Affordable Rent Programme An Analysis for the East London Partnership

Transcription

1 Affordable Rent Programme An Analysis for the East London Partnership Stage 1 Hackney 1

2 CONTENTS 1 Background Timeline Analyses of Existing Markets Tenure Average House Prices Housing Need Housing Benefit Claimants Rental Analyses Rental Definitions Rental Areas BRMAs & postcodes BRMAs, Median & 30 th Percentile Variations Historic LHA Levels Rental Comparisons (market, sub market & social rents) Income & Benefits Analyses Household Benefits Cap Income Analyses Income Levels Affordability Analyses Percentage of Income spent on housing by household size and unit type Income Distribution Rental Recommendations Benefit Analysis Affordability Revisited Methodology

3 6.2 Analysis Mortgage Comparisons Future Predictions for the Rental Market Appendices Appendix A Average Property Prices and Rents Appendix B Methodology Statements for Benefits Tables Appendix C Income Tables Appendix D LHA Historical data Appendix E McClements Scale Appendix F Income Distribution Data

4 1 Background 1.1 Timeline The timeline for the introduction of changes to the rents and benefits system is shown below. It should be noted that large scale benefit reforms have frequently been delayed in the past and the programme may be subject to slippage. February 2011 HCA issued Affordable Housing Development Framework prospectus for May 2011 First round HCA funding bids submitted April 2011 Affordable Rented model adopted. Up to 80% of Market Rent can be chargeable on all new affordable provision, and on fixed term tenancies. April 2011 across the board "30th percentile" cut to all LHA rates for new claimants 1 April 2011 LHA nationwide caps introduced for new claimants: o 1 bed 250 o 2 bed 290 o 3 bed 340 o 4 bed 400 January 2012 Existing claimants become subject to lower and capped LHA rates April 2013 new benefits claimants will be subject to Universal Credit April 2013 Total benefits cap introduced o 500 pw for couples and lone parents o 350 pw for single adults 1.2 Analyses of Existing Markets This section is intended to give some overall context in terms of the differing stock and housing need across the 7 Boroughs. For this exercise we have utilised the research already commissioned within the Strategic Housing Market Assessment 2010 and undertaken by Opinion Research Services. We feel that the extracts below are particularly relevant to this commission and the findings, particularly the stage 2 conclusions and recommendations. 1 Existing claimants will be exempt from the effects of the caps and lowered LHA rates for "up to nine months" from the date of the annual review of their claim 4

5 1.2.1 Tenure Currently, the proportion of total stock that is social rented housing in each Borough increases in the Inner London Boroughs. Just less than 80% of the housing stock in Havering and Redbridge is owner occupied. In Hackney and Tower Hamlets just less than 30% is owner occupied with private renting at 30% and social renting toward 50% of the stock. Redbridge has the lowest proportion of social rented housing at 10%. Fig. 1 5

6 1.2.2 Average House Prices The following chart shows how average house prices have changed since Discarding the inclusion of the City of London, it is interesting to see that Hackney and Tower Hamlets have currently moved slightly ahead of the other Boroughs post credit crunch in terms of value. Commentators have suggested that the Premium London Housing market is the leading edge of the recovery in the national housing market. Fig Housing Need The SHMA details Housing Need within Section 6 in a great deal of detail. Some of this analysis is of real interest when considering the issues of the benefits cap and difficulties in particular with the delivery of larger family units. The research is based on London Council s Housing Needs Index 2007/8. The following chart gives the overall context of need between the Boroughs. Some of the components that make up the HNI include under occupation, overcrowding, adverse stock condition, and private sector households receiving housing benefit. There is more detail on this at of the SHMA. 6

7 . Fig. 3 The following chart shows the need for affordable housing allocated across each Borough based on its HNI. Newham and Tower Hamlets have seen the highest rates of growth in the sub region and are therefore assumed within the research as being the areas which will see the most growth in the future. The apparent surpluses seen in market housing in Barking and Dagenham and Hackney indicate that the size of the affordable housing requirement based on the HNI exceeds the growth in all households. There is more detail on this point in section of the SHMA. Please note that this table uses a slightly adjusted HNI, removing one of the parameters that doesn t directly relate to housing. Therefore the table is more directly related to housing need. 7

8 Fig. 4 These figures are then split between tenure and unit size on the following chart. 8

9 Fig. 5 The high proportion of one bedroom dwellings required (particularly evident in Newham) is due to the large number of older single person households either in housing need and / or wishing to downsize together with the demographic trend of growth for single person households and childless couples. 9

10 1.2.4 Housing Benefit Claimants The following chart shows the increase in housing benefit claimants in each of the Boroughs since Highest growth can be seen in the outer Boroughs Waltham Forest and Redbridge. This could mean that these areas have more capacity within the private rented stock to house benefit claimants. Fig. 6 10

