Download Rent Levels and the Benefit Cap

Rent levels
and the
benefit cap
What happens to rent affordability and
development capacity if the benefit cap
is reduced from £26,000 to £23,000?
December 2014
Discussion paper
Why the benefit cap
matters to housing…
In 2013, Moat released The housing cliff, which examined the
impact of various government policies on build capacity post-2015.
One of the main concerns raised in that paper was the impact
of the benefit cap on housing. It discussed the lack of inflationindexing of the cap, and demonstrated how quickly this would lead
to unsustainable rent levels across the South East. The Housing
cliff highlighted that this was a particular issue for families in three
bedroom homes (and larger) under Affordable Rent.
Aside from the negative implications of this for work incentives
and for the Exchequer, Housing Benefit goes to the heart of the
affordable housing funding model which has moved away from
capital grant to revenue subsidy collected through rents. Lowering
the cap would therefore create a serious situation where collecting
rent becomes much more difficult, increasing the risk of arrears
and bad debt, and almost certainly leading to a reduction in build
capacity. This is discussed in more detail shortly.
The prospectus for the 2015-18 Affordable Homes Programme
makes it clear that providers will be required to charge 80% of
market rent. This is an important point that will be discussed in
more detail shortly.
Finally, a change to the benefit cap would also have to be weighed
against the national rollout of Universal Credit, which will be paid
directly to tenants rather than landlords. The DWP Demonstration
Projects saw a sharp increase in arrears because of this switch,
so housing associations are already anticipating lost revenue as
a result.
At the 2014 Conservative Party conference, the Chancellor
announced that if re-elected, a Tory government would further
reduce the cap to £23,000 (from the current £26,000 level). It is
important to understand the impact of this policy change from the
perspective of:
•
Lenders and investors – who have agreed, and may agree
future funding programmes both to support existing residents
and to build new homes, based on housing association
tenants’ ability to afford their rent;
•
Current tenants – who may face the prospect of gradually
finding their rent unaffordable;
•
Future tenants – who may struggle to be appropriately
housed as build capacity is reduced.
Impact on households
In setting Affordable Rent levels, Moat has taken steps to ensure
that no family moving into a property would be set an unaffordable
rent. A tipping point is reached when the cumulative effect of rent
plus ‘living benefits’ is greater than the benefit cap. We consider
this the point at which a family is placed at excessive risk of
unsustainable debt (eg. high credit card use to pay for basic needs)
or deprivation (eg. by limiting food or heating).
The following worked example, based on Greenwich Affordable
Rent figures, shows how this would work for various household
types under the reduced benefit cap (£442pw):
It is important to consider that a high proportion of housing
association residents receive either part or full Housing Benefit –
or the housing element of Universal Credit when the new system
is rolled out. This profile is not only limited to social landlords.
Separate research published by Moat titled A tale of two regions,
found that an increasing proportion of benefit-dependent
and vulnerable households are finding a home in the private
rented system [PRS]. In the cases where these households are
accommodated in the PRS, there is every likelihood that the rent
to be covered by benefits will be greater due to the juxtaposition
between rent levels and Housing Benefit.1
A tale of two regions also found that the situation for households
on lower incomes is becoming much more challenging due to
rising housing costs. It shows that Housing Benefit is being used
increasingly by people in work – contrary to the widespread view
that only unemployed people are eligible for housing support.
1
A Heywood, A tale of two regions, preliminary findings, September 2014.
*the cap for single people is expected to be lower than that for couples.
In this example, all money paid in rent above the £442 line would
need to be taken out of the non-housing elements of Universal
Credit – which are intended to cover living expenses such as food
and utilities.
On this basis, the modelling (on the following pages) shows that a
cap of £23,000 is too low for the rent currently being charged by
housing providers. To a great extent, this is true for social rent as
much as for Affordable Rent. This presents us with a difficult choice:
continue to charge rent at existing levels and tolerate higher debt
levels among our residents or; reduce rents and take a substantial
hit on development capacity.
