Leading the market?

A research report into whether Local Housing

Allowance (LHA) lettings are feeding rent

inflation

Chartered Institute of Housing

British Property Federation

September 2011

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Chartered Institute of Housing

The Chartered Institute of Housing is a registered charity and not-for-profit organisation. This means that the money we make is put back into the organisation and funds the activities we carry out to support the sector. We have a diverse and growing membership of over 22,000 people who work in both the public and private sectors, in 20 countries on five continents across the world. Chartered Institute of Housing Octavia House Westwood Way Coventry CV4 8JP Tel: 024 7685 1700 Web: www.cih.org

Email: customer.services@cih.org

British Property Federation

The British Property Federation is the trade association for property investors in the UK. It represents landlords in the commercial and residential sectors. So far as residential is concerned this means a number of affiliated national and regional landlord associations across England, who between them represent 15,000 landlords. It is also the representative body for larger private sector landlords, who although few in number, will have 100,000 private rented sector homes under their management. The BPF also has a number of housing associations, private student accommodation investors and support organisations such as agents and lawyers in membership. Along with the National Landlords Association and Residential Landlords Association we are one of the main three residential landlord representative organisations in the UK. British Property Federation 5th Floor St Albans House 57-59 Haymarket London SW1Y 4QX Tel: 020 7828 0111 Web: www.bpf.org.uk

Email: info@bpf.org.uk

© Chartered Institute of Housing / British Property Federation 2011

Written and researched by Sam Lister, Christoph Sinn and Thomas Younespour

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Contents

1. Executive summary 2. Background:

The Emergency Budget and Spending Review 2010 The scope and purpose of this report

3. The case against the LHA: a review of existing evidence 4. Methodology

Adjusting for the effects of caseload composition LHA inflation rates and the proportion of housing benefit lettings

5. Results and findings

Adjusting for the effects of caseload composition LHA inflation rates and the proportion of housing benefit lettings Other reasons for apparent inflation compared with non-LHA awards

6. Conclusions 7. References

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1. Executive summary

1.1 In attempting to reduce public expenditure, Government have sought to decrease

spending on levels of housing benefit through the local housing allowance (LHA) paid to private and social housing tenants. Substantial changes to the LHA and to welfare provision in general have resulted in a number of assumptions and information circulating about the potential savings from this.

1.2 In June 2010 the new Coalition Government unveiled its strategy to eliminate the budget deficit over the life time of Parliament largely through reductions in public expenditure

1.3 Housing benefit is the second largest item of social security expenditure and so it was

always likely that it would be the target of cuts. The total package is expected to reduce housing benefit expenditure by £1.8 million a year by the end of the Parliament.

1.4 The housing benefit cuts are to be implemented by a series of changes between April

2011 and April 2013 but the majority of the immediate changes affect private tenants and will start to take full effect from January 2012.

1.5 Announcing the changes in the Budget the Chancellor said that spending on housing

benefit had risen by around 50% in ten years from £14 billion to £21 billion and that costs were „completely out of control‟.

1.6 This argument was elaborated further in Governments impact assessment which

implied that the rapid rise in expenditure was at least partly due to the introduction of LHA in April 2008 and noted that average rent levels in LHA awards were on average £9 more than awards under the previous scheme.

1.7 Ever since the LHA scheme was first announced in 2002 it has been criticised as

being inflationary because the rent levels to which the claimant is entitled are published. The contention has been that landlords will simply raise their rents to LHA rates creating a continuous feedback loop whereby the rents paid by housing benefit rapidly inflate.

1.8 The belief that the LHA is inflationary is supported by the Welfare Reform Minister.

His evidence to the Work and Pensions Select Committee showed that between November 2008 and February 2010 the average rent paid to LHA claimants increased by 3% whilst in the wider (non-housing benefit) market average rents fell by 5%.

1.9 An extension of this argument is that housing benefit rent levels will inflate more

rapidly in markets where housing benefit tenants form the majority of lettings. The strategy is that by bearing down on the level of awards they will be able to influence local rents and that landlords will be forced to follow because housing benefit tenants make up around 40% of the private rented market.

1.10 CIH and the BPF have collaborated on research to review available data on the LHA

to see what if any effect it has on rent inflation. In particular we looked at whether the increase in average rents for LHA claims could be caused by other factors such as changes in the composition of the caseload.

