How renters will pay to keep mortgages low

One of the first things that any child learns is that 1+1 = 2. Not any more it seems. In the world of austerity 1+1 = 0.5.

That was the thought that struck me after reading work and pensions minister Steve Webb sum up for the government in the committee stage of the Welfare Benefits Uprating Bill this week. Thanks to his widely applauded work on pensions reform, Webb would come close to the top of many people’s lists of effective coalition ministers and he also knows his brief better than most people in Westminster. Yet for me he has always tried too hard to defend the latest piece of indefensible welfare ‘reform’.

And that’s exactly what happened on Monday as the Uprating Bill was rushed through its committee and third reading stages with debate severely limited and time to consider just one amendment.

The Bill will limit increases in most working age benefits to just 1 per cent in 2014/15 and 2015/16 but separate regulations mean it will apply for 2013/14 too. As I blogged two weeks ago, the limit will also apply to the local housing allowance (LHA) and is effectively a cut within a cut within a cut.

A move by Labour to remove the reference to 1 per cent from the Bill was predictably defeated despite some support from Lib Dem backbenchers. However, there was not even time to put two other amendments, including one from the Lib Dem rebels that would have uprated benefits in line with earnings instead, to a vote.

So why the haste – and why the Bill? As many MPs (and peers in a debate in the Lords last week) have pointed out, benefits could simply be uprated each year as normal. Setting it out so far in advance is widely seen as a political device by George Osborne to put Labour on the spot but nobody knows what will happen to inflation (and rents) in the meantime and therefore how big the real terms cut in benefits will be.

Not so, according to Steve Webb:

‘A number of my hon. Friends asked perfectly reasonably about why we needed to set out in legislation exactly where we were going. We all want our constituents to continue to enjoy, for example, the low mortgage rates that are absolutely crucial to their standard of living. We all know that for those of our constituents in the position of owning their own homes, the mortgage is their biggest single outgoing by a long way. It is vital, therefore, that we keep interest rates under control.’

It’s an answer that goes to the heart of the coalition narrative that says it was forced to act to tackle the deficit that it inherited and that cuts now are better – and fairer – than the alternative of a Greek-style borrowing crisis later. It’s routine rhetoric that can be challenged on any number of levels but the particular way that he formulated the coalition case is revealing. The implication is that, along with all the other working-age benefits, increases in the LHA for tenants have to be restricted to 1 per cent regardless of how much rents actually increase so that home owners can continue to enjoy record low mortgage payments based on the Bank of England’s 0.5 per cent base rate. In effect, given the continuing boom in buy to let, tenants on LHA will have to make up a bigger and bigger shortfall from their other benefits so that their landlords can continue to pay less for their mortgage.

Substantial savings

This continues an existing trend. I’ve blogged many times before about the issue of fairness between home owners and tenants in the wake of the credit crunch. Those low mortgage payments have not just cut costs for owners and landlords but also played a major role in preventing repossessions and landlord bankruptcies and a steeper decline in house prices – while rents have continued to soar. The Uprating Bill is part of the same process.

Combine record low interest rates with the slight fall in house prices since the 2007 peak and anyone with a mortgage has made substantial savings as a result. According to figures from the Halifax last week, mortgage payments fell from 48 per cent of disposable income in Q3 2007 to just 28 per cent in Q4 2012. That is also 8 percentage points below the average of 36 per cent seen over the last 30 years. The bank says that the average take home pay in the UK is £2,062. The average monthly mortgage payment is now £580 so that implies a saving of £410 a month on 2007 levels.

Buy to let – pronounced ‘absolutely dead’ by one of its pioneers in 2010 – has instead continued to grow and grow as landlords have seen their mortgage costs fall and the risk of repossession recede. Figures from the Council of Mortgage Lenders shows that it is up by more than 50 per cent since the credit crunch began in August 2007, by 23 per cent since the Bank of England cut interest rates to 0.5 per cent in March 2009 and by 13 per cent since the last election.

Yet despite those lower costs and risks rents have continued to rise, partly because of increased demand from would-be buyers who cannot get a mortgage. According to LSL’s buy to let index last week, the average private rent in December 2012 was £734 a month, up 3.2 per cent on a year ago and 11.2 per cent since December 2009 .

