Rent levels and the benefit cap

Transcription

1 Rent levels and the benefit cap What happens to rent affordability and development capacity if the benefit cap is reduced from 26,000 to 23,000? December 2014 Discussion paper

2 Why the benefit cap matters to housing In 2013, Moat released The housing cliff, which examined the impact of various government policies on build capacity post One of the main concerns raised in that paper was the impact of the benefit cap on housing. It discussed the lack of inflationindexing of the cap, and demonstrated how quickly this would lead to unsustainable rent levels across the South East. The Housing cliff highlighted that this was a particular issue for families in three bedroom homes (and larger) under Affordable Rent. The prospectus for the Affordable Homes Programme makes it clear that providers will be required to charge 80% of market rent. This is an important point that will be discussed in more detail shortly. At the 2014 Conservative Party conference, the Chancellor announced that if re-elected, a Tory government would further reduce the cap to 23,000 (from the current 26,000 level). It is important to understand the impact of this policy change from the perspective of: Lenders and investors who have agreed, and may agree future funding programmes both to support existing residents and to build new homes, based on housing association tenants ability to afford their rent; Current tenants who may face the prospect of gradually finding their rent unaffordable; Future tenants who may struggle to be appropriately housed as build capacity is reduced. Aside from the negative implications of this for work incentives and for the Exchequer, Housing Benefit goes to the heart of the affordable housing funding model which has moved away from capital grant to revenue subsidy collected through rents. Lowering the cap would therefore create a serious situation where collecting rent becomes much more difficult, increasing the risk of arrears and bad debt, and almost certainly leading to a reduction in build capacity. This is discussed in more detail shortly. Finally, a change to the benefit cap would also have to be weighed against the national rollout of Universal Credit, which will be paid directly to tenants rather than landlords. The DWP Demonstration Projects saw a sharp increase in arrears because of this switch, so housing associations are already anticipating lost revenue as a result. Impact on households In setting Affordable Rent levels, Moat has taken steps to ensure that no family moving into a property would be set an unaffordable rent. A tipping point is reached when the cumulative effect of rent plus living benefits is greater than the benefit cap. We consider this the point at which a family is placed at excessive risk of unsustainable debt (eg. high credit card use to pay for basic needs) or deprivation (eg. by limiting food or heating). The following worked example, based on Greenwich Affordable Rent figures, shows how this would work for various household types under the reduced benefit cap ( 442pw): It is important to consider that a high proportion of housing association residents receive either part or full Housing Benefit or the housing element of Universal Credit when the new system is rolled out. This profile is not only limited to social landlords. Separate research published by Moat titled A tale of two regions, found that an increasing proportion of benefit-dependent and vulnerable households are finding a home in the private rented system [PRS]. In the cases where these households are accommodated in the PRS, there is every likelihood that the rent to be covered by benefits will be greater due to the juxtaposition between rent levels and Housing Benefit. 1 A tale of two regions also found that the situation for households on lower incomes is becoming much more challenging due to rising housing costs. It shows that Housing Benefit is being used increasingly by people in work contrary to the widespread view that only unemployed people are eligible for housing support. *the cap for single people is expected to be lower than that for couples. 1 A Heywood, A tale of two regions, preliminary findings, September 2014.

3 In this example, all money paid in rent above the 442 line would need to be taken out of the non-housing elements of Universal Credit which are intended to cover living expenses such as food and utilities. On this basis, the modelling (on the following pages) shows that a cap of 23,000 is too low for the rent currently being charged by housing providers. To a great extent, this is true for social rent as much as for Affordable Rent. This presents us with a difficult choice: continue to charge rent at existing levels and tolerate higher debt levels among our residents or; reduce rents and take a substantial hit on development capacity. Impact on new housing supply Even if housing providers took the decision to lower rent levels to alleviate affordability concerns, this would not be straightforward. Housing providers seeking to build new homes under the Affordable Homes Programme need to convince the HCA that charging substantially less than 80% is necessary. In the prospectus for the Affordable Homes Programme, the HCA stated that: It is expected that homes for rent which are funded with capital grant funding from the Affordable Homes Programme will be let at Affordable Rent. While bids which include Affordable Rent at less than 80% of local market rent will be considered in very specific circumstances, such as where an Affordable Rent at 80% of local market rent would exceed the Local Housing Allowance, we will generally expect providers to charge rents of up to 80% of market rents to maximise financial capacity. 2 Making sense of the modelling The charts that follow show how many years it would take for rent plus living benefits to meet the benefit cap, and therefore become unaffordable. In the example below, we are suggesting that rents will: remain affordable for over ten years for one bedroom properties; become unaffordable in just under three years for two bedroom properties; and that three bedroom properties are already unaffordable (a value of minus four suggests that at today s inflation rate, this type of property became unaffordable four years ago). A full list of the data assumptions used can be found at the end of this paper, but in all tables we have assumed the following household compositions: one bedroom properties: a couple with one child; two bedroom properties: a couple with two children; three bedroom properties: a couple with three children. Both social rent and Affordable Rent levels have been tested in the areas where Moat operates across London and the South East. We have also decided to use actual housing association rent data 3, rather than using target rent as a substitute for social rent. Likewise, we have used actual Affordable Rent data, rather than calculating 80% of gross market rent. We believe that these figures are given added credibility by showing the rent levels that are actually being charged, rather than simply the maximum that could be charged. The final sentence is critical: the current model is dependent on higher rents to maximise financial capacity. If rents are artificially depressed, the model no longer stacks up and development levels are reduced. 2 HCA, Affordable Homes Programme : Prospectus, January 2014, p.36. pgph HCA, Statistical Data Return, September 2014