1.11 Caseload composition can cause an uplift in average rent levels if the proportion of

claimants shifts from between regions where rents are relatively inexpensive (such as the North and the Midlands) to more expensive areas (London and the rest of Southern England).

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1.12 Likewise a shift in the composition of the caseload away from single person households towards a higher proportion of families would also cause some uplift in average rents because larger properties are more expensive.

1.13 A simple comparison of the LHA rates at the start and end dates will show whether

rents levels have generally risen or fallen and the size of any caseload effect can be estimated by superimposing the caseload characteristics at the start date onto the LHA levels at the end date.

1.14 We also tested whether there was any evidence for a relationship between the

proportions of the market that is let to housing benefit claimants and LHA inflation by applying a standard statistical test.

1.15 We found that between November 2008 and February 2010 the number of areas in in

which LHA rates had fallen outnumbered those in which there had been an increase by a ratio of more than 2:1.

1.16 This pattern was repeated in all the regions and if anything was more marked in

London and the rest of southern England. This trend was also stronger in the one to three bedroom property sizes that together account for over 85% of all claims.

1.17 The increase in average rent levels during this period 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).

1.18 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. 1.19 Overall it seems that LHA rates do broadly reflect what is happening in the wider

(non-housing benefit) market and this should not be surprising because LHA rates are set from data that excludes housing benefit lettings. There is no evidence to support the contention that the LHA is inflationary or produces a feedback loop.

1.20 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.

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2. Background:

The Emergency Budget and Spending Review 2010 2.1 In June 2010 the new Coalition Government unveiled its Emergency Budget. The

principal aim was to eliminate the budget deficit over the life time of Parliament. The elimination of the deficit was largely to be achieved by reductions in public expenditure.

2.2 Social security is the largest item of public expenditure and since housing benefit is

the second largest component (or the third if tax credits are included) after retirement pensions it was always likely that it would be the target of cuts. Following the Emergency Budget further cuts to housing benefit were announced during the October 2010 Spending Review.

2.3 The cuts to housing benefit were to be implemented by a series of changes between

April 2011 and April 2013 affecting both private and social sector tenants. The majority of changes will however affect private tenants and will start to take effect (when transitional protection has expired) from January 2012. The total package is expected to reduce housing benefit expenditure by £1.8 million a year by the end of the Parliament.

2.4 The main changes affecting private sector tenants are:

The £15 weekly excess provision for both new and existing claimants is removed the purchasing power of local housing allowance (LHA) is set at the bottom 30% of the market instead of the bottom 50%

the LHA rates set as described above are subject to overall caps with the upper maximum based on a four bedroom instead of a five bedroom property size (further severely limiting the purchasing power of the LHA in London)

the upper age limit for single adults to qualify for the shared accommodation rate is raised from under 25 to 35 years old.

2.5 Announcing the changes in the Budget the Chancellor said that spending on housing

benefit had risen by around 50% in ten years from £14 billion to £21 billion and that costs were „completely out of control‟.

2.6 This argument was elaborated further in the DWP‟s July 2010 impact assessment of

the private rented sector changes. Although the impact assessment did not directly blame the rapid increase in costs on the LHA reforms introduced in April 2008 it did imply that it was partly responsible. It noted that “the average housing benefit award for local housing allowance cases is over £9 per week more than for customers still on the previous scheme for the private rented sector”.

2.7 The impact assessment set out the Government‟s justification for each of the

changes:

the overall caps address the excessively high rates paid to some customers

the removal of the five bedroom rate will bring the housing choices of larger families more in line with those that do not claim housing benefit

reducing rates to the 30th percentile will bear down on rental values being met by

housing benefit

the £15 excess is not justifiable in the current fiscal climate. The scope and purpose of this report 2.8 This aim of this report is not to challenge the Government‟s strategy to reduce the

budget deficit or indeed it strategy to reduce housing benefit expenditure but to examine in detail the proposition that housing benefit expenditure is „out of control‟ and, if it is, to test whether the local housing allowance scheme has been responsible for the rapid increase in the level of awards.

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2.9 The question as to whether the LHA has encouraged landlords to increase their rents

is important because it is central to the Government‟s strategy to keep costs under control. There is an important but subtle distinction to be made here between controlling costs and reducing expenditure. There is no doubt that the reforms will make savings but that is not the same as saying that the reforms will tackle the underlying causes that have led to the increase in expenditure.