Making sense of the modelling
The charts that follow show how many years it would take for rent
plus living benefits to meet the benefit cap, and therefore become
unaffordable. In the example below, we are suggesting that rents
will:
•
remain affordable for over ten years for one bedroom
properties;
•
become unaffordable in just under three years for two
bedroom properties; and
•
that three bedroom properties are already unaffordable (a
value of minus four suggests that at today’s inflation rate, this
type of property became unaffordable four years ago).
Impact on new housing supply
Even if housing providers took the decision to lower rent levels to
alleviate affordability concerns, this would not be straightforward.
Housing providers seeking to build new homes under the Affordable
Homes Programme need to convince the HCA that charging
substantially less than 80% is necessary.
In the prospectus for the 2015-18 Affordable Homes Programme,
the HCA stated that:
It is expected that homes for rent which are funded with
capital grant funding from the 2015-2018 Affordable Homes
Programme will be let at Affordable Rent. While bids which
include Affordable Rent at less than 80% of local market rent
will be considered in very specific circumstances, such as
where an Affordable Rent at 80% of local market rent would
exceed the Local Housing Allowance, we will generally expect
providers to charge rents of up to 80% of market rents to
maximise financial capacity.2
A full list of the data assumptions used can be found at the end
of this paper, but in all tables we have assumed the following
household compositions:
•
•
•
3
two bedroom properties: a couple with two children;
three bedroom properties: a couple with three children.
Both social rent and Affordable Rent levels have been tested in the
areas where Moat operates across London and the South East.
We have also decided to use actual housing association rent
data3, rather than using ‘target rent’ as a substitute for social rent.
Likewise, we have used actual Affordable Rent data, rather than
calculating 80% of gross market rent. We believe that these figures
are given added credibility by showing the rent levels that are
actually being charged, rather than simply the maximum that could
be charged.
The final sentence is critical: the current model is dependent on
higher rents to maximise financial capacity. If rents are artificially
depressed, the model no longer stacks up and development levels
are reduced.
2
one bedroom properties: a couple with one child;
HCA, Affordable Homes Programme 2015-18: Prospectus, January 2014, p.36. pgph. 196.
HCA, Statistical Data Return, September 2014
Data and analysis
Social rent - existing £26,000 cap
The above chart shows that under the current £26,000 cap, social
rent should continue to be affordable for a number of years in most
local authorities in the South East. However, the cap needs to be
urgently indexed for inflation to prevent three bedroom properties
becoming unaffordable. In most of the local authorities shown, this
will happen within two years.
Social rent - proposed £23,000 cap
Under the proposed £23,000 cap shown above, the green bars
fall below zero in all of Moat’s areas, meaning that three bedroom
social rented homes would no longer be affordable. There would
also be a strong risk of putting two bedroom properties at the limit
of affordability. As shown above, two bedroom properties in all but
eight local authorities would become unaffordable within four years.
The sensitivity of social rent to a £3,000 reduction to the benefit cap
is somewhat unexpected, and must be seriously considered.
Affordable Rent - existing £26,000 cap
The above chart shows that Affordable Rent can still be considered
affordable for one and two bedroom properties in most areas shown
under the £26,000 cap. However, two bedroom properties will only
remain affordable for a short period unless the cap is indexed for
inflation.
For instance, two bedroom properties in Greenwich will become
unaffordable in little over two years if the cap is not inflated. Three
bedroom properties are already unaffordable in most parts of
4
Moat, The housing cliff, September 2013, p.10.
the South East, with the only exceptions being Basildon, Dover,
Shepway, Swale and Thanet. However, even these areas will
become unaffordable within two years.
This chart is very similar to that which appeared in Moat’s Housing
cliff paper4, but with the addition of one bedroom properties. The
other key difference is that this is based on actual Affordable Rent
levels, not on 80% of gross market rent.
