The changes to Local Housing Allowance and the rest of the Housing Benefit system have been covered frequently on Red Brick. We don’t think much of them.
But one argument that the government deployed seemed logical to a lot of people. That was the common Ministerial assertion that, because LHA claimants make up as much as 40% of the private rented market, the level of LHA payments must be a big factor in the rise in private rents over recent years. And the corollary was that cuts to benefit, and hence to tenants’ ability to pay, would inevitably lead to a fall in rents, which would be a good outcome.
In my old economics textbook I find some support for this in theory: if supply is constant and effective demand falls, then the price should fall as well. Cue much Tory-speak about the good old market mechanism.
However in the real housing market demand is in such excess over supply that the neat little supply and demand chart really doesn’t work. If you reduce benefits so that tenants in high demand relatively expensive areas have to move out, there are many people willing to replace them at the same price. The price will not fall. Yet in the cheaper areas where the tenants are expected to move to, there will be more people chasing the small proportion of homes that become available at or below the 30% percentile (the new cap) at
any one time: the price is likely to rise.
A new report ‘Leading the Market’ from the Chartered Institute of Housing and the British Property Federation pours more cold water on the ‘LHA causes high rents’ argument.
They conclude that
“The increase in average rent levels during this period (2008-2010) is entirely due to a shift in the relative distribution of the caseload from the North and the Midlands towards London and Southern England. After adjusting for this ‘caseload effect’ average housing benefit rent levels fell by 1% (instead of the reported 3% rise).”
“We found no evidence for a relationship between the LHA inflation rates and the proportion of the market that is let to housing benefit tenants.”
“There is no evidence to support the contention that the LHA is inflationary or produces a feedback loop.”
“Our findings call into question the Government’s strategy that it can use its power as a bulk purchaser to force landlords to reduce their rents. If LHA rates do not contribute towards rent inflation then conversely they cannot be used as a tool to force rents down.”
In short the policy is not just wrong in principle: it is wrong in theory and it is wrong in practice.