11 2 Rental Analyses 2.1 Rental Definitions The capital funding guide currently states at 4.1 of the intermediate rent section that The HCA Framework document makes reference to affordable rent valuation methodology in section 3.4. It is clear that the valuation should be built on the definitions contained within the RICS redbook and undertaken by an RICS accredited valuer. For such accredited valuers, the Market Rent(s) will be provided in accordance with the Royal Institution of Chartered Surveyors Appraisal and Valuation Standards ( the Standards ), effective date 01/08 incorporating any subsequent revisions in effect as at the date of the Valuation. The definition of Market Rent is: The estimated amount for which a property or space within a property should lease (let) on the date of valuation between a willing lessor and a willing lessee on appropriate lease terms in an arm's length transaction after proper marketing wherein the parties had acted knowledgeably, prudently and without compulsion. 2.2 Rental Areas BRMAs & postcodes The Local Housing Allowances (LHAs) are the maximum level of housing benefit that a household can claim based on the size of property they need and occupy. The LHA is more commonly known as the housing benefit ceiling. The seven Local Authorities in the East London Sub region fall within 5 BRMAs with some local authorities sitting entirely within a single BRMA and others sitting across 3 very different BRMAs Central London Inner East London Inner North London Outer East London Outer North East London 11

12 The table below shows the postcodes that are to be analysed. Some of these sit across multiple BRMAs and therefore when comparing market rents to LHA by postcode, we will assign a single BRMA to each postcode to keep the report concise. Fig. 7 A further analysis which looks at the interplay between BRMAs within a postcode area can be done on request. Where LHA comparisons are made, we were required to use one BRMA as we can see above, sometimes a number of BRMAs fall within the same postcode. As such, we undertook a mapping exercise to ascertain the most appropriate BRMA to use in all cases one of the BRMAs covered a much larger area than the other(s). These are marked in red on the above table. The source data showing average market rents and property prices for each postcode area is attached in appendix A What is clear from the postcode level data is that there is a large variation in rents and property prices between the postcodes within each Borough as shown in the graphs below. 12

13 Fig. 8 Fig. 9 13

14 2.3 BRMAs, Median & 30 th Percentile Variations The table below shows the current BRMAs that each Local Authority sits within. It also shows the current LHA rates as of January 2011, the current LHA rates at the 30 th percentile and the current LHA rates at the 30 th percentile, but subject to the National Cap. From April 2011, LHA rates will be calculated at the 30 th percentile, meaning that this becomes the top limit for housing benefit supportable rents. There is some ambiguity with regard to RSLs adherence to this which will be re visited in the affordability section and Stage 2. Fig. 10 This information comes from the Valuation Office Agency (VOA) 14

15 On the following tables we have plotted and overlaid the LHA 30 th percentile against 80% market rent. This is quite a key set of charts that we will refer back to. We can see that there are certain instances where the blue line, 80% market rent, peaks over the red line signifying the capped LHA 30 th percentile levels. These are areas where Housing Benefit would not cover the rent (if residents are subject to normal LHA rules), and therefore could be seen as potentially problematic in affordability terms. We can see a slightly different pattern across each unit size 1 bed to 4 bed, although there are instances of 80% market rent breaching LHA levels in each type. We will refer back to this LHA cap in the affordability section. LHA 30 th Percentile to 80% Market Rent A Comparison by Unit Size Fig

16 2.4 Historic LHA Levels There is historic LHA data dating back to April 2008 for five of our BRMA areas. Unfortunately, the VOA do not have historic data for the Inner North BRMA. The graphs below show the historic LHA levels for the five areas over 3 years. The raw data for these charts is shown in appendix F. They are fairly constant and it is clear from the graphs that there has not been a steady increase in LHA over the last 3 years which is something that investors and funders would no doubt like to see. Fig

17 2.5 Rental Comparisons (market, sub market & social rents) The level of differences between social rents and market rents varies by borough across the sub region. The social rents across the 7 Local Authorities are all broadly the same. They do change between boroughs, but not significantly. The difference across the sub region between the cheapest RSL rent and the most expensive for a 1 bed flat is only 13% and for a 4 bed the difference is only 11%. Therefore, existing social rents are far removed from open market forces. The two graphs below show how constant social rents are in each LA (the blue line) and how varied market rents are (the red line). The difference between the cheapest and most expensive market rent is 89% for 1 beds and 83% for 4 beds. Hackney and Tower Hamlets have the highest market rents and as we will see later, these boroughs both have slightly lower incomes. This would imply that people in those boroughs spend a higher proportion of their incomes on housing costs, perhaps partly as they may spend less on travel. Fig. 13 The graphs below display the existing social rents in LA stock and RSL stock as well as various percentages of market rent by borough. They clearly show the high increase in rents in Tower Hamlets (orange) and Hackney (red) relative to the other boroughs. 17

