A response to Pay to Stay: Fairer Rents in Housing consultation Published by DCLG; 9 th October 2015 Catalyst Housing Ltd
1. Introduction Catalyst Housing Ltd welcomes the opportunity to respond to the Pay to Stay: Fairer Rents in Housing consultation, published by the Department for Communities and Local Government on 9 th October 2015. Catalyst provides more than 21,000 homes in London and the South East, through a wide range of rental and homeownership opportunities. We are one of the leading housing associations in London and the South East. We aim to be a catalyst for change and improvement wherever we work, pursuing better homes, better service and a better future for our customers. We ve been at the forefront of housing for more than 80 years, constantly adapting and evolving our services to meet customers changing needs. Today, we provide a wide range of housing solutions and community development initiatives, working closely with residents and partners to meet local needs. 2. The proposals The Government s view is that tenants in social housing should not always benefit automatically from subsidised rents and has decided that social housing tenants with household incomes of 40,000 and above in London, and 30,000 and above in the rest of England, will be required to pay an increased level of rent for their accommodation if their rent is currently being subsidised below market rent levels. The starting assumption is that the policy will operate in broadly the same way as the current Pay to Stay policy. Housing Associations will be able to keep and use the additional income that this policy raises to reinvest in new housing. The Government will use primary legislation to bring forward powers to implement the policy and ensure it is in place from April 2017 onwards. It is expected that the detail of the policy will be set out in regulations. In the consultation paper, views were invited on: How income thresholds should operate beyond the minimum threshold set at Budget, for example through the use of a simple taper / multiple thresholds that increase the amount of rent as income increases. Whether the starting threshold should be set in relation to eligibility for Housing Benefit. Based on the current systems and powers that Local Authorities have, what is your estimate of the administrative costs and what are the factors that drive these costs? 3. Operation of thresholds To assess the impact of the proposals on Catalyst and its residents living in discounted rented accommodation a number of detailed models were developed. The models calculate net incomes from gross earnings and calculate Tax Credits and Benefits (if any). In the case of Tax Credits, no assumptions were made regarding childcare costs. In the case of Housing Benefit, average Local Housing Allowance rates were used across boroughs. Average market rents for a mix of local authorities, unit types (flats and houses) and numbers of bedrooms were determined by Catalyst s in-house Intelligence team using an established RICS methodology. By reference to ONS data, Catalyst estimates that c 10% of our households will be affected by the proposals (Appendix 1). We have explored three options: a) Jump to rent once relevant threshold ( 40k London, 30k elsewhere) is reached b) Stepped increase to rent once relevant threshold reached c) Tapered increase to market rent once threshold reached
Increasing to market rent as soon as income threshold is exceeded ( Jump ) Jump (figure 1) produces the biggest disincentive to work as an income increase of 0.01 above the threshold triggers a large rent increase and therefore a large drop in disposable income 1. This is set out in Appendix 2a for a range of local authority areas (Westminster, Brent, Reading and Aylesbury Vale) and household types (Single person, lone parent with one dependent child, Couple with two dependent children). The effect is smallest for Catalyst residents in Aylesbury Vale and largest in Westminster. Generally, the effect is larger in bigger properties, in houses as opposed to flats and the closer the home is to central London. In 4 bed houses in Kensington & Chelsea, for example, of which Catalyst has 38 the increase would be over 800 per week which is greater than the net income of someone earning 40,000.01. Housing Benefit will not pick up all of the strain because it is capped by Local Housing Allowance. 800 700 Disposable income 600 500 400 300 200 100 0 1,000.00 5,000.00 9,000.00 13,000.00 17,000.00 21,000.00 25,000.00 29,000.00 33,000.00 37,000.00 41,000.00 45,000.00 49,000.00 53,000.00 57,000.00 61,000.00 Gross household income DI - rent DI - rent Figure 1: Jump model single person in 1 bed flat in Brent We estimate that this model would raise c 11 million additional rent per annum on the assumption that Catalyst is able to actually collect the rent (households may well have credit and other commitments that mean that they simply are unable to pay the whole of the rent). There is also an assumption that residents do not take action to limit their incomes below the relevant threshold ( 30k or 40k). Because of: 1. The dramatic effect that this model has on disposable incomes (especially for those with household incomes only marginally above the relevant threshold); 2. The inequality of the proposal; and 3. The fact that this will act as a major work disincentive Catalyst believes that simply raising rents to market levels as soon as the income threshold is exceeded should not become policy. 1 Defined as net income plus benefits and tax credits (if any) minus rent. Appendix 1 sets out the impact of the three models on disposable incomes for a range of household types and locations.