4 Data and analysis Social rent - existing 26,000 cap The above chart shows that under the current 26,000 cap, social rent should continue to be affordable for a number of years in most local authorities in the South East. However, the cap needs to be urgently indexed for inflation to prevent three bedroom properties becoming unaffordable. In most of the local authorities shown, this will happen within two years.

5 Social rent - proposed 23,000 cap Under the proposed 23,000 cap shown above, the green bars fall below zero in all of Moat s areas, meaning that three bedroom social rented homes would no longer be affordable. There would also be a strong risk of putting two bedroom properties at the limit of affordability. As shown above, two bedroom properties in all but eight local authorities would become unaffordable within four years. The sensitivity of social rent to a 3,000 reduction to the benefit cap is somewhat unexpected, and must be seriously considered.

6 Affordable Rent - existing 26,000 cap The above chart shows that Affordable Rent can still be considered affordable for one and two bedroom properties in most areas shown under the 26,000 cap. However, two bedroom properties will only remain affordable for a short period unless the cap is indexed for inflation. For instance, two bedroom properties in Greenwich will become unaffordable in little over two years if the cap is not inflated. Three bedroom properties are already unaffordable in most parts of the South East, with the only exceptions being Basildon, Dover, Shepway, Swale and Thanet. However, even these areas will become unaffordable within two years. This chart is very similar to that which appeared in Moat s Housing cliff paper 4, but with the addition of one bedroom properties. The other key difference is that this is based on actual Affordable Rent levels, not on 80% of gross market rent. 4 Moat, The housing cliff, September 2013, p.10.

7 Affordable Rent - proposed 23,000 cap The chart above is alarming it shows that paying rent would become extremely problematic for many additional families on Housing Benefit under a 23,000 cap. All three bedroom properties would become instantly unaffordable under the proposal, and many two bedroom properties would become unaffordable also (two bedroom properties are discussed in more detail later). It is important to note that this analysis is based on actual housing association rents, not 80% of market rent, so this is a reflection of what would happen under what is currently being charged. Only one bedroom properties would continue to be affordable at current rent levels; in most local authorities for a period of between six to ten years.

8 Affordable Rent, two bedrooms - proposed 23,000 cap The chart above demonstrates that the new frontline of the affordability battle is with two bedroom properties no longer just larger homes. It shows that two bedroom Affordable Rent properties become unaffordable within two years in all but six local authorities where Moat operates. All of these would subsequently become unaffordable within four years. To ensure the continued affordability of two bedroom Affordable Rent properties under the 23,000 cap proposal, housing associations would need to begin depressing rent levels across virtually all local authorities in the South East. It is unclear whether the HCA would allow this given that it would have major consequences on development programmes which would have to be revised downwards to cover lost revenue.

9 Conclusions The proposed 23,000 cap would have a significant impact even on social rent, let alone Affordable Rent. The evidence shows that in all of Moat s areas of operation, three bedroom social rented homes would no longer be affordable under the 23,000 cap (from day one of the cap s introduction). Under the 23,000 proposal, two bedroom social rented properties would catch up to the cap within four years in most of Moat s local authority areas. As we already knew, the current 26,000 cap can still be considered relatively affordable outside London under Affordable Rent (especially for smaller properties), but urgently needs to be indexed for inflation to continue to be affordable. These new figures, which test the 26,000 cap against actual rents being charged, reinforce this message. The proposed 23,000 cap wipes out three bedroom Affordable Rent homes across the South East, and two bedroom Affordable Rent levels would be placed under severe pressure. Only one bedroom properties would continue to be affordable in the short-term. We expect that lenders and investors will be significantly spooked by the 23,000 cap proposal, as they begin to assess the double whammy of housing associations difficulty with collecting rents and escalating rents. This comes at a time where there is a chronic imbalance of supply of affordable housing relative to demand. It is therefore critical that government carefully assess the impact of policy which may drive supply down further, and plan for the consequences appropriately. The current 26,000 benefit cap does not present a substantial risk to the affordability of social rent for one and two bedroom properties in the short-term. It does, however, need to be indexed for inflation within the next two years to ensure the continued affordability of three bedroom properties. Overall, it is alarming that all three bedroom properties within Moat s areas of operation would become instantly unaffordable under the 23,000 cap for both social rent and Affordable Rent. We are also concerned by the speed at which affordability would become a problem for two bedroom properties. The tables show that if the 23,000 cap is introduced, two bedroom properties for Affordable Rent would: Become instantly unaffordable in eight local authorities where Moat operates. Become unaffordable in 83% of local authorities within two years. Become unaffordable in all areas within four years. In relation to social rented two bedroom properties, the tables show that the 23,000 cap would: Make 80% of local authorities unaffordable within four years. Make all areas unaffordable within six years.