18 Fig. 14 Given benefits will not vary by borough 2 and that income levels are lower in Hackney and Tower Hamlets, it is clear that in those boroughs, rents may need to be set at a lower proportion of market rents if affordability is to be properly taken into consideration. There will be more on this later. The following table shows all of the rent levels that we have researched, averaged by Borough. In terms of market rents levels, we looked at current market comparables with estate agents at the time of the research. i.e. this is a snap shot of the market at a particular time late January This is not collated and verified data from a secondary source, but comparables researched on day 1 of the project, in much the same way that valuers would use current comparables for land valuations. Research was undertaken in the three Borough postcodes, and then averaged to reach a Boroughwide level. Accuracy could be improved by looking at more areas within a Borough, preferably all postcodes. However, for this time limited exercise each Borough chose three appropriate postcodes to give an indicative spread. The highlighted figures show where rents breach the LHA limits. 2 With the exception of Council Tax Benefit, household benefits will not differ by borough although the Housing Benefit element will be led by the rent 18

19 Fig

20 3 Income & Benefits Analyses 3.1 Household Benefits Cap The introduction of a household benefits cap of 500 for couples with or without children was formally announced in the Comprehensive Spending Review (CSR). The relevant extract from the CSR (page 69) is shown below. Fig. 16 The introduction of a limit to welfare benefits to 500 per week/per household irrespective of family size has important implications on the ability of some average families to obtain the required levels of Housing Benefit to pay rent. The Welfare Reform White Paper of 2010 expanded on the CSR statement above by detailing how the Universal Credit would work. The White Paper stated on page 23 (extract below) that all benefits in the Universal Credit when combined with child benefit and JSA/ESA would not be able to exceed the maximum amount of household benefit which was previously announced as being capped at 500 per week. Fig. 17 As we will explain in the next section, it is clear that there will be insufficient benefits for larger families affected by the cap to pay the required rent levels. The extract below from the Treasury as published on 4 October 2010 states that it will be down to Local Authorities to reduce Housing Benefit to ensure that households do not receive more benefit than the 500 cap. 20

21 It is unclear at this stage whether council tax benefit will be included within the household benefit cap. The only formal announcement we could find from the same Treasury announcement above stated that council tax benefit will be included within the household cap of 500. If this is the case, the money left for rent will vary by Local Authority due to the different way Local Authorities both set Council Tax and apply Council Tax benefits. Fig. 18 For our calculations below, we are assuming that council tax benefit is outside the cap as the Welfare Reform White Paper did not state it was included within the cap. The omission of the council tax benefit from the cap results in the money left for rent for each family size being the same across all Local Authorities as National Benefits are set irrespective of location. The impact of the household benefit cap and the Universal Credit will be explored further on in the report. 21

22 4 Income Analyses 4.1 Income Levels The ability of households to pay rent when there is a person working will vary dependent on the income level of the household. In addition, for the same level of household earned income, the affordability of various rent levels will vary dependent on the makeup of the household since the various child benefits/tax credits change based on how many children there are in a household and what ages those children are. There are many different income source tables available of differing levels of detail and reliability. We have used two of the main publically available income source tables which are the NSO and the GLA/Paycheck tables. The NSO source data below uses median gross income levels as detailed in the table below. Fig. 19 The source data is from 2008 and there has been wage inflation of approximately 2% PA since the data was gathered according to data from the National Statistics Office. However, for the purpose of the exercise we have used the base figures in Table 3.14 above as we are unsure whether the wage inflation applies evenly to our sub region and also due to the fact that wage increases could well be reversed due to spending cuts. The data highlighted yellow from the NSO has been used for the income tables in our benefits analysis as they provide us with taxable earned income through the PAYE system by borough which 22

23 then allows us to calculate tax credits for various family sizes, etc. From this we have attempted to show the ability of different household sizes to pay a set level of rents. The GLA income data for the Sub Region is shown below. This is different to the NSO data as it shows average Gross Household Income rather than individual incomes. The data is also adjusted for average family size (equivalised) by borough to give us an average income per borough taking into account family sizes in that borough. Equivalisation attempts to equate standard of living to income by family size e.g. a childless couple on 20,000 gross income will have more disposable income than a couple on the same income with 4 children and the related costs that this brings. Therefore, with equivalised data, the childless couple s income is worth more as their standard of living is higher. A discount rate (the McClements Scale) is applied to calculate the equivalised figures, with a discount per child, becoming larger as the child gets older (and costs more). Therefore, we can see that Boroughs with a larger gap between the equivalised and unequivalised data are Boroughs that have a larger amount of families. If the equivalised data was higher than the unequivalised, then that borough would have a large amount of single occupiers. This is not the case for any of the Boroughs in the East London Partnership. The incomes in the table are obviously higher than the individual employment income levels as they take into account other income such as benefits, and the fact that there may be two earners in a household. The full London data set is included as appendix C Fig. 20 Using the equivalised income level above, it should be noted that every Borough in the East London Sub Region has a household income level below the London average. In addition, Barking & Dagenham and Newham have household incomes that are below the national average. 23

