The Chancellor Intends to Freeze Housing Allowance. He Should Think Again

UK Policy Housing Public finances

The Chancellor Intends to Freeze Housing Allowance. He Should Think Again

Commentary
Posted on: 2nd March 2021
Christina Palmou
Senior Economist

This Wednesday the government is poised to start unpicking temporary measures put in place to safeguard living standards during the pandemic. Although much of the speculation has been on whether the Chancellor will extend the £20 uplift in Universal Credit rates, what he does to housing benefits will also be important. Freezing the Local Housing Allowance (LHA, the maximum amount of private sector rent that will be covered by benefits in a particular area), as he is expected to do, would be unfair, untimely and economically unsound.

LHA rates were delinked from prevailing rent levels by George Osborne in 2012 and then frozen in cash terms for four years from 2016. In response to the pandemic the Chancellor realigned rates with the 30th percentile of local housing costs. Going back to Osborne-style freezes means that LHA will again fall below the 30th percentile, widening the gap between housing benefits and actual housing support.

This gap could open up quite quickly. Our analysis, illustrated in Figure 1 below, shows these changes had by 2019 resulted in a £1240 per year shortfall of the allowance for an average two-bedroom property at the 30th percentile (the cheapest third of rents to which LHA rates were previously linked). As shown in Figure 2, the shortfall was largest in the south of England and urban areas where rents rose fastest. We estimate that the average two-bedroom claimant family pre-COVID, had an income (excluding housing benefits) of £17,000, making the shortfall a stark 7.3 per cent of its remaining budget.

Figure 1: Annual gap between housing costs and housing benefit for a two-bedroom house at the 30th percentile

Source: Author’s calculations using Valuation Office Agency data on LHA rates for financial years 2013-2021

Figure 2: Gap between housing costs and housing benefit for a two-bedroom house, 30th percentile

Universal Credit statistics published this February highlight the striking effect the decision to re-align LHA rates with housing costs has had on private renter claimants during the pandemic. The uplift has resulted in a near 10 percentage point increase in the number of households that report LHA actually covered their rent.

Figure 3: Percentage of LHA recipients in privately rented accommodation for which LHA did not cover their rent

A decision on Wednesday to re-freeze LHA would come at a moment when statistics on rent arrears are staggering. Housing debt built up over the pandemic totals an estimated £375 million affecting 840,000 households across England and Wales. According to the Joseph Rowntree Foundation (JRF), already from November, around 2.3 million households were worried about paying rent over winter, 700,000 were already in arrears and 350,000 had been served an eviction notice or been spoken to about eviction by their landlord. New survey evidence by the Resolution Foundation shows that three in ten families are more in debt than they were a year ago and one in five Universal Credit claimants, more than half a million of which are private renters, are behind on essential bills. COVID, has hit low-income households particularly hard, and LHA recipients are more likely to be employed in retail, hospitality, and the arts.

It is possible the Chancellor is counting on a galloping economic recovery upon reopening to spare many having to choose between food and housing. But even if there is a rapid bounce, it will take a long time to benefit many renters. Despite the sizeable support of the furlough scheme, 7.8% of UK renters were unemployed in September, with most indicators suggesting unemployment will not peak until the middle of 2021. As hopeful as we want to be about reopening, weak business balance sheets will slow down absorption of those already made redundant and many that had found themselves suspended for months between unemployment and a job on deep freeze may find that that job has not survived the pandemic.

The number of jobs lost that will come back and the speed with which that will happen is still not clear, but last week’s Business Impact of COVID Survey results suggest about 22% of renters are employed in sectors where more businesses report lower confidence of survival.

What’s more, freezing LHA is most likely a false economy. The OBR estimates the move would bring the £1 billion cost of increasing LHA rates in 2020-2021 down to £0.3 billion by 2025-26.  But the cuts introduced in the 2010s have since been found responsible for rising evictions, homelessness and households living in insecure accommodation. As a result, they failed to achieve their projected savings: due to the spike in local authority spending to protect affected families, for every pound central government saved, local government spending increased by 53 pence.

Even if the fiscal savings implied were not doubtful, violating the common-sense principle that housing support should be proportionate to the market rent faced by tenants, seems misguided. Even before COVID, housing was climbing up the public’s priorities for additional government spending, third after education and health. A moment when we may see the biggest year-on-year rise in poverty rates since the 1980s is surely the wrong time to scale back on housing support. The Chancellor should think again.

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