Making sense of welfare reform - what does it mean?

Today the Welfare Reform Bill receives Royal Assent, almost 21 months since its measures were announced in the June 2010 Emergency Budget. Throughout, our top priority has been to ensure that housing benefit retained a link to the rents people actually pay. The power itself was buried in the middle of the bill as an opaque clause that gave the Secretary of State sweeping powers to change the way housing benefit is calculated.

Currently Local Housing Allowance – the housing benefit paid to private tenants – is set by rent officers who look at the local rents in the area, line them all up from the cheapest to the most expensive and then take the 30th percentile as the relevant LHA rate for the area. This means that the bottom third of the rental market should be affordable to households on housing benefit. If market pressures cause rents to rise, the LHA rate increases. Conversely, if rents fall, the LHA rate drops.

But from this April LHA rates will be frozen – even though rents are still rising steadily – and rent officers will stop this monthly check on the market. Instead, from April next year, all LHA rates will be adjusted by a one-size-fits-all measure, the Consumer Price Index. The CPI is designed to measure general inflation, not changes in the rental market. It is based on the average shopper’s “basket of goods”, and gives rents a very low weighting. In effect, the changing price of a meal out will have greater influence on LHA rates than what happens to actual private rents.

Historically rents have risen much faster than CPI inflation, so this change means that LHA rates will fall out of step with private rents over time. We spoke to a number of MPs and peers about this threat during the bill’s passage and they were successful in getting the Minister Lord Freud to acknowledge the long-term risk created by the CPI link. The Government has committed to reviewing the impact after two years and has said that rates can be up-rated if rates and rents are out of step.

We will be monitoring what happens to rents and LHA levels over the next few years and keeping the Government to this promise. Tenants may not be badly affected by a couple of years of below-market LHA increases, but if left unchecked over time, more and more people will be unable to pay their rent, creating a time bomb of pent up housing need that will be very costly for a future government to defuse.