24 4.2 Affordability Analyses There are many ways to calculate and measure affordable rent levels. Deciding what level of rent is affordable is a complex undertaking as there are many varying factors such as family size, distribution of income across household members, various tax codes and tax credits as well as regional variations in the non housing based cost of living such as transport cost. The National Housing Federation defines affordable rent levels as those below 25 percent of household income for new tenant households in work. In 2007, the Department of Communities and Local Government adopted the same definition for council tenants. For our main analysis, we will assume that 1/3 of gross income is the maximum that can be spent on housing costs if housing is to be affordable. We are using this single figure in part to keep the report relatively concise. The 1/3 of income rule has been used widely in the past by funders to determine sustainable affordable mortgage payments. Private landlords often use specialist organisations called Tenant Referencing Agencies to vet potential new tenants before they let their property. One of the main services these referencing agencies provide is an affordability check to ensure that the rents are affordable. Given that the private sector s affordability limits are based on experience and historic levels of rent defaults based on commercial principles, we are relatively safe to assume that the rent to income ratio that they require for a particular rent is the maximum affordable ratio if the tenant is to continue to pay the rent. The standard level of gross rent to income acceptable to private landlords is 40%. We found one agency that went up to 43% and some that were 33%. Based on these findings, we are safe to say that if annual rents are more than 40% of gross annual salary, then it is likely that the tenants could not afford to pay the rent on a long term basis based on the experience of private landlords. If the private sector will not commercially take a risk above a 40% affordability figure, then we should be aiming for comfortably below this level. We will be using 1/3 of gross income or 33% in our modelling. 4.3 Percentage of Income spent on housing by household size and unit type. The top table below show the median annual gross income level in each borough and the full market rent for each unit type across the postcodes within each borough that we analysed. The second table then shows the money spent on rent for each type as a percentage of gross household income. What is immediately apparent is that full market rents for 3 & 4 bed households are completely unaffordable for those on average incomes. 24

25 In Hackney and Tower Hamlets the private rents on 4 beds are equivalent to gross household income. This clearly demonstrates the inability of people with larger families to pay market rents for the required unit sizes in these areas. The weekly 4 bed rent in Hackney is 534 per week ( 27,884 PA) and therefore the conclusion has to be that those currently paying these rents in the private sector are either on the highest of incomes or receiving larger than average income top ups in the form of state benefits. Fig. 21 At 80% of market rents the affordability obviously increases across the board and the 1 beds become affordable on the whole at 30% of income across the sub region. It should be noted that these are the new preferred Affordable Rent levels and that whilst they seem viable in some instances for smaller units, there is difficulty with the larger units. 25

26 Fig. 22 At 65% and 60% of market rents the 2 beds become affordable across the region and in Havering, even the 4 beds start to become affordable. The table would seem to support the widely made claims that the new system will result in families moving towards the outer boroughs. Fig. 23 Fig

27 At 50% of market rents, it is clear that the there is scope to increase the rents on the smaller units and still keep them affordable. However, the 3 & 4 beds are still unaffordable to the average household in Hackney and Tower Hamlets. Fig. 25 The final table shows the affordability of existing RSL rents in each area and as expected, it shows that existing social rents are affordable in every area if using the 1/3 of average income rules. Fig. 26 The maximum rent that is affordable as a percentage of average household income is shown below. It does show that there are wide variations in the councils with Hackney and Havering being the extreme examples where only 73% of market rent is feasible in Hackney, whereas in theory 126% is affordable in Havering. 27

28 Fig. 27 It should be noted that the above tables do all present a simplistic approach to affordability calculations as the tax credits received by larger families are higher. We have attempted to look into this in more detail in the Affordability Revisited section, and we will be testing the findings above by building up a more detailed affordability picture. However, for modelling and comparison purposes this approach is clear and straight forward. The results above clearly show that there is a pattern of increased affordability the further away from the centre of London you go. A comment on the implications of this for future prices is shown in the future predictions section. 4.4 Income Distribution One of the key outputs required from this work is to ascertain what percentage of the population in each local authority area can afford various rent levels for each bedroom size. The section above has just looked at average incomes and did not take into account the percentage of the population on other incomes. In order to determine how many households can afford various rent levels, we need to determine what percentage of the population earns different levels of income. To do this, we have used London wide income distribution data from the GLA which shows the number of households in London that have income levels within each 5k band from 0K to 100k+ The table is shown below for reference and we can see that the most common household earning bracket is 15k to 35k, with the 20k 25k band the highest populated. The data is included as appendix D. 28

