Public Accounts CommitteeWritten evidence from L&Q

Introduction

This submission is being made to raise a concern that government housing policy and benefits policy is at odds leading to rents to rise which will increase the benefit bill.

Context

The government has committed to saving £18 billion from the welfare bill by 2014–15 (£1.9 billion of which will come from housing benefit) and prevent the £23 billion spent on housing benefit from rising further. This will require careful management of both the number and value of housing benefit claims. To achieve this, the DWP has developed a package of welfare reforms which cut, cap and squeeze benefit entitlement, in particular housing benefit.

When set against the chronic shortage of affordable homes, however, the government’s identified benefit savings appear increasingly unachievable as high demand pushes up private rents and social landlords rely on rents of up to 80% of market rent to fund development.

The recent National Housing Federation report, Home Truths 2012, sets out the scale of the housing shortage. Last year, although 111,250 new homes were built, 390,000 new households were formed. With home ownership beyond the reach of many, and the cost of renting privately rising by 37% over the past five years, it is unsurprising that one in 12 families is now on a social housing waiting list and homelessness is 26% higher than two years ago.

In just three years, this pressure has resulted in an 86% increase in working people claiming housing benefit.1 The solution is to build more affordable homes and social landlords have two main tools to achieve this; the blended capital/revenue subsidy through the Affordable Homes Programme and borrowing/funding from alternative sources, though each is not without problems. If capital investment in new social homes is to remain low, with the affordable rent regime in its place, the £23 billion housing benefit bill will continue to rise as residents rely more heavily on housing benefit to cover their housing costs. Yet our ability to utilise other sources of funding for development is comprised by welfare reform changes. Direct payment, the size criteria and benefit cap will all contribute increased arrears, transactions costs and bad debt, thereby weakening our financial stability and reducing lender confidence.

These tensions in housing and welfare policy are becoming more evident. The following sections seek to provide specific evidence to support our case that the policy of DWP and DCLG need to be realigned.

The Affordable Homes Programme

The Affordable Homes Programme Framework2 recognises the need for more affordable housing; it argues the system of capital grant funding is unsustainable in the current climate and unable to deliver the homes we need. Through the new delivery model, social landlords can use a combination of Homes and Communities Agency (HCA) funding and existing assets to deliver new supply. The key to this delivery model is the affordable rent product, which allows landlords to charge up to a maximum 80% of market rent for both new homes and conversions. Affordable rent homes will be allocated in the same way as target rent social housing; where tenants are eligible for Housing Benefit it will continue to be paid in full in the same way as for social rented properties.

Affordable Homes at L&Q

Under the Affordable Homes Framework Delivery Agreement (FDA) signed with the HCA L&Q secured some £35.8 million of funding to support the delivery of 1,800 new rental and low cost home ownership units. The conversion of approximately 2,184 0–2 bedroom properties will generate a further £89 million of additional revenue to meet the commitments we have made under this agreement.

Between April and mid-September we converted a total of 486 tenancies, with the average affordable rent we are charging currently at 70% of the local market rent overall. Our initial research shows there to be little difference between the household characteristics of those moving into homes affordable or target rent homes. However, in terms of the economic profile, those moving into affordable rent homes have lower incomes, are less likely to be in work and have higher welfare benefit dependency than those paying a target rent. Around 82% claim housing benefit, compared to 75% of those moving into target rent homes and more of those nominated by local authorities for affordable rent are economically inactive, a feature reported by other registered providers across London.

The cost of affordable rent

The discrepancy between housing benefit payments for residents in target and affordable rent homes is significant. The below tables set out the difference in housing benefit entitlement for a single person (over 25) living in a one bedroom flat in Hackney, a borough with relatively high rents.3

NO INCOME

Rent type

Income £

Rent £

HB
entitlement £

Resident
contribution £

Target rent

0

88.48

88.48

0

Affordable rent

0

165.67

165.67

0

LOW INCOME

Rent type

Income £

Rent £

HB
entitlement £

Resident
contribution £

Target rent

210

88.48

0

88.48

Affordable rent

210

165.67

75.32

90.35

MEDIUM INCOME

Rent type

Income £

Rent £

HB
entitlement £

Resident
contribution £

Target rent

326

88.48

0

88.48

Affordable rent

326

165.67

0

165.67

As illustrated in the above tables, affordable rent increases the housing benefit entitlement for residents on full housing benefit (no income). It can also result in residents who have previously been able to cover all their rent (as shown in the low income example) being reliant on partial housing benefit to meet their housing costs. This may in part, explain why residents moving into affordable rent properties are more likely to be in receipt of housing benefit. These tables also highlight potential disincentives to work for residents on partial housing benefit. A resident moving from low income to medium income would contribute an additional £75.32 to their rent, out of an additional £116 income, and amount equivalent to almost 70%.

When this picture is considered across L&Q, the results demonstrate the full cost of the revenue subsidy. Assuming no change in income, residents who require full or partial housing benefit to cover the cost of their rent will have any additional cost from target to affordable rent met by housing benefit.

The average difference in red between target and affordable rent properties by bedsize is shown in the table below.

Bedsize

Average rent
difference £

Number of
AR
conversions

Number of
AR new
builds

Total AR
homes

Additional
annual rent
costs £

1

32.15

1,026

214

1,240

2,407,392

2

44.31

1,158

414

1572

3,640,510

3

60.03

0

422

422

443,261

4

94.97

0

142

142

19,754

5

94.97

0

4

4

0

Totals

2,184

1,196

3,380

6,510,917

The additional rental income from 3,380 properties (made up of 2,184 conversions and 1,196 new homes) let at affordable rent over target rent is £6.5 million annually. Assuming 75% of this cost is met through housing benefit, this equates to an annual increase in housing benefit of £4.9m. These figures are conservative estimates which do not take account of any higher levels of benefit dependency on affordable rent. It should also be noted that L&Q are currently operating on an average of 64% of market rent in Hackney, and an average of 60% of market rent across our stock. These figures would increase further if L&Q were to set affordable rents at up to 80% of market rent as is permitted.

The falling off of new housing supply combined with the increase in rents in both the private rented sector and the affordable rent regime generates pressure on the housing benefit budget, bringing more households into dependence on it, including those in work. This will only continue and will lead to the savings indentified by DWP being missed. This conflict in government policy needs addressing.

7 December 2012

1 Home Truths 2012, National Housing Federation

2 2011–15 Affordable Homes Programme Framework February 2011

3 Figures are based on average target rent and affordable rent for a one bedroom property Hackney (2012).

Prepared 25th March 2013