Increasing to market rent via a series of income thresholds ( Stepped ) Stepped produces a complex system of poverty traps/disincentives (i.e. as gross income increases above a threshold there is a sharp drop in disposable income due to a stepped increase in rent). This is set out in Appendix 2b for a range of local authority areas (Westminster, Brent, Reading and Aylesbury Vale) and household types (Single person, lone parent with one dependent child, Couple with two dependent children). The frequency and severity of the traps depends in part on the number of thresholds. Generally, the fewer the thresholds the larger the traps. The size, type and location of the property all act to increase the sizes of the traps (i.e. larger houses in London will have bigger traps than small flats outside of London). Disposable income 900 800 700 600 500 400 300 200 100 0 1,000.01 6,000.01 11,000.01 16,000.01 21,000.01 26,000.01 31,000.01 36,000.01 41,000.01 46,000.01 51,000.01 56,000.01 61,000.01 66,000.01 71,000.01 76,000.01 Gross household income DI - rent DI - rent Figure 2: Stepped model - single person in 1 bed flat in Brent The larger the number of thresholds, the more complex it will be to administer. Assuming 5 steps, we estimate that this model would raise c 5 million additional rent per annum on the assumption that Catalyst is able to actually collect the rent (households may well have credit and other commitments that mean that they simply are unable to pay the whole of the rent). There is also an assumption that residents do not take action to limit their incomes below the relevant threshold ( 30k or 40k). The Stepped model removes some of the difficulty of the Jump model (in that the decreases in disposable incomes are smaller and fewer residents will be exposed to them). However, because 1. Disposable incomes decrease after an income threshold is exceeded (especially for those with household incomes only marginally above the relevant threshold); and 2. That this will act as a work disincentive Catalyst does not think that this should become policy.
Increasing to market rent gradually using a taper ( Tapered ) Tapered produces a disincentive in so far as there is a rent increase (and therefore the full benefit of increased gross income is not received). However and in general, households disposable incomes continue to increase as gross incomes rise (although at a slower rate) until the full market rent becomes payable 2. There are effectively two approaches to the way in which a taper could be applied. The first is to declare a fixed taper (x% of the difference between the full market rent and the discounted rent per y increase in income). The second is to declare an ultimate threshold above which the full market rent is payable (and a variable taper increase percentage required to increase the discounted rent to the market rent is calculated from that). The former is simpler but means that in areas of very high rents the effect of the taper will extend further up the income scale. The latter is more complex to administer but gives certainty over the point at which there is an expectation that the full market rent will be paid. In the fixed taper approach, the reduction in the rate of increase in disposable income varies according to the percentage used and its impact in terms of how far it reaches along the income range varies according to the size, type and location of the property involved (as described in Jump ). In the ultimate threshold approach, the reduction in the rate of increase in disposable income varies according to the size, type and location of the property involved (as described in Jump ) but its impact in terms of how far it reaches along the income scale is fixed. Disposable income 900 800 700 600 500 400 300 200 100 0 1,000.01 6,000.01 11,000.01 16,000.01 21,000.01 26,000.01 31,000.01 36,000.01 41,000.01 46,000.01 51,000.01 56,000.01 61,000.01 66,000.01 71,000.01 76,000.01 Gross household income DI - rent DI - rent Figure 3: Tapered model - single person in 1 bed flat in Brent We estimate that this model would raise c 5.5 million additional rent per annum on the assumption that Catalyst is able to actually collect the rent (households may well have credit and other commitments that mean that they simply are unable to pay the whole of the rent). There is also an assumption that residents do not take action to limit their incomes below the relevant threshold ( 30k or 40k) 2 Except in areas where the Local Housing allowance is less than the pay to Stay rent in which case incomes do not rise until the full market rent becomes payable.