29 Fig. 28 The median earnings range in the table above is 30k to 35k which supports the London average median figures in the GLA table. If we apply the distribution of income to the median incomes of our 7 Local Authorities we get the following table. Fig. 29 As the medians are lower than the London average, this does result in our calculations showing a zero income for some households. Unfortunately, with the London level income distribution data we have used it is not possible to avoid this. If required, we would be able to create more accurate versions of the above table per borough if the Boroughs want to subscribe to obtain the source income data by Borough. Some Boroughs have provided income distribution information, and therefore where possible we have used this in the affordability summaries detailed later. If we apply the above distribution of household income in each Local Authority to full market rents, we can see what percentage of the population can afford RSL rents based on rents being 1/3 of their income. 29

30 What is clear is that there are some families that cannot afford social rent using this approach as the distribution of the income where income drops is not offset by increases in benefits which are likely to be the case in reality. This is one of the complexities that have unfolded in preparing the report and the section which covers affordability and benefits attempts to address this in part. Fig. 30 The tables below show the same results for larger unit sizes. As expected, the % of households that can afford the 2 bed rents drops across the board. This is the case as the income levels have remained the same but the rents are higher. Fig. 31 The tables for 3 & 4 bed units are below. Despite the omission of future HB alterations due to higher rents (more of which later), it does seem clear that there is an affordability problem for a large percentage of the population to pay 80% market rents. 30

31 Fig. 32 Fig Rental Recommendations Based on the above 1/3 of household income calculations, we had to make an initial recommendation for rent levels for our benefits analysis that will go some way to achieving the aims of the higher rent/less grant funding regime. Given the 1 and 2 beds are more generally affordable, we have kept them at the 80% level. However, given affordability concerns on the larger units, we have decreased the rents to 65% for 3 beds and 60% for 4 beds. 31

32 Fig. 34 The issue with this approach is that the 3 bed rent is slightly less than the 2 bed rent. However, given the affordability issues, the rental subsidy may in fact need to be higher for larger units if affordability is a key factor in setting rents. 5 Benefit Analysis In this section we have undertaken some benefit calculations, based on a series of income levels. This is to allow a greater understanding of this area and the effects of the changes on household income in particular the effect of the Household Benefit Cap. The calculation methodologies for these tables are included as appendix B The following table shows current benefits levels not including Housing Benefit. The figures include Income Support / Job Seekers Allowance, Working Tax Credit, Child Tax Credit, Child Benefit, and Council Tax Credit. Fig

33 The following table attempts to calculate Universal Credit, as a comparison to the current system. Fig. 36 Please note that these calculations were undertaken before the publication of the Welfare Reform Bill. The green cells show some of the factors currently used in benefits calculations that are to be subsumed into Universal Credit. The total income based on the Universal Credit system is the bold orange column, and this is derived from the Universal Credit forecast (blue) plus the Outside Universal Credit factors in yellow. The calculations undertaken to forecast Universal Credit are fairly complex and are dealt with in more detail in appendix B. 33

34 In basic terms we can see that the switch to Universal Credit has a generally slightly positive effect on the income of our sample, with most households seeing an extra a week. However, the clear and urgent issue is the effect of the 500 pw overall benefit cap on unemployed households. The following chart makes this very clear, based on our adjusted rent levels. Fig. 37 The benefits include housing costs, as assessed against our adjusted rents. As the Housing related benefits are apparently the last in to the calculation, these would be altered downwards where households breach the cap. 6 Affordability Revisited 6.1 Methodology Having undertaken an analysis of benefits at various income levels, we then attempted to link this in with our affordability work and test our initial findings, layering on detail. Firstly, we used the benefits chart to create a simple affordability table at the various earnings levels that were calculated. In the first instance we looked at this without the effect of the household benefits cap. 34

35 Fig. 38 Some clarifications of the column headings: Earnings we have included net and gross earnings, and the affordability ratios should be calculated using gross income (pre tax). Adjusted rent This is ELP wide and is, as detailed earlier, 80% rents for 1 & 2 beds, with 65% rents for 3 beds and 60% for 4 beds. Housing benefit This has been extracted from the Housing Benefit column of the benefits table Rent minus HB This is the rent shortfall, i.e. rent not covered by Housing Benefit. This is included for information only. Total benefits under UC system This is extracted from the benefits table and includes UC and outside UC amounts. This was calculated prior to the publication of the Welfare Reform Bill. Total income This is gross earnings plus total benefits. 33% of gross income As detailed earlier, our underlying affordability assumption. 35

