those parts of London shaded red below, the new LHA caps restrict people on Housing Benefit to below the bottom third of the private rented housing market. Here’s the map in fullscreen.

Using slightly older data from 2011, just before the introduction of the new LHA regime, we can get a better idea of the extent to which different areas of London are affected by the new caps. The map below shows, for London BRMAs, the amount by which the January 2011 30th percentile market rent for a 3-bed property falls above (red) or below (green) the new LHA cap of £340 a week. In Inner West London, people on Housing Benefit face a shortfall of £5 a week if they want to live outside the bottom third of the housing market and  aren’t able to top up with their own resources. In Central London the shortfall is over £300 a week. Here’s the map in fullscreen.

These maps show that people on Housing Benefit are being ‘priced out’ of large areas of central and inner London, and in many cases the stock of property in inner London that remains affordable to those on Housing Benefit is restricted to well below the bottom third of the market. Data from the Department for Work and Pensions (Table 9) show that only 7% of private rented accommodation in central London is now affordable for those on Housing Benefit, as opposed to 52% before the 2011 reforms.