As: 1. The Tapered model removes more of the difficulties of the Jump model (in that there are only exceptionally decreases in disposable incomes, which are smaller); 2. The work disincentive is smallest; and 3. The model is the least inequitable Catalyst believes that if one of the three models has to be applied then this is what should become policy. In terms of whether a fixed taper or ultimate threshold should be applied, Catalyst believes that the ultimate threshold model should be used so that it can be tied in to as current Shared Ownership limits ( 60,000 out of London; 71,000 for 1 and two beds in London and 85,000 for 3 or more beds in London). 4. Starting threshold and eligibility for Housing benefit We have considered whether the starting threshold should be set in relation to eligibility to Housing Benefit, by which we understand that a higher rent will be payable as soon as eligibility for Housing Benefit is exhausted. This would effectively shift the threshold much further down the household income scale and starting thresholds would effectively be determined by the household composition and the discounted rent payable on the property. Depending upon the level of increased rent due once Housing Benefit is exhausted (either through a jump, stepped or tapered model), at incomes slightly above the point at which Housing Benefit is no longer payable, the rent increase could result in eligibility for Housing Benefit being restored and this could act as a disincentive (because of the problems associated with claiming benefit). Because of the complexity of administering this proposal and the way that this affects working households with very low incomes, Catalyst does not consider that this approach should become policy. 5. Alternative starting thresholds We have considered whether the starting thresholds should be set at a higher level (i.e. 50,000 in London and 40,000 elsewhere). The effect of doing this would be to dramatically cut the number of households that would pay higher rents (we estimate a cut from c10% to 4%) and this in turn would reduce the amounts of additional income. We estimate that potential additional income would reduce: In the jump model, from c 11 million to 5 million; In the stepped model from 5 million to 1.8 million; and In the tapered model from 5.5 million to 2 million. By reference to the administrative costs (section 6), this would make the stepped and tapered approaches unviable. 6. Administrative costs We have considered the administrative costs involved in assessing incomes and the factors that drive these costs. We consider that the following affect the costs of administration:
The number of households that require an income assessment The extent to which incomes need to be verified The existence of data sharing arrangements with HMRC What happens if a household does not respond to a request for information The complexity of the calculation Whether there will be provisions to backdate changes The structure of any appeals process The need to recalculate when residents circumstances change Pay levels necessary to recruit suitable employees to administer the scheme Assuming that: Every household needs to be assessed; There are no data sharing agreements; There is a need to respond to changes of circumstances, requests for backdating and appeals; and A robust income verification framework needs to be applied We estimate that the cost to Catalyst to administer the scheme will be in the range 1,000k to 1,700k per annum. The calculation is set out in Appendix 3. In addition to this, there will be one-off IT development and on-going IT support costs, one-off legal and administrative costs related to changing tenancy agreements, on-going legal costs associated with appeals, on-going costs related to chasing rent arrears arising from this scheme and on-going recruitment and training costs for the new employees we will need. Without details of the exact nature of the proposals it is difficult to estimate these. On a worst case basis, we would anticipate that we need to set aside 2.2 million for the first year and c 1.7 million in future years. The total cost to Catalyst will be reduced if: Potential households are identified through central and local government agencies Earnings and taxable welfare benefits are verified by HMRC and DWP There are clear rules relating to non-provision of information There is limited and clearly defined scope for backdating There is limited and clearly defined scope for appeals There is limited and clearly defined scope for when a change of circumstances triggers a reassessment. This points to the need for a set of clear and carefully thought out regulations that balances fairness to households, administrative burden to business and the desire to raise capital to support a house building programme. 7. An alternative approach to Pay to Stay proposals Catalyst believes that there is a better way to achieve the government s twin objectives of ensuring that: Tenants in social housing do not automatically benefit from subsidised rents; and
The policy supports work incentives Catalyst believes that the power to set rents without outside interference should be restored to Housing Associations and that therefore the Rent Standard set by the Regulator of Housing should be abolished. Instead, there should be a voluntary agreement between the sector and the government to set rents in accordance with the ability of the sector s residents to pay. This voluntary agreement could act as a means of ensuring that Housing Benefit costs are controlled. Catalyst itself would introduce Living Rents which are determined by market rent levels and household incomes. We would produce a range of rental and home ownership products at different price points and would target household groups with different levels of income. So for example we would have a set of deeply discounted rents for those with incomes below lower decile earnings, sets of moderately and marginally discounted rents for those with earnings below the median and so on. The product range would also include opportunities for renters to switch tenure and part own their homes. Higher income households could purchase outright with Right to Buy should they so decide. Rent product Lower decile Lower quartile Median Upper quartile Deeply discounted Moderately discounted Marginally discounted Shared ownership Outright sale Figure 4: Illustrative diagram showing relationship between Living Rent products and earnings levels (in London). We believe that this model of tying rental products to incomes is much more efficient, would act as a work incentive and it would ensure that there is no automatic right to a subsidised rent. The voluntary nature of the agreement would build upon the trust generated by the recent voluntary Right to Buy agreement. 8. Further information For further information, please contact: Kevin Nichols, Head of Strategy and Business Intelligence 020 8832 3273 kevin.nichols@chg.org.uk