36 Affordability gap This calculates how much under or over the 33% of gross income threshold the rent actually is. Figures coloured red are over the threshold and are therefore deemed, for the purposes of this exercise, unaffordable. Actual affordability ratio This is the value of rent to gross income. Affordable rents should be below 33% The next table shows affordability levels with the total benefit cap in place. Fig. 39 HB reduction / adjusted HB Where households benefits exceed the cap, HB is lowered accordingly. In this regard we understand that HB is the last element in to the calculation, and Local Authorities will be required to amend payments accordingly. Benefits remaining before cap Negative figures show that the total benefits exceed the cap, and therefore HB must be reduced by this amount to bring total benefits within the cap. Once we had undertaken this analysis, we wanted to apply these findings to our Boroughs, looking at various rent level options. Also we wanted to apply our own equivalisation calculation to the data. At present we are showing earnings and benefits, but not the cost effect of children. Income rises in the form of benefits, but costs also rise. 36

37 Therefore the next step was to apply the McClements equivalisation scale to our data, and the table of results is included as appendix E (as an appendix due to the size of data). The equivalisation factor is in the second column, and we can see that the scale has a significant effect as more children are added, with especially high weighting for the 5 th and 6 th children. We applied the scale to our total income made up of gross earnings and benefits, and have shown affordability of this adjusted income on various percentages of market rent. Please note that we used employment income of 20,000. This was one of our levels calculated within the benefits analysis and it was the closest to the region wide employment income medians (from NSO data). The effect of the equivalisation is large with affordability of bigger family homes worsening significantly, particularly in the expensive Boroughs. The use of the McClements scale seems to imply that child related benefits are actually less than child related costs, so there is an overall net loss of income with more children. Due to this heavy equivalisation effect on the larger households, we decided to look at the equivalisation in another way, by neutralizing the cost and income effect of children, thereby assuming the child related benefits match child related costs. As the affordabilitly analysis is not a precise science we wanted to help build up a picture, by comparing a number of approaches. Our child cost equivalised data attempts to remove the direct child related benefits from the forecast, and also remove the McClements scale. It should be noted that removing the child related benefits is not a straight forward exercise in terms of Universal Credit, and therefore our methodology here is somewhat crude, being based on current child related costs. However, we felt it useful as part of the overall picture, and for testing against the other approaches. This calculation was undertaken individually for each Borough and the table for Hackney is shown below. 37

38 Fig. 40 We now have three separate ways of looking at affordability and that has allowed us to directly compare the results and build up a picture of the issues. Also, as well as looking at the median gross income, we have added the Borough lower quartile affordability information. Please note that these lower quartile figures are derived from the Borough median gross income (from the GLA / Paycheck data). The medians are then applied to the Londonwide distribution pattern to allow us to plot the lower quartile. Results are below. It should be noted that these income figures do not differ by family size, and certainly at the lower quartile level, larger families will be receiving benefits which will have an effect on affordability. There is more on this issue in the analysis. Fig

39 The comparison table for Hackney is below: Fig Analysis Having undertaken further detailed affordability modelling using the McClements scale, and the child cost equalised approach, we feel that the original model using 33% affordability on median gross income is in fact a sound approach, and we would advise that this is considered as the primary indicator due to it's simplicity and clarity. The further two models help to flesh out the picture and in most cases back up the original findings by building up the detail. In many instances the affordability results are close between the three approaches. There are some discrepancies. In Boroughs where the median gross income is considerably above the earnings modelled in 2 and 3 (such as Havering and Tower Hamlets) then affordability will be worse for 2 and 3 as we're effectively modelling with a lower income. Therefore, directly comparing 1 to 2 (and 3) is not exactly comparing like with like. We have used the 20k figure for input in 2 and 3, because it was the closest band modelled within the benefits analysis to all of the Borough's median individual employment income figures. The weighting applied by the McClements scale implies that households need more than the allocated child related benefits to cover their child costs, and this rises with higher numbers of children as ages, and costs, increase. Therefore the 5 and 6 child households modelled on the McClements scale come out generally poorly in affordability terms. As stated previously, these affordability calculations are not a precise science, and we could refine the detail indefinitely although it may never exactly match a real life instance. We feel that the more 39

