Sunday, 31 October 2010

A thought on the Housing Benefit caps

Sometimes I read a "news" report and wonder whether I'm missing something. It's not uncommon for those who drink vast amounts to suffer forgetfulness and, over time, to lose their analytical powers. Perhaps I have reached that stage, but I don't think I have. I'm talking about the proposal to cap housing benefit and, in particular, about an article peddled by the BBC (here).

For the benefit of anyone who has missed the story or who is reading from beyond these shores I'd better lay the background. One welfare benefit payable in the UK is called Housing Benefit, it provides funds specifically to cover the cost of mortgage interest payments or rent. The proposal under discussion is that the amount payable towards rent should be capped. The cap will have four stages. Those renting a one-bedroomed property will be allowed no more than £250 a week, with up to £290 a week payable for a two-bed house or flat, £340 for three and £400 for four bedrooms (or more, or so I presume). These figures equate to annual rent of £13,000, £15,080, £17,680 and £20,800 respectively.

I am not the first to observe that these are large sums of money. To have £13,000 in your pocket after tax you have to earn something in the region of £18,000. On the assumption that someone renting for £13,000 also wishes to eat, water and clothe themselves at an additional cost of £100 a week, their annual pre-tax earnings would have to be in the region of £24,000. That is not far from annual average earnings. The payment of £20,800 in rent requires pre-tax earnings of around £27,000 before a single morsel of muesli has crossed the tenant's lips.

Housing benefit is paid out of taxes received by the Treasury. It is necessarily and inevitably the case that many employed taxpayers earn less than these sums and could not possibly pay that much in rent. Their taxes will be used to pay for other people to occupy homes they could not afford. It's an easy and, I think, lazy argument to say that the proposed caps are justified merely because many of those paying taxes could not afford even those sums in rent. That rather misses the point.

Someone who has been earning more than enough to pay rent of £13,000 or £20,800 a year might lose their job and be reliant on benefits until he or she finds another position. There is nothing essentially objectionable about them receiving benefits to help them keep their home until they find new work. If that work does not allow the payment of such a high rent they will have to move anyway but if it does they will resume paying the rent. In such a situation Housing Benefit provides a stop-gap relief pending the establishment of a new situation which, I would have thought, is what benefits are intended to do. That others have never been in the position to rent a property at such values is really neither here nor there. In this context Housing Benefit is akin to an insurance payment and those who rented at these figures necessarily earned more and paid more tax than those on lower incomes. Although Housing Benefit could be seen to come partly from those on lower incomes the reality is that those who previously paid their rent out of taxed income and claim the benefit while they are between jobs have already paid for it.

There is, of course, another group - those who have not had, do not have and have no reasonable prospect of ever having enough earned income to pay their rent and are habitually dependent on Housing Benefit. For this group the question "why should people with modest taxed incomes who cannot afford such rents pay so much towards their rent?" is more pertinent. Indeed it is hard to see any justification for such people to be subsidised out of tax to live in expensive areas. Harsh though it might sound in the modern world of holistic touchy-feely wibble, beggars can't be choosers. Or to put it less harshly, if you live on hand-outs you can have no complaint about the payer saying "sorry, we can only hand-out so much".

The BBC article I linked to above (this one) asserts that the majority of two-bedroomed properties in London will be too expensive for Housing Benefit claimants if a cap of £290 a week is introduced. This is where I wonder whether I'm losing my faculties. Landlords want the best return they can get but they know they have to pitch the rents they demand according to the ability of likely tenants to pay. Pitch it too high and there are no takers. More importantly, landlords know that the worst thing possible is what is known as a "void period" - a time when the property is empty and no one is paying rent. Say the desired rent is £300 a week, that is £15,600 a year. Four weeks without a tenant reduces the annual rent received to £14,400. If you have a tenant paying £300 a week through Housing Benefit and are told the benefit payable will be reduced to £290 a week, what would you do? Throw out the existing tenants - possibly incurring legal costs and risking a void period - or reduce the rent to £290 a week? No doubt some would choose the first course but reducing the rent would still bring in £15,080 a year, a tiny reduction accompanied by the certainty of payment.

Say your two-bedroomed property commands a rent of £500 a week rather than £300. It would have to be in a very smart part of town for that to be a true market rent. On being told your existing tenant will only pay £290 because he is on Housing Benefit and that is the limit, the question you have to ask is whether you will find a replacement tenant who will pay substantially more. In areas where £500 a week is a true market rent the answer is almost certainly that you will find a new tenant. It's tough luck on the existing tenant but you cannot avoid the fact that such a property is at the high end of the market and it cannot be justifiable for taxpayers to keep someone else there when they cannot pay the going rate and others could.