2.10 Nor can any savings made justify the proposition that housing benefit policy can be

used as a tool to drive down private sector rents or, on the other hand, that the local housing allowance has been responsible for driving up private sector rents in local markets where housing benefit lettings predominate.

2.11 This report explores the arguments and the evidence as to these key questions and

in particular tests the following propositions:

the rapid rise in expenditure has been partly driven by LHA inflation

the LHA scheme encourages landlords to increase their rents

the rate of increase in the housing benefit rents is related to the proportion of the market that is housing benefit lettings (i.e. the bigger the share of the market that are housing benefit lettings the faster the increase in LHA rates)

the rents charged in the housing benefit sector have risen at a faster rate than in the wider (non-housing benefit) market; and

that LHA rates have risen at an unsustainable speed. We do this through an examination of the existing evidence and some new analysis.

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3. The case against the LHA: a review of the existing evidence

3.1 The policy of calculating housing benefit on a flat rate local housing allowance has

attracted strong opinions both for and against ever since it was first proposed in 2002. The policy has attracted criticism on a number of different grounds. One of the most persistent claims has been that the improved transparency resulting from publication of the LHA rates will result in rent inflation as landlords with properties at rents below the LHA rate will simply raise them to that level.

3.2 This belief is so commonly held that it has become conventional wisdom. There is no

doubt that instances of this kind of behaviour do occur and anecdotes are rife. But anecdotes, even those that can be proven to be true, do not constitute robust evidence and on their own cannot be sufficient to support the general proposition that the LHA is inflationary.

3.3 The DWP‟s evaluation programme of the LHA pathfinders concluded that “while the

more generous [Pathfinder] LHA regime may have contributed to some small uplift in overall rent levels […] there was no substantial impact

1”. Some have since (rather

unfairly) criticised the findings on the basis that the conditions in the pathfinders are unique. Never-the-less the evaluation programme remains the most comprehensive study of the housing market impacts to date.

3.4 Likewise others have expressed concerns that the transparency of the LHA regime

(i.e. publication of the LHA rates) would simply result in landlords raising their rents to the LHA levels. The Select Committee Inquiry found that there was some convergence of rents around the LHA rate but noted that there was more downward convergence on rents above the LHA rate than upward convergence of rents below the LHA rate

2.

3.5 The housing benefit reforms following on from the June 2010 budget and the

Government‟s claim that housing benefit is „out of control‟ have heightened interest in the idea that the LHA is inflationary and that the LHA regime is at least partly responsible for the rapid rise in expenditure.

3.6 Outside of the anecdotes there have been a number of official studies into the LHA

and its effects. The most important and substantial are the DWP‟s Evaluation Reports of the Pathfinder stage and the Two Year Review of the Local Housing Allowance.

3.7 A number of the headline facts from the Two Year Review were cited by the Welfare

Reform Minister in his evidence to Work and Pensions Inquiry on the Budget 2010 reforms. The Welfare Reform Minister cited powerful evidence from the Review that suggested that the LHA was inflationary:

“One of the most shocking things that has been happening in the market, when you look at the marketplace, is what happened after the crash and the onset of the recession. From November 2008, for the next 15 months, the property index declined by 5% and our HB claimants‟ payments went up 3%, which shows the disconnect there is between what is happening in the marketplace and what we are paying. It is one of the reasons that we took the view that we have to break this feedback loop of us pumping in money that pumps up the amount of money we have to pay. That is a very, very good example of what has been going wrong in the marketplace as a result of us being pretty unsmart buyers of private rented accommodation

3”.

1 DWP (2007) page 67

2 HC (2011) Table 1 and paragraph 32

3 HC(2011) Oral Evidence, Ev 25, Q132

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3.8 When this is considered alongside evidence of the higher awards received by LHA tenants compared with tenants on the previous scheme (i.e. the pre-LHA method of assessment) (paragraph 2.6) then there appears to be a strong case that the LHA is inherently inflationary.