Appendix 1: Estimate of numbers of residents affected by proposals Methodology As Catalyst does not regularly collect income information from its households, and income collected at time of letting is likely to be out of date and incomplete, the number of households impacted is estimated using other data sources. These include publically available data: UK Census (ONS); Annual Survey of Hours and Earnings (ONS); Statistical Data Return (HCA), as well as internal sources: Catalyst census project; Orchard Housing Management System; Catalyst s Intelligence Team. Details of how Catalyst estimated the number of households per income threshold, by bed size and top ten local authorities are set out below. When considering Catalyst households earning an annual gross income above 30,000 out of London and above 40,000 in London, of the estimated 10,638 households in Catalyst s top ten local authorities, 1,111 households (10.4%) are estimated to be affected. It is estimated that 396 (35.7%) of these are outside London and 715 (64.3%) within London. The 10.4% figure has been used in the modelling that underpins this response. Household weekly gross income deciles: ONS UK Census (2013) provides average weekly gross income thresholds, by decile, for all households within the UK. The proportional split between tenures, within each decile, is also provided. As the weighted sample size is also provided, it is possible to re-calculate the table to provide the proportional split across deciles for only registered social landlord households. Table A50 - Percentage of households by economic activity, tenure and socio-economic classification in each gross income decile group, 2013 (Excel sheet 50Kb) According to this table, <0.5% of registered social landlord households earn more than 75,000. As the proportions are not provided to a significant level of accuracy, it must be assumed that no registered social landlord households earn more than 75,000 per annum. The ONS UK Census results have not been provided by local authority and therefore weekly gross income deciles cannot be split further using this data. However, the Annual Survey of Hours and Earnings (2014) provides average weekly gross income deciles per job by constituency, which (after reworking consistency to local authority) can be used as a proportional proxy to reweight the overall proportions within each weekly gross income decile, giving an income adjustment for each local authority. ASHE 2014 (provisional) Table 10 - Place of Residence by Parliamentary Constituency (ZIP 8407Kb) Thus it is possible to estimate the proportion of registered social landlord households within weekly gross income thresholds, for each local authority. Income thresholds Although the UK Census provides weekly gross income thresholds according to decile, this analysis requires certain thresholds to be considered. Specifically annual incomes of 30,000; 40,000; 61,000; 71,000 and 85,000, being the pay-to-stay lower thresholds out of and within London as well as the upper thresholds for Shared Ownership out of and in London (for 1-2 beds and 3 or more beds). For ease and accuracy of analysis 35,000; 45,000, 50,000; 55,000 are also considered. Using the deciles provided, it is possible to interpolate between percentages to calculate the proportion of households below a particular threshold. For this analysis, the following categories are then determined and used for calculation (the lighter grey cells representing 100%):
Below 30k 30k - 34.9k 35-39.9k Below 40k 40k - 44.9k 4k5-49.9k 50k - 54.9k 55k- 59.9k 60k + 71k + 85k + Number of Households by tenure As income data is provided nationally, is it prudent to continue to calculate at higher levels, prior to applying to any Catalyst information. The ONS UK Census (2011) provides the total number of households by tenure and local authority: 2011 Census: QS405UK Tenure - Households, local authorities in the United Kingdom (Excel sheet 281Kb) For this analysis, only Catalyst s top ten local authorities (by stock count) are of interest, being: Ealing; Brent; Kensington & Chelsea; Hillingdon; Hounslow; Oxford; Reading; Luton; Slough; and Hammersmith and Fulham. The Statistical Data Return (2014) made by all registered social landlords (RSL) in England, provides stock counts by RSL, local authority and tenure. SDR 2013 to 2014 full data sheet This data provides a proxy relationship between the total number of registered social landlord households and those belonging to Catalyst. From this information it is possible to use the previous proportional data and apply actual household counts, giving the number of Catalyst households within weekly gross income thresholds, for each top ten local authority. Household size Although the ONS UK Census results do not provide weekly gross income deciles by household bed size, they do provide weekly gross income deciles according to the number of people in the household. Table A49 - Percentage of households by size, composition and age in each gross income decile group, 2013 (Excel sheet 49Kb) Again, as the weighted sample is provided, it is possible to re-calculate the table to provide the proportional split across deciles by person size, for all UK households. Using the data previously provided for the proportion of registered social landlord households across weekly gross income deciles, it is possible to determine the proportional split across deciles by person size, for only registered social landlord households. Results from the Catalyst census (2014) are used to transform this data to use bed size rather than person size. This then provides the proportion of registered social landlord households across weekly gross income deciles, by bed size.
