Lining their pockets

Originally posted on August 24 on Inside Edge 2, my blog for Inside Housing

Something about the rash of stories this week about ‘private landlord subsidy’ left me feeling very uneasy.

The stories were based on a briefing from the National Housing Federation (NHF) on how the amount of housing benefit that goes to private tenants has doubled in the last decade. As reported in the Daily Mail and elsewhere that means ‘Private landlords rake in £9bn a year from Housing Benefit’.

The figures were mostly familiar ones about the big increases seen since the financial crisis in the total bill, the number of claimants and the number of private tenants who are in work and also on housing benefit.

David Orr argued:

‘It is madness to spend £9bn of taxpayers’ money lining the pockets of private landlords rather than investing in affordable homes.’

He’s right, it is madness. Yes, private landlords do get £9.3bn in housing benefit. Yes, the bill has doubled since 2008.

And no, they don’t use it directly to build new homes. However, as Sky News reported, some landlords are converting houses into tiny flats to maximise their income. And the finances of many new developments of apartments rely on off-plan investors like buy-to-let landlords.

Far better, as the NHF argues, to invest in social housing with lower rents. It calculates that if the housing benefit bill would be £2.2bn lower if all the private tenants claiming it were in social homes.

On top of that, buy to let enriches older ‘investor’ landlords at the expense of young would-be home buyers. And, far from investing in new affordable homes to rent, we pay housing benefit instead on former social housing bought under the right to buy and now re-let at much higher rents.

So you won’t find much sympathy for buy-to-let landlords here but the coverage still left me feeling uneasy.

First, the private/social split is not as black and white as it appears. The ‘madness’ message seems to be in part an attempt to persuade the government to change a spending review settlement that included no new homes for sub-market rent and a rent cut that will damage housing association finances.

However, many NHF members have market rent schemes and some of their tenants will get housing benefit. Most are building for affordable rather than social rent and many are busily converting existing social homes to higher rents when they come up for re-let.

And the NHF has signed a deal to implement the right to buy on a voluntary basis knowing that associations will be compensated by the forced sale of the best council homes as they fall vacant.

You can criticise associations for this or accept that they are doing their best in a hostile funding environment but the net result will be less social housing and more spending on housing benefit to cover higher rents. The CIH currently estimates that the right to buy and other policies will result in the loss of 370,000 social rented homes by 2020.

Second, if you look at the numbers in more detail, that ‘doubled in the last decade’ line is accurate but misleading. The housing benefit bill for private tenants did rise from £4.6bn to £9.3bn between 2005/06 and 2014/15. However, as this graph from the NHF report illustrates, almost all of the increase happened before 2011/12:

Part of the fall in real terms seen since then is down to a fall in the caseload but the main reason is that ‘landlord subsidy’ has already been cut many times. In virtually every Budget since 2010, chancellors have cut housing benefit across all sectors but the private rented sector has been a particular target.

The combined effect is that the average local housing allowance (LHA) claim (£110.44 in May 2016) is now £3.22 lower than at the time of the 2010 general election. One result, says Richard Lambert of the National Landlords Association, is that the proportion of private landlords who let to tenants on housing benefit has halved over the last five years.

Over the same period, the average claim for a housing association tenant rose 22% from £77.30 to £93.96 because housing benefit covered guaranteed above-inflation rent increases. That was of course before the 1% a year rent cut was imposed from April (reflected in the dotted line for future years in the graph).

However, the squeeze in the private rented sector is set to get even tighter thanks to the four-year freeze in LHA and other benefits that also began in April. The consequences are illustrated in a story in The Guardian this morning trailing a report from the Fabian Society that private tenants could face huge shortfalls by 2020.

The shortfall between private rent and housing benefit on a two-bed home in a mid-range housing market will rise from £35 a month now to £108 a month in 2020, say the Fabians, and £283 by 2030 if the freeze continues. Assuming the same 2.5% a year increase in rents, in a more expensive area the shortfall will rise from £68 a month to £187 by 2020 and £475 by 2030.

The report does not cover this but families in larger homes will face much bigger shortfalls thanks to the imminent cut in the overall benefit cap on top of the benefit freeze.

Andrew Harrop, Fabian Society general secretary, says:

‘For the next few years, as the housing benefit shortfall grows, people are likely to make ends meet by giving up on other essentials or by trading down into overcrowded, unfit housing. But sooner or later, something will have to give.

‘After 2020, either housing benefit for private tenants must be made significantly more generous, or large numbers of people will become homeless.’

The NHF is quite right to highlight the madness of spending billions on housing benefit in the private rented sector when we should be building social housing instead.

However, moving from one to the other will take time and will cost money. You can’t simply turn off one tap and turn on the other. Headlines about landlords ‘raking in’ and ‘pocketing’ the money help to create a mood music that drowns out the message about the dangers to tenants.

Complain too loudly about ‘landlord subsidy’ and the result will be even bigger rent shortfalls.