3.9 An extension of this line of reasoning is that because housing benefit tenants

comprise a significant proportion of the market, if LHA rates are forced down then this will in turn, help force down the rents charged by landlords of housing benefit tenants. As the Welfare Reform Minister put it when asked about the effect of the reforms:

“[…] the bulk of people who have relatively small reductions in their Housing Benefit-[…] we would expect to be able to establish new rates with their landlords. The reason we are expecting that to happen is not very far to seek. In many, many markets, [the Government through housing benefit] is a 40% purchaser and you are changing the terms of trade, there is nowhere else for many landlords to go. Now, I know that is not the case in every market […], but as an average and as a whole, that is what we would expect to happen.”

3.10 Taken together the case against the LHA as feeding inflation appears to be powerful.

However, the weakness in the argument is that average awards (and rent levels) are dependent on caseload composition. In other words the average is weighted towards the most common types of case so that if larger households and households that live in the south of the country form the majority of cases then this will skew the average upwards. Therefore when comparing the average rents between two points in time adjustments need to exclude the effects of caseload before conclusions can be drawn as to whether the LHA is inflationary.

3.11 The remainder of this report re-examines the evidence set out in this section and

tests the assumptions that the LHA is inflationary and in particular tests whether:

whether changes in caseload composition had any influence in the apparent uplift in the rent levels of housing benefit awards

there is any real relationship between the proportion of the market that is let to housing benefit tenants and the rate at which LHA levels increase (or decrease).

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4. Methodology

4.1 Statistical analysis of available data sources were deemed the most appropriate

method for reviewing the evidence on whether the LHA is inflationary and whether there is a relationship between the proportion of the market let to housing benefit tenants and the rate at which LHA levels increase or decrease and whether changes in caseload composition had any influence in the apparent uplift in the rent levels of housing benefit awards.

In completing our review we split our analysis into two different elements:

firstly, the effects of caseload composition on average rent levels

secondly, the relationship between LHA inflation and the proportion of the market let to housing benefit tenants.

This section sets out the methodology used to analyse the above data. Adjusting for the effects of caseload composition 4.2 We started by taking the same comparison points as in the LHA two year review

study (November 2008 and February 2010). The simplest way of removing the caseload effects is to compare the actual LHA rates as at the two dates. This data can be obtained from the Direct Gov website. The only complication is that some of the LHA boundaries have changed between the two dates which make comparisons unreasonable and there are also a small number of missing data sets.

4.3 We started with the current boundary set for England (152 areas) and assumed that

broad rental market areas (BRMAs) with the same name were broadly comparable. The overall number of areas since 2008 has decreased slightly (from 156), but there are some new areas as well. There were 13 areas in total in which data was missing or which were new or defunct. These were recorded as no data.

4.4 We then compared the caseload composition for LHA cases, and sorted the data into

English regions to see if there was any shift in the composition of the caseload between the cheaper and more expensive regions.

4.5 In order to make a proper comparison between November 2008 and February 2010

and to estimate the true size of any increase or fall in the level of rents paid by housing benefit claimants the ideal would be to superimpose the November 2008 caseload characteristics onto the February 2010 LHA rates.

4.6 Unfortunately we do not have access to the full DWP Single Housing Benefit Extract

dataset and so were unable to sort and select the data sets we would have wished. However, Parliamentary questions have provided a breakdown of the LHA caseload by local authority for November 2008 and March 2010

4, including a breakdown of the

caseload by property size for the March 2010 data. This data (March 2010) is sufficiently detailed and close to the ideal (February 2010) to enable an estimate of the size of any uplift in rent levels caused by changes in the regional caseload composition.

4.7 The LHA caseload figures for November 2008 do not provide any breakdown by

property size so the March 2010 figures were used to estimate the proportions and were applied to the November 2008 caseload figures.

4.8 The main challenge to overcome was to select and match the two sets of data. LHA

rates are derived from rents within areas set by the rent officer (BRMAs) which are not coterminous with local authority boundaries, and are (very roughly) around twice the size of the average local authority. Another problem is that some of the BRMAs have been substantially revised and redrawn within the chosen period.

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4.9 The Valuation Office Agency (VOA) supplied a dataset that set out which BRMA(s)

covered each local authority, and if there was more than one for a particular authority, the proportion of that authority (by geographic area) that each BRMA covered. The dataset was used to assign a single BRMA to each local authority being the one that covered the largest proportion.