Affordable Rent - proposed £23,000 cap
The chart above is alarming – it shows that paying rent would
become extremely problematic for many additional families on
Housing Benefit under a £23,000 cap. All three bedroom properties
would become instantly unaffordable under the proposal, and
many two bedroom properties would become unaffordable also
(two bedroom properties are discussed in more detail later). It is
important to note that this analysis is based on actual housing
association rents, not 80% of market rent, so this is a reflection of
what would happen under what is currently being charged.
Only one bedroom properties would continue to be affordable at
current rent levels; in most local authorities for a period of between
six to ten years.
Affordable Rent, two bedrooms - proposed £23,000 cap
The chart above demonstrates that the new frontline of the
affordability battle is with two bedroom properties – no longer just
larger homes. It shows that two bedroom Affordable Rent properties
become unaffordable within two years in all but six local authorities
where Moat operates. All of these would subsequently become
unaffordable within four years.
To ensure the continued affordability of two bedroom ‘Affordable’
Rent properties under the £23,000 cap proposal, housing
associations would need to begin depressing rent levels across
virtually all local authorities in the South East. It is unclear
whether the HCA would allow this given that it would have major
consequences on development programmes which would have to
be revised downwards to cover lost revenue.
Conclusions
•
The proposed £23,000 cap would have a significant impact
even on social rent, let alone Affordable Rent. The evidence
shows that in all of Moat’s areas of operation, three bedroom
social rented homes would no longer be affordable under the
£23,000 cap (from day one of the cap’s introduction).
•
Under the £23,000 proposal, two bedroom social rented
properties would catch up to the cap within four years in most
of Moat’s local authority areas.
•
As we already knew, the current £26,000 cap can still
be considered relatively affordable outside London under
Affordable Rent (especially for smaller properties), but urgently
needs to be indexed for inflation to continue to be affordable.
These new figures, which test the £26,000 cap against actual
rents being charged, reinforce this message.
•
The proposed £23,000 cap wipes out three bedroom
Affordable Rent homes across the South East, and two
bedroom Affordable Rent levels would be placed under severe
pressure. Only one bedroom properties would continue to be
affordable in the short-term.
•
We expect that lenders and investors will be significantly
spooked by the £23,000 cap proposal, as they begin to
assess the double whammy of housing associations’ difficulty
with collecting rents and escalating rents.
•
This comes at a time where there is a chronic imbalance of
supply of affordable housing relative to demand. It is therefore
critical that government carefully assess the impact of policy
which may drive supply down further, and plan for the
consequences appropriately.
•
The current £26,000 benefit cap does not present a substantial
risk to the affordability of social rent for one and two bedroom
properties in the short-term. It does, however, need to be
indexed for inflation within the next two years to ensure the
continued affordability of three bedroom properties.
•
Overall, it is alarming that all three bedroom properties
within Moat’s areas of operation would become instantly
unaffordable under the £23,000 cap – for both social rent
and Affordable Rent. We are also concerned by the speed at
which affordability would become a problem for two bedroom
properties. The tables show that if the £23,000 cap is
introduced, two bedroom properties for Affordable Rent would:
•
•
Become instantly unaffordable in eight local authorities
where Moat operates.
•
Become unaffordable in 83% of local authorities within
two years.
•
Become unaffordable in all areas within four years.
In relation to social rented two bedroom properties, the tables
show that the £23,000 cap would:
•
Make 80% of local authorities unaffordable within
four years.
•
Make all areas unaffordable within six years.
Notes and assumptions
Rent levels
• We have taken the average of all housing association
General Needs rents and Affordable Rent within Moat’s area
of operation, plus service charge levels, broken down by local
authority area. Only service charges eligible for Housing Benefit
were included.
•
•
As Affordable Rent figures are based on actual average
housing association data, there are some local authorities
where rent levels have been artificially depressed below 80%
of gross market rent levels. This is a key distinction with other
studies, which typically use the 80% figure regardless of what
is actually being charged.
We have assumed an inflation rate of 2% - the Bank of
England target rate.