And that really is the point I want to make today. The Housing Benefit rent caps will only result in existing tenants having to move if others are willing to occupy the same properties and pay a higher rent out of post-tax income. That situation will prevail in some instances. There is no denying that existing tenants who are required to move will find it upsetting. Regrettable though that is, the caps are at high figures and there is only so much taxpayers should be required to pay towards the housing costs of others.

Lurking behind all of this is a state of affairs that arises whenever government subsidises anything. If the subsidy does not have a limit people will milk it for all they can. How many two-bedroomed flats for which Housing Benefit currently pays £350 a week would actually command that figure in the open market? Landlords of benefit claimants pitch the rent at the highest figure they think will be paid in Housing Benefit. The same rent might not be achieved from renters paying from earned post-tax income. If they thought they could get more from non-benefit claimants they would do so, indeed they would be mad not to do so. In real life they know there is nothing to be gained from pitching benefit claimers' rent below open market rent so it can only be the same or higher. I'll give you one guess which is the more likely.

But there's more. The Chief Executive of the political lobbying group Shelter is reported to have claimed that "tens of thousands of households could be forced from the centre" of London. Shelter started as a genuine charity finding practical solutions for the homeless. The mere fact that it has a Chief Executive means it has outgrown its charitable functon and has become a business. It is in the business of justifying its own existence in order to keep its Chief Executive and such other salaried staff as it might have in their comfortable positions, which means its first function is now lobbying. So let's look at his proposition.

Tens of thousands of households could be forced from central London, he opines. OK, let's assume that happens. How, in the real world, can it happen? The properties they occupied will still exist and the landlords of those properties will still want to have tenants. Chucking out a tenant is only a good idea if you get a replacement. A tenant who pays minimal rent and trashes the furniture but still provides a small overall profit is better than no tenant at all. It is a necessary part of the Chief Executive's argument that tens of thousands of potential tenants are currently prevented from renting because benefit claimants are hogging the properties. On what possible basis can it be right that those tens of thousands should be excluded when they are able and willing to pay but cannot do so because taxpayers (including the prospective tenants) are keeping others in those properties? It is not a one sided coin. Existing tenants will only be ousted if currently frustrated potential tenants are waiting to take their place and pay, from their own post-tax resources, for the privilege. Why is he not lobbying for these excluded unfortunates to realise their dream?

Will "tens of thousands of households" be displaced? Of course not. But even if they were, tens of thousands of other households will take their place and pay for something they desire and can afford but presently cannot attain.


Jim said...

Tens of thousands, possibly hundreds of thousands, maybe even millions, of people 'have' to move every year for all sorts of reasons. Divorce, relationship breakup, deaths, redundancy, reduced pay, new children, etc etc. Why should benefit claimants be any different? Why should they be able to live in the same property ad infinitum at the taxpayers expense?

You are totally correct too in your analysis of the level of rents. I suspect in 90+% of cases that this new rule will impact upon the landlord will decide to reduce the rent to the new limit. A few may take the chance to get rid of difficult tenants, but most will prefer the devil they know, than trying to find new tenants. As a landlord you also know that while a higher rent MAY be available from private payers, the benefit claimant will most likely stay put, whereas the private payer may move on if their job changes, or they find a better deal elsewhere.

The whole thing is a storm in a London teacup. It is indicative of the London-centric nature of the media that its getting such an airing. For the rest of the nation its entirely irrelevant.

Mark Wadsworth said...

Splendid stuff. Especially this:

"The Housing Benefit rent caps will only result in existing tenants having to move if others are willing to occupy the same properties and pay a higher rent out of post-tax income. That situation will prevail in some instances. There is no denying that existing tenants who are required to move will find it upsetting."

If you think laterally, that is much the same as saying this:

"Land Value Tax will only result in existing occupiers having to move if others are willing to occupy the same properties and pay the tax out of gross income (income tax having been abolished). That situation will prevail in some instances. There is no denying that existing occupiers who are required to move will find it upsetting."

james c said...


The rules are that HB will pay the average rent for a property.This is usually not very generous (apart from the headline cases of immigrants in 7 bedroom houses) and certainly not above market levels.

Thus, it does not seem likely that landlords will slash their rents by very much.

The other issue, which you have not touched upon, is the obligation councils have to house the homeless. This is why HB is a problem in central London.

DWMF said...

I suggest you watch the report by Joshua Sweeney on Panorama. It should be on the BBC iPlayer.