4.10 The final data sets for analysis were then selected by applying the following criteria

A sample of local authority areas was selected from each region with the aim to keep the same caseload proportions as in the full dataset for November 2008

Where possible authorities were selected that were covered by a single BRMA or where the coverage of the dominant was at least 80%. However, in order to achieve the regional caseload targets this minimum threshold was not achieved in a small number of cases. The final dataset comprised of 126 local authorities in England (38% of all English authorities).

4.11 The November 2008 caseload figures (with property size proportions based March

2010) were then applied to the November 2008 and February 2010 LHA rates and average rents calculated. To test the accuracy of the calculations the average rent derived was compared with the DWP average for March 2010, after making an adjustment for Scotland and Wales. The average rent figure (and the adjustment) for March 2010 was taken from the DWPs impact assessment based on the same date

5.

LHA inflation rates and the proportion housing benefit lettings 4.12 The method employed was as follows:

a standard statistical test was applied to the dataset to establish whether there was any correlation between the proportion of the local market let housing benefit tenants and the rate of increase (or decrease) in the LHA and

LHA inflation rates were sorted according to their frequency within a particular band to help reveal whether there was any clear bias towards an inflationary effect.

The main challenges to overcome concerned the sources and selection of data. 4.13 The VOA has published the LHA rates on a monthly basis since the national start of

the LHA scheme in April 2008 which provided an accurate and reliable data set from which to calculate the LHA inflation rates. The rate of inflation was April 2008 to March 2011: the maximum period over which the LHA was calculated according to the original rules (i.e. 50

th percentile, no caps).

4.14 We used the dataset supplied by Lord Freud (the Welfare Reform Minister) to the

Work and Pensions Select Committee on the size of the local private rented sector combined with caseload data from the DWP Single Housing Benefit Extract to calculate the proportion of the local market let to housing benefit claimants. There is some weakness in the data on the size of local markets but it is generally accepted as being the best source available.

4.15 The final data sets for analysis were then selected by applying the following criteria

BRMAs had been substantially been redrawn since 2008 were discarded

The new unitary local authorities created in 2009 were discarded

As with the estimate of the caseload effects, a single BRMA was assigned to each authority by the proportion covered. Each BRMA was selected once only and if it applied to more than one local authority the one with the highest rate of coverage was preferred. If there was still more than one (e.g. where a single BRMA completely covered two or more authorities the authority with the largest housing benefit caseload was preferred.

A minimum threshold of BRMA coverage was set (at 85% and 95%) to minimise any distortion caused in their being more than one LHA rate operating across the

5 DWP (2010a)

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same local authority (we analysed the data for both 85% and 95% minimum coverage).

4.16 Applying these criteria with the threshold set at 95% generates a dataset of 125 local

authorities (38% of English local authorities) covered by 89 BRMAs (59% of BRMAs) and the 85% threshold 177 local authorities (54%) accounting for 111 BRMAs (73%). The results were very similar for both datasets.

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5. Results and findings

Results: adjusting for the effects of caseload composition 5.1 Although average rents for housing benefit claims rose by 3% during the period

November 2008 to February 20106 the actual changes in LHA rates provide a

completely different picture. Table 1 shows that in England 61% of LHA rates fell and a further 1% experienced no change at all. Only 30% of LHA rates actually rose during this period. The proportion of rates that fell compared to rate rises is in the ratio of 2:1. It should be noted that this general pattern is slightly stronger among the 1 bed to 3 bed property sizes which (as at March 2010) represented 88% of the caseload.

5.2 We can therefore be confident that any increase in the average rent levels has not

been caused by inflation in the LHA rates. It also suggests that the majority of any increase in the average rent levels has been caused by changes in the relative regional distribution of the caseload rather than the relative distribution of property sizes.

Table 1: Net change in LHA rates November 2008 to February 2010 English BRMAs

LHA rate Fall No change Rise No data Total

Shared 69 8 62 13 152

1 Bed 97 1 41 13 152

2 Bed 104 0 35 13 152

3 Bed 100 0 39 13 152

4 Bed 95 0 44 13 152

5 Bed 90 0 49 13 152

Total 555 9 270 13 912

% of total 60.8 1.0 29.6 8.6 100

5.3 Table 2 confirms that there was shift in the regional distribution of the caseload

between the two sample dates – and significantly the region that experienced the greatest change was London which has by far the highest LHA rates. This is almost certainly the major factor behind the rise in the average rent level received by claimants.