The latest housing benefit statistics from the DWP show that the average local housing allowance award rose from £107.12 a week in November 2008 to £115.13 in April 2011. However, that was the month that the government started to implement a range of cuts, including bedroom caps, the 30th percentile and the extension of the shared accommodation rate, and the average award had fallen back to £107.30 by August 2012, the latest month for which figures are available. Ministers will doubtless see that as evidence that their reforms are working. However, the figures only record awards, not actual rents, so they do not record the rising shortfalls that tenants are having to find out of their other benefits or the number of tenants who have been forced to move as a result.

When the Bank of England cut interest rates to that record low 0.5 per cent in 2009, it was widely seen as a desperate temporary measure to stop a collapse in the housing market sparking even worse problems in the wider economy. Four years later many economists are now speculating that rates will stay at 0.5 per cent until 2017 at least. Meanwhile other government schemes like Funding for Lending are driving mortgage rates even lower and existing owners with big deposits are reaping the biggest benefits.

For tenants on the local housing allowance, the one ray of hope is that the government has pledged to use 30 per cent of the savings from 1 per cent uprating (£140 million over two years) to exempt rate in areas where rent increases are highest. However, there is no more detail yet of how and where this will apply. In answers to written questions, Steve Webb has said that: ‘Our intention is that this funding will be used to increase the local housing allowance rates in areas where rent increases are causing a shortage of affordable accommodation. We do not know yet which areas will see the largest problems with affordability but will consider the available evidence, including rental data collected by the rent officer to decide how it is targeted.’

Cut within a cut

However, housing organisations were already warning of a disastrous impact from CPI uprating as more and more areas become unaffordable on LHA rates over time. Shelter pointed out that private rents rose by 70 per cent in the 10 years to 2007 while the CPI only rose by 20 per cent. Analysis by Shelter and the CIH estimated that large parts of the country would become unaffordable and that tenants who could not move to a cheaper home would gradually have to make up the rent out of their other income. The cut within a cut to 1 per cent just accelerates that process and at the same time reduces the other income they will have available.

None of that matters of course beside the key coalition aim of bringing down the deficit – even though the flatlining economy means that the benefits bill continues to rise. The Autumn Statement measures only deliver about £6 billion of the £10 billion savings the coalition wants by 2015/16 and the Cabinet was discussing further cuts this week. ‘If we do not commit now to firm targets on where we are going, the OBR will not sign them off, they will not appear in our spending plans and the market will not believe us,’ said Steve Webb on Monday, using the kind of abstraction favoured by politicians who like to make out that decisions have been forced on them. ‘If the market does not believe us, interest rates will go up as will the mortgages of our constituents who will have less spending power— where?— in the local economy, which is exactly where everybody has said they want to see demand.’

So ‘the market’ dictates that the benefits of tenants have to be cut so that mortgage rates can stay low and the spending power of home owners and their landlords is not cut. Howewer, tenants have spending power too and it will be cut as a direct result of the Bill: the Human Cities Institute calculates that £3.5 billion of purchasing power will be lost to social housing communities over the next three years.

In a debate that is meant to be all about ‘fairness’ – whether it’s the charged language of strivers and shirkers or the argument that benefits should be uprated by 1 per cent because that is the limit for public sector pay – what about equity between owners, landlords and tenants?

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2 Comments on “How renters will pay to keep mortgages low”

  1. Rahul says:

    Is the issue with your analysis that you accept the govts assumption that a reduction in govt spending generates a fall in interest rates? This has been comprehensively dis-proven by people like Jonathan Portes. Without your accepting the assumption the causal link between lowered HB and lowered mortgage payments doesn’t work, I think.

  2. julesbirch says:

    Thanks Rahul – I agree and wouldn’t accept that assumption at all, although rates can’t really fall much more than they already have. I think the point is that ministers believe that public spending has to be cut to keep rates (and mortgages) low and that in turn triggers the cuts in benefits – so the logic of austerity is that renters should pay more so owners and landlords can pay less.


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