40 detailed work here backs up and validates the original basic modelling and we would therefore recommend this as the primary data source. Also, using the pre equivalised gross household income data will allow much easier adjustment and comparison of the income levels without the circular problem in modelling terms of earnings and rent levels effecting benefits. In this sense, the more detail that is added the less usable the data becomes. We have added a lower or 25 th percentile from the gross household income, using the London wide income distribution pattern (unless Boroughs have provided this information separately). As expected, affordability is hugely affected across the board, by the lower income levels. However, it should be noted that these gross household income affordability calculations are based on current income distributions. The significant changes to the benefits system may have some effect on income levels in future. There is likely to be a bunching of lower income distribution behind the household benefit cap of 26,000, and we may see a fall off immediately after this. A number of RSL residents will be caught by the total cap, although those on lower income in receipt of working tax credits will be exempt. In theory this could mean that Housing Benefit or Housing Allowance could support a fair portion of these resident s rents, making the higher rent levels more affordable. This is particularly relevant as the HCA framework document makes it clear that RSL residents will not be subject to the LHA maximum rent caps. Therefore the lower quartile results could be overly pessimistic, as it assumes that Housing Benefit would not increase as well as rent. For some, their income will go up along with their rent easing affordability issues. However, what becomes clear is that for those larger families subject to the benefits cap with no other income source, affordability becomes a huge problem. As we have shown in the previous section, there is likely to be a lowering of the Housing Benefit for larger families due to the need to get within the 500 weekly cap. Assuming that the child related benefits payments are needed to cover child related costs (and the McClements scale suggests that there s actually a net loss here) then this would ultimately result in hard choices between rent payments and other necessities such as food or clothing. 7 Mortgage Comparisons Given the increases in rents from social rents to up to 80% of market, it is worthwhile looking at the differences been these higher rents, mortgages and shared ownership costs to see if there are any anomalies. For 1 bed flats, in all areas except Barking & Dagenham, a mortgage based on 90% will cost more than the market rent. This would make sense given the fact that if mortgages were significantly below market rents, then more people would enter the buy to let market. It seems that the Barking & Dagenham rent and property price data for 1 bed flats may well be an anomaly in the source data as it does seem unusual. However, the rent to value ratio is higher for 1 40

41 beds in Barking and Dagenham than it will potentially be in an area where buy to let activity increases. Fig. 43 What is clear from the above chart is that the cost of a mortgage in the outer areas at 610 and 624 is enough to pay 80% market rents in the LBTH and Hackney. Therefore, working families in Hackney and Tower Hamlets that are suddenly faced with the offer of a property at 80% market rent may decide to take the cheaper option of buying a property in the outer areas assuming they can pay the 10% deposit. In most instances the cost of LCHO is below the 80% market rent level. LCHO is only more expensive in Hackney and Tower Hamlets due to the higher property values. The table below shows the same data but in relation to 2 bed properties. With the 2 beds, the cost of a mortgage is significantly higher than market rents with the exception of Barking and Dagenham. Once again, the cost of a 90% mortgage in Barking and Dagenham at 821 per month is significantly cheaper than the 80% rent in the more central boroughs. 41

42 Fig. 44 The tables below show the situation for 3 and 4 beds for reference. As expected, similar issues arise to the tables above. Fig

43 Fig Future Predictions for the Rental Market It is currently very difficult to predict the future for LHA levels and the London rental market due to the up coming two staged alterations in Housing Benefit levels: In April 2011, Housing Benefit will only be payable on the 30 th percentile LHA rates. As detailed above, this will see a drop in the Housing Benefit claimable by approximately 10% (depending on the BRMA). In April 2013, the total benefit cap will see a more significant drop in Housing Benefit claimable, particularly for larger homes. In relation to the shift to the 30 th percentile LHA rates, the government have assumed that changes to the system will bring private sector rents down as landlords are forced to ensure their lettings are still attainable to the majority of the market. This is the position recently put forward by Iain Duncan Smith and Boris Johnson. Philippa Roe, cabinet member for housing at Westminster Council, recently articulated the sentiment in an article in the Guardian: Following the budget, some housing charities have voiced concerns that the cut in benefit will lead to an increase in homelessness. While we respect their views, it is important to point out that the current system has artificially raised rents. 43