5.4 It is noticeable that the two sample dates in the review fall either side of the financial

crisis (September 2009). In the six month period from September 2009 to March 2010 the private rented sector caseload in London increased by 11.5% compared with 10.4% for the rest of Great Britain. The same is true of the whole of the south of England (11.0%) compared with the rest of Great Britain (10.3%).

5.5 The economy had already started to slow down prior to the financial crisis and its

impact would have likely been felt earlier in the Midlands and North old industrial regions before the South where the economic base is more diverse. Following the financial crisis, and with the finance industry being centred in London, it would not be surprising if the relative rates of increase were higher in London and the South immediately following the crash.

6 HC(2010) and DWP

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Table 2: Percentage distribution of caseload by region Nov 2008 to March 2010

Region November 2008 March 2010

North East 5.27 5.34

North West 16.46 15.41

Yorkshire & Humber 12.48 10.34

East Midlands 6.51 7.20

West Midlands 9.67 9.45

East of England 8.54 8.65

London 16.45 18.79

South East 14.79 14.51

South West 9.82 10.32

North & Midlands 50.39 47.74

Greater South (East of England, South East and West, London)

49.60 52.27

5.6 The power of the caseload effect on average rent levels is illustrated in table 3. Even

though LHA fell across all regions in property types that represent almost 90% of the caseload and the relative frequency of falls was more marked in the higher rent regions the caseload effect was still sufficiently strong to cause uplift in average rent levels.

Table 3: Falls and gains in LHA rates for 1 bed to 3 bed properties by greater English

region (Nov 2008 to Feb 2010)7

Region 1 Bed 2 Bed 3 Bed

Fall Gain Fall Gain Fall Gain

North & Midlands 39 27 45 21 43 23

London 10 2 8 5 10 3

Rest of Southern England

49 12 52 9 48 13

Totals All Falls All Gains

North & Midlands 127 71

London 28 10

Rest of Southern England

149 34

5.7 To estimate the scale of the change in average rent levels we need to take account of

size of the rise or fall in each individual LHA rate as well as their frequency Table 4 shows the average (mean) and median change (expressed as a fall) in LHA rates without taking account of any caseload characteristics (i.e. based only on the number of BRMAs).

Table 4: Average percentage fall in LHA rates by property size

Shared 1 Bed 2 Bed 3 Bed 4 Bed 5 Bed

Median 0.14 0.28 0.27 0.27 1.73 1.88

Mean -0.87 0.99 1.26 1.17 2.03 2.96

5.8 Table 4 shows the median fall in LHA rates between November 2008 and February

2010 to be around ¼ of 1% with larger falls in the larger property sizes (but these property sizes also had the largest individual increases. The mean fall was around 1% - although the shared room rate showed an increase of about the same size. Although these figures take no account of the caseload (i.e. they give the same weighting to fall or increase regardless of whether the caseload is very small or large) they provide a useful check as to whether our estimate of the overall average change is reasonable.

7 Excluding cases where there was no data or there was no change.

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Table 5: Average rent level March 2010 and estimate of average rent levels after adjusting for caseload changes November 2008 to February 2010

DWP Average LHA rent March 2010 Great Britain

£126

Sample estimate Great Britain February 2010 £127 (99% accurate)

England only estimate average rent November 2008

£136.14

England only estimate average rent February 2010 if no change in caseload composition since November 2008

£134.82

% fall in average rent level after adjusting for caseload

0.9903

5.9 Table 5 shows the average rent level for March 2010 and the estimates of average

rent levels after adjusting for caseload changes between November 2008 and February 2010. The sample generates an estimate of the average rent level for February 2010 that is very close to the DWP published figure for March 2010. This gives confidence in the accuracy of the estimates for the adjusted average rent levels for February 2010 (i.e. after stripping out uplift caused by caseload changes).

5.10 The results in table 5 show that average LHA rates fell by around 1% after stripping

out the changes in the regional distribution of the caseload. The estimate falls between median and the mean for the „raw‟ LHA rate changes (Table 4) and provides further confidence in its accuracy.