A) Jump to market rent model Appendix 2: Impact of Pay to Stay upon disposable incomes Westminster Single Person Lone parent + 1 child Couple + 2 children Gross annual earnings 646 pw 118 pw 369 pw 125 pw 421 pw 157 pw 40,000 465 213 478 182 460 56 45,000 520 269 533 237 515 76 50,000 566 315 579 283 561 92 55,000 612 361 625 330 607 118 60,000 658 407 672 376 653 164 65,000 705 453 718 422 700 211 Brent 107 pw 243 pw 117 pw 308 pw 156 pw 427 pw 40,000 475 339 486 296 461 276 45,000 531 394 541 351 516 295 50,000 577 440 587 397 563 311 55,000 623 487 633 443 609 338 60,000 669 533 680 489 655 384 65,000 715 579 726 535 701 430 Reading 102 pw 198 pw 117 pw 227 pw 135 pw 245 pw 30,000 349 253 355 246 370 303 35,000 415 319 421 311 417 319 40,000 480 384 486 376 482 372 45,000 536 439 541 432 537 427 50,000 582 485 587 478 583 473 55,000 628 532 634 524 630 519 Aylesbury Vale 87 pw 150 pw 100 pw 167 pw 124 pw 179 pw 30,000 365 302 373 305 382 336 35,000 431 367 438 370 428 373 40,000 496 432 503 436 493 438 45,000 551 488 559 491 548 493 50,000 597 534 605 537 595 539 55,000 644 580 651 583 641 586 Disposable income defined as Net earnings plus benefits and tax credits minus rent. Figures expressed as pw
B) Stepped increase to market rent Westminster Single Person Lone parent + 1 child Couple + 2 children Gross annual earnings 118 pw 369 pw 125 pw 421 pw 157 pw 646 pw 40,000 465 414 478 419 460 375 45,000 520 470 533 474 515 417 50,000 566 466 579 461 561 411 55,000 612 512 625 507 607 427 60,000 658 508 672 494 653 443 65,000 705 503 718 481 700 459 Brent 107 pw 243 pw 117 pw 308 pw 156 pw 427 pw 40,000 475 448 486 448 461 407 45,000 531 503 541 503 516 462 50,000 577 522 587 511 563 454 55,000 623 569 633 557 609 500 60,000 669 587 680 565 655 492 65,000 715 606 726 574 701 484 Reading 102 pw 198 pw 117 pw 227 pw 135 pw 245 pw 30,000 349 330 355 333 370 348 35,000 415 396 421 399 417 394 40,000 480 442 486 442 482 438 45,000 536 478 541 476 537 471 50,000 582 524 587 522 583 517 55,000 628 551 634 546 630 541 Aylesbury Vale 87 pw 150 pw 100 pw 167 pw 124 pw 179 pw 30,000 365 352 373 359 382 370 35,000 431 418 438 425 428 417 40,000 496 471 503 476 493 471 45,000 551 513 559 518 548 515 50,000 597 559 605 564 595 562 55,000 644 593 651 597 641 597 Disposable income defined as Net earnings plus benefits and tax credits minus rent. Figures expressed as pw. In the stepped model, 5 equal thresholds have been assumed and the full market rent becomes payable at gross household income = 71,000 in London and 60,000 elsewhere.