44 When the new, lower housing benefit rate is in place, we believe that rents will automatically fall as landlords will not be able to charge such high sums. The government have suggested that some private sector landlords have been milking the system and costing the tax payer money. However, although this may well be the case in some instances, there is little evidence to show that lowering housing benefit will cause the rent level re adjustment, and in fact the opposite may be true, with demand increasing sharply in less expensive areas away from the city centre. The Strategic Housing Market Assessment (section 6) contains some very detailed analysis in relation to the Housing Market dynamics within the 7 Boroughs (plus the City of London), and therefore we do not intend to reproduce this. However, key implications of the reduction to housing benefit are reported as follows: Potentially, there could be reduced household formation rates which may reduce the number of households seeking affordable housing The supply of private rented dwellings may change significantly, especially for households on lower incomes The total number of benefit claimants in the private sector is unlikely to fall, but their locations will change to lower priced areas Alternately, where landlords do not reduce rents more properties may return to open market housing An increase in the number of households seeking to address their own housing requirements by buying or renting is likely Local authorities may be pressed to find housing solutions for increasing demand from households who cannot resolve their own needs, resulting in homelessness presentations and overcrowding rising further. A survey recently undertaken and published by London Councils, found that around 60% of 270 landlords who responded to the survey said they would not lower the rents they charge by any amount at all if changes in Local Housing Allowance left tenants unable to pay them. Tenants unable to pay would move or be evicted, to be replaced by tenants who can afford the rent (presumably those not dependent solely on benefits). The survey concludes that alterations to LHA levels and the introduction of benefit caps will lead to increased homelessness and overcrowding and force many who can no longer afford their rents to seek cheaper accommodation, probably involving moving from Inner to Outer London Boroughs. We can see that there is a great deal of speculation on this crucial issue, with widely differing views. However, most of the industry experts specializing in this area predict an up to 5% rent increase across London within the next year, with only the government expecting the rent drop in line with the lower LHA levels. The individual Borough characteristics and differing average rent levels will clearly have an effect on supply and demand once the new restrictions come into effect. 44

45 In addition to the above, the table below repeated from earlier shows the maximum percentage of rent that is affordable based on 1/3 of average household income by borough. Given the increased affordability in the outer boroughs and the likely increase in demand in the outer boroughs due to displacement, it does seem likely that the rents in those cheaper outer areas will increase within the private rented sector and probably also in the social rented sector. Fig. 47 We therefore speculate that the lower value outer London areas could potentially see a higher annual rent increase due to higher potential demand as people migrate to more affordable areas. Therefore we have applied a sliding scale of potential LHA rent increases across the seven Boroughs. This is in correlation to existing (January 2011) 30 th percentile LHA rates: Barking & Dagenham 6% Havering 6% Newham 5% Redbridge 5% Waltham Forest 5% Hackney 4% Tower Hamlets 4% Over time, this migration from inner to outer Boroughs (e.g. Hackney to Barking and Dagenham) could cause some equalisation of rent levels, although this is likely to be driven by the outer Boroughs increasing rents rapidly rather than lowering in the centre. Please note that this is pod s speculation purely as part of the wider exercise. 45

46 9 Appendices 9.1 Appendix A Average Property Prices and Rents 46

47 9.2 Appendix B Methodology Statements for Benefits Tables The modelling in these tables uses consolidated changes to tax and benefits rules announced in the Emergency Budget of June 2010 and the Comprehensive Spending Review October These tables include modelling for the effects of reductions in real values of benefits caused by government changes to up rating methods. Current value assessments start with the current values, rules and rates in tax year 2010 / 2011 and future assessments progress from those. Future values used are based on starting figures and then adjusted in 3 ways: Earnings, other incomes, tax bands etc. use current values. Benefits which are to be up rated by CPI in future have their current values reduced by the cumulative year by year difference between RPI and CPI Benefits, and elements of benefits, which have been frozen have their current values reduced by the cumulative RPI. This, crudely, allows comparison of the real future values of income to be compared with starting values. The CPI and RPI forecast figures used are those produced by the Office for Budget Responsibility. Universal Credit assessment has been modelled by using forecast benefit values together with the tapers and disregards proposed in the White Paper, Universal Credit: welfare that works Cm For LHA, the VOA current and 30th percentile national figures have been averaged and the reduction applied to rental figures. Those figures have then been treated in the same way using the CPI reduction in following years when the LHA figures will be up rated by CPI. Changes in Council Tax Benefit, outlined in the CSR and white paper have not been included as no detail is yet available. Instead the current rules are used with a 10% reduction from the proposed date. 47

48 Universal Credit has a proposed disregard of earnings which is reduced from the starting point by 1.5 times the rent level until it reaches a 'floor' level. For the purposes of this model a rent level, shown alongside, has been used to enable this calculation. UC therefore includes a housing element within it and a current scheme HB level has been calculated to provide a comparator. This HB figure is post reductions of 10% for JSA claimants but has not had any other of the proposed reductions applied to eligible rents, such as 30th percentile or LHA limits, even though announcements indicate that size limits and, presumably, eligible rent limits may be in force in NB. The HB 90% reduction for JSA claimants is not implemented within the UC calculation as, in the absence of JSA and any work hours element it is not known how, or whether, an equivalent measure will be implemented. 2014/2015 has been chosen as the comparator year as the announced changes in the budget and CSR due to come into force over the following years, will all be active by then. 48

49 9.3 Appendix C Income Tables 49

50 9.4 Appendix D LHA Historical data 50

51 51

52 52

53 53

54 9.5 Appendix E McClements Scale 54

55 9.6 Appendix F Income Distribution Data 55