5.11 The estimate takes no account of any effect due to changes in the caseload

composition arising from property size (the data sets did not provide a property size breakdown for November 2008). It seems likely that this would also create some uplift– although somewhat smaller than the regional effect.

5.12 Between November 2008 and February 2010 the LHA caseload more than doubled

from around 400,000 cases to almost 1,000,000. The very steep rise is only partly due to an increase in the number of claims but also reflects the gradual transfer of non-LHA cases into the LHA system as claimants moved home (the non-LHA caseload declined about 3% a month). Given that smaller households tend to be more mobile they would have formed a greater proportion of the LHA caseload earlier on. Therefore the apportionment used in the sample (which was based on the March 2010 property distribution) is likely to overestimate the actual number of larger properties.

5.13 The actual effect is however likely to be small, probably no greater than ½ of 1%

because the larger properties form only a small part of the caseload. 5.14 Our estimate of the actual change in rent levels during the period November 2008 to

February 2010 is within the range of 1% to 1¼%. This is still somewhat smaller than the 3% fall reported in the Two Year Review that was derived from the Find A Property index. However, in order to make a fair comparison the property index should also be weighted so that it reflects the caseload characteristics of housing benefit claimants, rather than simply reflecting the volume of properties on offer

8.

8 See also HC (2010) for a discussion about the limitations of this index.

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LHA inflation rates and the proportion housing benefit lettings 5.15 Table 6 shows the distribution of LHA inflation rates from the selected sample since

the introduction of the LHA in April 2008 until the changes (caps and 30th percentile)

came into effect on the 1 April 2011. 5.16 Over this longer period the number of gains is larger than the number of falls but in

the vast majority of LHA rates (85%) fall within the modest range of bands from annual falls of up to 2% to annual increases of up to 4%. This pattern is even more marked in the 1 bed to 3 bed properties where 93% fall within this relatively narrow band width.

Table 6: Distribution of Gross annual LHA inflation rates 1 April 2008 – 31 March 2011

Negative Positive

6.01+ 4.01 -6.00

2.01 -4.00

0.01 – 2.00

0.00 0.01 – 2.00

2.01 -4.00

4.01 -6.00

6.01+

Shared 1 4 11 28 4 22 23 11 5

1 Bed 1 0 2 15 30 41 15 4 1

2 Bed 0 1 2 10 30 50 12 4 0

3 Bed 1 0 2 7 21 50 23 5 0

4 Bed 1 2 9 21 15 16 33 6 6

5.17 Over the same period retail price index (RPI) inflation increased by an average of

2.77% per annum so that in the majority of cases LHA rates will have fallen in real terms. All this strongly suggests that regardless of any influence that a high concentration of housing benefit lettings might exert on the local market, it seems extremely unlikely that it will be significant.

5.18 Figure 1 is a scatter graph for 1 bed properties from the data sample that plots gross

LHA inflation rates against the proportion of the whole market (by local authority area) that is let to housing benefit tenant. There is no evidence of a correlation between the two variables (if there were the data points would cluster close to a diagonal line rising from left to right). Very similar plots were obtained for all other property sizes.

Figure 1: LHA inflation rates and the proportion of the market that is let to housing

benefit claimants (April 2008 –March 2011)

-10.00%

-8.00%

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

0.00% 20.00% 40.00% 60.00% 80.00% 100.00%

LH

A i

nfl

ati

on

rate

2008

-2010

Private rented sector lettings on HB (%)

1 Bed

16

5.19 A linear regression analysis was applied to the data for all property sizes the results are in table 6. At best only 2.1% of the variation in rent inflation is due to the proportion of the market that is let to housing benefit claimants. This leaves 97.9% of the variation unexplained. In all instances, the relationship between the two variables is not statistically significant..

Table 7: Percentage of the variation in rent inflation due to the proportion of the market that is let to housing benefit claimants by property size

Shared 1 Bed 2 Bed 3 Bed 4 Bed 5 Bed

1.5 0.7 1.0 0.2 2.1 0.2

5.20 On reflection this should not be surprising because the method by which the LHA is

calculated specifically requires rent officers to exclude data from housing benefit lettings

9. The results appear to support the current robust method employed by rent

officers to calculate LHA rates and suggest that even in markets where housing benefit lettings dominate the possibility of feedback occurring is minimal.

