Published: 11 Feb 2016 by Vicky Pearlman

Parliament must look long and hard at the potential impacts of the Government’s proposed Pay to Stay policy, part of the Housing and Planning Bill.

Shelter is not against the principle of some social housing tenants paying slightly higher rents, depending on their income and household need. But we are very concerned that doing it in this way risks taking a sledgehammer to a nut and finding there is little of the nut left at the end.

Under Pay to Stay, households who live in social housing, and are considered to have ‘high incomes’, will have to pay much more for their home if their rent is currently below average private sector rents for their local area (known as a market rent). The threshold for ‘high income’ will be £40,000 in London and £30,000 in the rest of the country – and that’s a household income, not an individual. This means that:
• A couple who are both working full-time on the ‘actual’ living wage of £7.85 would earn £32,656 a year and be classed as ‘higher income’.
• A couple working full-time on the new Minimum Wage (£7.20 from Spring 2016) will have an annual household income of £29,952. If one of them were to agree to a single overtime shift they will be pushed over the £30k threshold.

There are 3.92 million social rented homes in England, 7.4 per cent of which will be affected by Pay to Stay. If the policy was implemented today, 290,000 ordinary households across the country would have to pay 80 per cent of market rent (rising eventually to 100 per cent) or risk losing their home.

Worse, there is no proposal to increase the income threshold with inflation or earnings. Over time, failing to uprate the thresholds will drag tens of thousands of tenants, who may not consider themselves to be ‘high income social tenants’, into Pay to Stay. Eventually, if the thresholds are not uprated, it will catch households most people would consider to be on pretty low incomes.

The guiding principle for social housing was that rents were based on a formula that combined local wages and local property values. For example, for much of Southern England, rents were set at about 54 per cent of market rents, and even lower in very expensive areas. Crucially, social housing rents in expensive areas have allowed people to work without being dependent on housing benefit. But the difference is not so marked everywhere: in Shropshire, social rents are typically around 86% of market rates, in Darlington the proportion is 89%. In some places, social rents actually exceed those in the private rented sector.

We have 5 big concerns about Pay to Stay:

1. It will increase the housing benefit bill

When Pay to Stay was first discussed, back in 2012, the Government proposed an income threshold of £100,000. This was subsequently reduced to £60,000, and the scheme that was introduced then was voluntary. Many households at the much lower (£30,000/£40,000) income thresholds of the new model will still be entitled to housing benefit – so increasing their rent will simply increase the housing benefit bill. Under Universal Credit, help with housing costs will be available even further up the income scale – meaning more tenants affected by Pay to Stay will be added to the benefit bill.

Others could be pushed on to housing benefit for the first time. Twelve per cent of social tenants entitled to housing benefit currently do not claim it – but could be forced to if their rent is increased suddenly.

2. It will weaken incentives to work

Setting the income thresholds as low as this could seriously undermine work incentives, because increasing your earnings to a bit above the threshold will dramatically increase your rent. As the minimum wage rises, most social tenants in full-time work will eventually be paying market rent, or near-market rent. This would have a disastrous impact on work incentives – few people would seek to increase their hours or progress to higher paid work if the only reward was an increase in their housing costs, potentially cancelling out their higher earnings.

There’s also a more complex problem with the way housing benefit kicks in. Lower social rents play an important role in work incentives, by stopping lower earning households needing housing benefit, meaning that they keep more of any additional income that they earn. Setting the income threshold so low would mean that families will find themselves with weak work incentives throughout their working life. It would also mean that an increase in rent could push them back into dependence on housing benefit.

A system of tapers, as suggested by Government, would go some way to address this – but it is hard to fathom how a system of intermediate thresholds and tapers would work, without becoming so complicated as to remove any incentives to work.

The only way to prevent a rise in the housing benefit bill and significantly reduced incentives to work is to exempt households entitled to housing benefit or universal credit from Pay to Stay.

3. It will price out nurses, paramedics and teachers

Income thresholds set at £30,000/£40,000 will price out social tenants not usually considered to be on a high income, including nurses, paramedics and teachers, as soon as the policy is introduced. Schools and the NHS are already struggling to recruit suitable staff in high rent areas. If the income thresholds fail to keep pace with wage inflation, this will increasingly push key workers away from jobs vital to our communities.

4. It will create a costly, bureaucratic headache

As if these outcomes weren’t worrying enough, we also have doubts about the wisdom of expecting social landlords to collect evidence of income from all social tenants – when only a small minority are likely to have incomes over the Pay to Stay thresholds. Currently, around 7 per cent of social tenants are likely to have incomes high enough to cross the threshold – in less affluent parts of the country, this percentage is likely to be even lower. International experience shows that inspecting the incomes of everyone in social housing is intrusive and difficult.

An international comparative study commissioned by Shelter concluded that most countries that have charged increased rents based on incomes have found them to be difficult and inefficient in practice, and to generate adverse consequences. Most parts of Germany, for example, have stopped charging increased rents because the bureaucratic costs of implementation were found to be substantial, self-reported income estimates were found to be unreliable and investigation costly. It works slightly better in Hong Kong, where income is reviewed every two years (after ten years of tenancy) and increased if a tenant’s income has risen too far. However, a high level of state surveillance is common in Hong Kong, so income disclosure is viewed as normal by tenants and routine by housing officers. Even so, income ceilings are set high enough that few tenants are charged increased rents, and very few lose their tenancies.

5. ‘Higher income’ social tenants will be unable to afford to buy

The proposed income thresholds are lower than those the Government has used elsewhere, to define who is eligible for help to buy their own home. For example:
• Households are eligible for support to purchase a three bedroom home under Shared Ownership if they earn less than £85,000 a year
• Households under 40 years old can receive a 20% discount when buying a Starter Home if their income is close to £100,000, as homes up to £450,000 are eligible
• Tenants eligible for the Right to Buy extension will be able to access a discount of over £100,000 regardless of their income – the total discount could exceed the amount they have ever paid for the property in rent.

We are concerned that social tenants with household incomes of £40,000 or even £50,000 will find it difficult to access the home ownership market in many parts of the country – an increase in their social rent would simply reduce their ability to save for a deposit. To avoid this, income thresholds should be set at a level above which other Government home ownership schemes would be genuinely affordable.

So while we can see the argument for some better off social housing tenants paying slightly higher rents, we believe that the proposed income thresholds are far too low, given how unaffordable market rents are in many parts of the country, particularly for family-sized homes. Added to this, it is difficult to see how the costs and practical headaches of implementing the scheme will not outweigh any possible benefits.

Rather than creating an additional burden for social landlords forced to charge higher rents to a tiny proportion of renters, the real solution is to provide more genuinely affordable housing – including more homes at low, social rents.