C) Tapered increase to market rent Westminster Single Person Lone parent + 1 child Couple + 2 children Gross annual earnings 118 pw 369 pw 125 pw 421 pw 157 pw 646 pw 40,000 465 465 478 478 460 460 45,000 520 479 533 485 515 436 50,000 566 485 579 484 561 411 55,000 612 491 625 482 607 427 60,000 658 496 672 481 653 443 65,000 705 502 718 479 700 459 Brent 107 pw 243 pw 117 pw 308 pw 156 pw 427 pw 40,000 475 475 486 486 461 461 45,000 531 509 541 510 516 473 50,000 577 533 587 526 563 475 55,000 623 557 633 541 609 478 60,000 669 581 680 557 655 480 65,000 715 605 726 572 701 482 Reading 102 pw 198 pw 117 pw 227 pw 135 pw 245 pw 30,000 480 480 355 355 370 370 35,000 536 520 421 402 417 398 40,000 582 550 486 449 482 445 45,000 628 580 541 486 537 482 50,000 674 610 587 514 583 510 55,000 720 640 634 542 630 538 Aylesbury Vale 87 pw 150 pw 100 pw 167 pw 124 pw 179 pw 30,000 496 496 373 373 382 382 35,000 551 541 438 427 428 419 40,000 597 576 503 481 493 475 45,000 644 612 559 525 548 521 50,000 690 647 605 560 595 558 55,000 736 683 651 595 641 595 Disposable income defined as Net earnings plus benefits and tax credits minus rent. Figures expressed as pw In the tapered model, ultimate thresholds of 71,000 in London and 60,000 have been assumed and the full market rent becomes payable at gross household incomes above these levels.
Appendix 3: Administrative costs Scenario A Scenario B Scenario C Scenario D Units requiring assessment 3 11773 11773 11773 11773 Assessment time (hrs) 4 2 1 2 1 Working weeks 47 47 47 47 Effective working hours 30 30 30 30 Officers needed 17 9 17 9 Admin cost per unit (scan/mail/telephone/e-mail/text) 25 25 15 15 Administrator Salary 30,000 30,000 30,000 30,000 On-costs% 30% 30% 30% 30% Team leaders needed 3 2 3 2 Team leaders salary 38,000 38,000 38,000 38,000 On-costs% 30% 30% 30% 30% Manager salary 45000 45000 45000 45000 On-costs% 30% 30% 30% 30% Costs (Administrators) 663,000 351,000 663,000 351,000 Costs (Team leaders) 148,200 98,800 148,200 98,800 Costs (Manager) 58,500 58,500 58,500 58,500 Total staff cost 869,700 508,300 869,700 508,300 Total admin cost (cost per unit x no of units) 294,325 294,325 176,595 176,595 SUB TOTAL 1,164,025 802,625 1,046,295 684,895 Cost per assessment 98.87 68.18 88.87 58.18 Contingency for changes of circumstances 291,006 200,656 261,574 171,224 Contingency for appeals 232,805 160,525 209,259 136,979 TOTAL 1,687,836 1,163,806 1,517,128 993,098 In all scenarios there are assumptions that 25% of cases require 1 reassessment due to a change of circumstances and that 5% appeal the determination and that an appeal takes 4 times as long to determine. Scenario A Assume time spent per case to be 2 hours and that admin costs for scanning, mailing, telephoning, e-mailing and texting are 25 per case. Scenario B Assume time spent per case to be 1 hour and that admin costs for scanning, mailing, telephoning, e-mailing and texting are 25 per case. Scenario C Assume time spent per case to be 2 hours and that admin costs for scanning, mailing, telephoning, e-mailing and texting are 15 per case. Scenario D Assume time spent per case to be 1 hour and that admin costs for scanning, mailing, telephoning, e-mailing and texting are 15 per case. 3 Assumes no identification of households requiring assessment supplied by central/local government department 4 Total time spent including first and any follow up requests for information, clarification of information, dealing with enquiries, processing information, performing the calculations (including market rent), notification of outcome.