Published: 9 Jul 2015 by Kate Webb

Housing benefit has been squeezed for so long it’s easy to miss that it took another hammering in yesterday’s Budget. Cuts hitting private renters – including large numbers of working households – will see huge swaths of the country become unaffordable by the end of this parliament.

Freeze to LHA

The chancellor announced that Local Housing Allowance rates will be frozen for four years – twice the two year freeze promised in the Conservative manifesto. Local Housing Allowance rates set the maximum amount of support that private renters can receive towards their housing costs. The system was one of the big losers in the 2010 Emergency Budget, when rates were re-pegged from median local rents (meaning families on housing benefits could afford half the homes in their local area) to the bottom 30th percentile – meaning only three in ten homes in an area are affordable.

It was a big chunk of support for families to lose overnight but we always warned the real risk would be felt down the line. In 2012 the link between LHA rates and local rents was broken entirely – meaning housing benefit no longer increased as rents rose. Instead LHA rates were up-rated by CPI inflation from April 2013; an arbitrary measure that meant the safety net became unresponsive to rising rents and localised pressures.

This radically removed one of housing benefit’s strongest features – it’s responsiveness to actual rent increases. In an attempt to find further savings, the Treasury went further and up-rated LHA rates by just 1% in 2014 and 2015, with exemptions for some of the highest pressure areas. Meanwhile in the last year alone, average rents in England increased by 2.1%.

As a result LHA rates have already fallen behind actual rents in nearly 70% of England, meaning families are chasing an ever smaller number of properties at the bottom of the market covered by housing benefit, or are having to make up the difference by cutting back on essential spending elsewhere.

The new four year freeze will inevitably exacerbate this. Our model suggests that after two years – the freeze originally mooted – nearly all of the country will be unaffordable. The bottom third of the market will be affordable in just 20 local authorities.

Extending the freeze means that the cuts will become deeper as rents continue to rise. We consider an area to have become very unaffordable to benefit claimants when LHA rates fall below the 10th percentile. By 2019 60 local authorities will be very unaffordable, marking huge parts of the country out of bounds to people who need support. This includes most of London, large parts of the Home Counties, towns like Reading and high pressure areas like Manchester.

At this point the impact on households changes from having to make up often painful shortfalls to struggling to keep or find anywhere remotely affordable to live. Households risk losing tenancies and those who have to move will struggle to find another home without moving large distances.

It’s difficult to see how homelessness will not continue to rise. We’re already seeing big pressures emerge from the private rented sector, with the loss of a tenancy now the single biggest cause of homelessness.

The promise of Discretionary Housing Payment and respite for the highest pressure areas will provide some welcome relief, but will be insufficient to offset this huge national drift towards unaffordability. A four year freeze risks pushing the system to breaking point; banking savings today in the knowledge that a costly correction will be necessary later – and leaving local authorities and organisations like Shelter to pick up the pieces in the meantime.

Loss of family premium

The budget also announced a change to the way housing benefit is calculated for working households. The means test has been made less generous and the amount families are assumed to need to meet their basics needs has been squeezed by removing what’s known as the Family Premium. This is an income allowance worth £17.45pw and will be removed from new claimants from April 2016. Changes to tax credits to remove support from larger families will further affect the way housing benefit is calculated from 2017.

Exploiting the complexity of housing benefit and tinkering with means tests and tapers is a clever ruse to extract savings from housing benefit in a technical way that doesn’t attract attention in the way that big, visible cuts like the bedroom tax did. We’re still looking at the details and the interaction with tax credit changes, but our initial calculations suggest that the impact on families will not be insignificant. A single mother working 20 hours a week at the new national minimum wage would be around £11 per week worse off if the family premium were removed today.

That’s £11 a week that would come in really useful if you’re already struggling to make up a shortfall caused by the inadequacy of LHA rates. One reason the impact of the LHA reforms to date hasn’t been even more severe is that families have been able to squeeze their budgets and make up shortfalls. This cut combined with the reforms to tax credits will make it ever harder.