10 Notes and assumptions Rent levels We have taken the average of all housing association General Needs rents and Affordable Rent within Moat s area of operation, plus service charge levels, broken down by local authority area. Only service charges eligible for Housing Benefit were included. As Affordable Rent figures are based on actual average housing association data, there are some local authorities where rent levels have been artificially depressed below 80% of gross market rent levels. This is a key distinction with other studies, which typically use the 80% figure regardless of what is actually being charged. We have assumed an inflation rate of 2% - the Bank of England target rate. Affordability To determine affordability according to bedroom size and household composition, we have used the following assumptions: for one bedroom properties, we have assumed a couple with one child; for two bedroom properties, we have assumed a couple with two children; for three bedroom properties, we have assumed a couple with three children. Overall, we have tested the affordability for: a single person with no children in a one bedroom property; a couple with no children in a one bedroom property; a couple with one child in a one bedroom property; a couple with two children in a two bedroom property; a couple with no children, with a lodger. We have not attempted to take this beyond the preliminary testing stage as it is difficult to avoid loose assumptions about whether the lodger is also receiving Universal Credit, and is probably of little statistical merit. It is also likely that the income from the lodger s rent would cover any shortfall caused by the benefit cap; a couple with three children in a three bedroom home. Universal Credit calculations We have decided to test affordability based on Universal Credit rather than on current benefits, on the assumption that it will continue to be rolled out over the next 18 months. Therefore, whenever the term Housing Benefit is used, it may refer to the housing element of Universal Credit. For couples, we have assumed that both are over 18, with family element included. We have assumed that all adult members of the household are looking for work, and receive the maximum entitlement. We have not assumed any disability-related benefit. Council tax The source of the data on council tax levels is: DCLG, Council Tax levels set by local authorities in England 2014 to 2015 (revised), Table 8: 2014 to 2015 area Council Tax for a dwelling occupied by two adults by band, 23 July We have used the total council tax payable by residents, by local authority. We have then used the average total amount of council tax payable for a Band D dwelling occupied by two adults within a billing authority's area before any reductions due to discounts, exemptions or council tax benefit (council tax support from 2013). Band D statistics are regarded as the benchmark when comparing council tax levels in different areas or over time. 4 As many local authorities have frozen council tax and are limited to a maximum 2% increase year on year without triggering a referendum, we have decided not to assume an increase in council tax levels year on year. 4 DCLG, Council Tax levels set by local authorities in England 2014 to 2015 (revised), 23 July 2014, p.13.

11 Council Tax Support element In April 2013, Council Tax Benefit [CTB] was replaced with Council Tax Support [CTS]. CTB gave low income households a discount on the amount of Council Tax payable, often reduced to zero. The change marked a significant move from a nationally devised system to one of 326 different local schemes in England. Alongside this restructuring, the money provided by central government to fund CTS was reduced by 10%. Each local authority is now responsible for devising its own scheme within the reduced budget, and are responsible for any shortfall or surplus in the CTS budget. As a result, most local authorities have adopted schemes where everybody pays something. 5 We have assumed maximum support, for both singles and couples as required. We have assumed no second adult rebate, as many councils have removed this rebate. We have assumed that the council s savings limit has not been reached. Most LAs impose a limit of 16,000 in personal savings. We have used the National Policy Institute s Council Tax Support Scheme Characteristics in English LAs data as the base of this work. But we have then introduced the latest minimum council tax payment levels ( ), sourced from each LA s website where possible. For further information please contact Moat s Public Affairs and Policy Manager, Angelo Sommariva on angelo.sommariva@moat.co.uk. 5 New Policy Institute, Council Tax Support Update.

12 About Moat Moat is a housing association providing affordable homes in thriving communities for people in the South East of England. For over forty years we have delivered high quality general needs homes for social rent, Affordable Rent, retirement and independent living. We also have a strong low cost home ownership offer, with an excellent track record of helping people into homeownership. We are one of the HCA s development partners and currently develop over 500 new homes per year. For further information, please contact Angelo Sommariva, Public Affairs and Policy Manager angelo.sommariva@moat.co.uk