Affordability
• To determine affordability according to bedroom size
Universal Credit calculations
• We have decided to test affordability based on Universal Credit
rather than on current benefits, on the assumption that it will
continue to be rolled out over the next 18 months. Therefore,
whenever the term ‘Housing Benefit’ is used, it may refer to the
‘housing element’ of Universal Credit.
•
For couples, we have assumed that both are over 18, with
£17.40 family element included.
•
We have assumed that all adult members of the household are
looking for work, and receive the maximum entitlement.
•
We have not assumed any disability-related benefit.
Council tax
• The source of the data on council tax levels is: DCLG, Council
Tax levels set by local authorities in England 2014 to 2015
(revised), Table 8: 2014 to 2015 area Council Tax for a dwelling
occupied by two adults by band, 23 July 2014.
and household composition, we have used the following
assumptions:
•
4
•
for one bedroom properties, we have assumed a couple
with one child;
•
for two bedroom properties, we have assumed a couple
with two children;
•
for three bedroom properties, we have assumed a couple
with three children.
•
We have used the total council tax payable by residents, by
local authority. We have then used the average total amount
of council tax payable for a Band D dwelling occupied by two
adults within a billing authority's area before any reductions
due to discounts, exemptions or council tax benefit (council
tax support from 2013). Band D statistics are regarded as
the benchmark when comparing council tax levels in different
areas or over time.4
•
As many local authorities have frozen council tax and are
limited to a maximum 2% increase year on year without
triggering a referendum, we have decided not to assume an
increase in council tax levels year on year.
Overall, we have tested the affordability for:
•
a single person with no children in a one bedroom
property;
•
•
•
•
a couple with no children in a one bedroom property;
•
a couple with three children in a three bedroom home.
a couple with one child in a one bedroom property;
a couple with two children in a two bedroom property;
a couple with no children, with a lodger. We have not
attempted to take this beyond the preliminary testing
stage as it is difficult to avoid loose assumptions about
whether the lodger is also receiving Universal Credit, and
is probably of little statistical merit. It is also likely that the
income from the lodger’s rent would cover any shortfall
caused by the benefit cap;
DCLG, Council Tax levels set by local authorities in England 2014 to 2015 (revised), 23 July 2014, p.13.
Council Tax Support element
• In April 2013, Council Tax Benefit [CTB] was replaced with
Council Tax Support [CTS]. CTB gave low income households
a discount on the amount of Council Tax payable, often
reduced to zero. The change marked a significant move from a
nationally devised system to one of 326 different local schemes
in England. Alongside this restructuring, the money provided by
central government to fund CTS was reduced by 10%. Each
local authority is now responsible for devising its own scheme
within the reduced budget, and are responsible for any shortfall
or surplus in the CTS budget. As a result, most local authorities
have adopted schemes where everybody pays something.5 We
have assumed maximum support, for both singles and couples
as required.
•
We have assumed no second adult rebate, as many councils
have removed this rebate.
•
We have assumed that the council’s ‘savings limit’ has not
been reached. Most LAs impose a limit of £16,000 in
personal savings.
•
We have used the National Policy Institute’s Council Tax
Support Scheme Characteristics in English LAs 2013-14 data
as the base of this work. But we have then introduced the
latest minimum council tax payment levels (2014-15), sourced
from each LA’s website where possible.
For further information please contact
Moat’s Public Affairs and Policy Manager,
Angelo Sommariva on
[email protected].
5
New Policy Institute, Council Tax Support Update.
About Moat
Moat is a housing association providing affordable homes in
thriving communities for people in the South East of England.
For over forty years we have delivered high quality general
needs homes for social rent, Affordable Rent, retirement and
independent living. We also have a strong low cost home
ownership offer, with an excellent track record of helping
people into homeownership. We are one of the HCA’s
development partners and currently develop over 500 new
homes per year.
For further information, please contact
Angelo Sommariva, Public Affairs and Policy Manager
0845 359 6866
[email protected]