The missing link – impact assessment silent on LHA

MPs had their first opportunity on Tuesday to vote on measures to restrict benefit increases to one per cent. This will be a real-term cut to the incomes of hard pressed families in and out of work. At Shelter we know that many people are already struggling to make ends meet – as evidenced by nearly one million households resorting to payday loans to help pay their rent or mortgage last year.

The Autumn Statement said that Local Housing Allowance rates (LHA) would also be up-rated by one per cent only next year and the year after. This is despite the DWP forecasting that rents will increase by four per cent a year [PDF].

Before Christmas we argued that the real damage to private renters was done in last year’s Welfare Reform Act. This broke the crucial link between LHA rates and actual rents, meaning that even if private rents soar, the support available to private renters will be unable to keep pace.

The impact of this on housing affordability is deeply concerning. Aware of this, Ministers had already agreed to monitor the impact of linking LHA rates to CPI, with a pledge to increase support if there was a critical lack of affordable housing.

Yet the impact assessment [PDF] published today by the DWP makes no attempt to quantify the additional impact of up-rating LHA by one per cent. It predicts that the average household will be £3 per week worse off as a result of the one per cent rise to other benefits, but is silent on the issue of the additional squeeze to private renters.

Analysis by Shelter suggests that losses faced by private renters will be more than double official DWP estimates. By April 2015, more than half of LHA rates for two bed properties will be £3.45 or more a week below what they would have been if LHA had kept pace with CPI (based on the Office for Budgetary Responsibility’s latest estimates).

For example, from this April the two bed LHA rate in Solihull will be £147.40 per week. With a 1 per cent cap, this will increase to just £150.36 by April 2015. However, if LHA rates had increased by CPI inflation, rates would be £4.20 a week higher at £154.56.

But historically rents have risen faster than CPI inflation [PDF]. Shelter’s analysis shows that by April 2015 the 2 bed LHA rate in Solihull will be £11.88 below what it would have been if support for renters had kept pace with rents in the bottom third of the market.

When the move to break the link between LHA rates and actual rents is taken into account, more than half of LHA rates will be £7.45 or more below what they should have been. The DWP has acknowledged that rents are rising fast in some markets and has pledged to exempt the least affordable areas from the one per cent cap, but has released no information on how this will be calculated. Our concern is that funds set aside for the exemption will be insufficient to reverse the squeeze on renters.

These amounts may not sound dramatic to those fortunate enough to be on average earnings. But any annual rent increase above one per cent will force families to cut back on other essentials; made harder by sluggish wage growth and the real-term cuts to other benefits and tax credits enacted by today’s bill. Over time the private rented sector will become increasingly unaffordable to low income households, raising real fears of homelessness [PDF] for those who drop off the bottom of the rental ladder.