5.21 Overall the results provide confidence that the method used to set LHA rates is

sufficiently robust to ensure that they reflect changes in the wider market and that the LHA figures derived from the rent data are not distorted by housing benefit lettings.

Other reasons for apparent inflation compared with non-LHA awards 5.22 The above analysis does not explain the difference in rent levels between LHA and

non LHA awards, which as at March 2010 were around £9 per week (paragraph 2.6). Although there are many similarities in the calculation of the Local Reference Rent (LRR) used in non-LHA cases and the setting of the LHA there are some important differences both in the way these are set and in the method to calculate the award (the eligible rent).

5.23 The main differences are as follows:

under the LHA (prior to April 2011) the claimant was able to keep up to £15 more than their actual rent if the LHA rate was higher (the „excess‟)

ineligible service charges (such as fuel and water) are not deducted from the claimants eligible rent in LHA cases (because they are already taken account of in the setting of the LHA rate) and so would not be counted towards the „excess‟, whereas for non-LHA claimants the excess is always deducted

in non LHA cases the eligible rent is the lowest of either the LRR or the rent officers market valuation

there are certain differences in the calculation of what constitutes an appropriate size; and

the LRR is calculated from a trimmed mid-point between the highest and lowest rent whereas the LHA is based on a median (the middle item of all the rents in the evidence base in ascending order). If anything the LRR calculation is very slightly more generous.

In terms of value the first two points are the most significant. There is no doubt that overall the LHA is more generous in the setting of eligible rents than the non-LHA scheme.

5.24 DWP‟s impact assessment

10 shows that £5 of the £9 difference is wholly accounted

for by the excess. There are no published figures on the average value of ineligible service charges but a figure of between £2 and £4 would seem a reasonable estimate. After deducting these two, the uplift arising from any assumed remaining inflationary tendency is at best very modest or at worst negligible.

9 The Rent Offiers (Housing Benefit Functions) Order 1997, SI No 1984

10 DWP (2010a)

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6. Conclusions

6.1 There are a number of aspects in the calculation of the eligible rent for LHA claims

(prior to April 2011) that make it more generous than non-LHA awards. The most important are the £15 „excess‟ and the lack of deduction of ineligible charges. Taken together these almost wholly account for the difference between LHA and non-LHA awards. After taking these into account any supposed remaining inflationary effect is nil or negligible.

6.2 Since the start of the LHA scheme in April 2008 until March 2011 actual increases in

LHA rates have been modest. In the vast majority of areas and across all property sizes the change falls within the band from a low of a 2% per annum fall to a 4% per annum rise. Theses changes do not take account of RPI inflation which over the same period has averaged 2.77%.

6.3 Prior to March 2010 the number of areas in England in which LHA rates fell

outnumbered the areas in which there were rises by a ratio of more than 2:1. This pattern was repeated in all the regions in England and if anything was more marked in London and the rest of southern England.

6.4 The general pattern of LHA falls and rises noted above is even more marked in the

one to three bed property sizes and these account for over 85% of all claims. There appears to be some evidence for a very slight increase in volatility in the rarer property sizes (shared accommodation, four & five bed) but this applies to falls as well as increases. If there is an effect here then it maybe due in part to the scarcity of evidence used to set LHA rates but this would require further investigation.

6.5 The apparent 3% inflation in average rent levels in the period prior to March 2011 is

entirely due to changes in the caseload composition the most significant being a shift in the relative distribution of the caseload from North towards London and Southern England.

6.6 Our estimate of the actual change in rents during this period without this „regional

effect‟ (in other words what the average rent change would have been if the caseload composition had remained the same) is that rents fell by an average of 1%. Therefore the total uplift caused by this regional effect is equivalent to a 4% rise (turning a 1% fall into a 3% increase).

6.7 We also have reason to believe there would be a somewhat smaller effect due to an

increase in the number of claims in larger properties because of the gradual transfer of non-LHA cases (larger households tend to move less frequently) although without the further release of data we are unable to estimate its size.

6.8 Our estimate of the fall in housing benefit rent levels during the period November

2008 to February 2010 is still somewhat smaller than the 5% fall in market rents reported by the Find A Property index over the same period. However, in order to make a fair comparison the property index should also be weighted in the same way as the caseload characteristics before any inference could be made that the LHA is inflationary.

6.9 Overall, it seems that LHA rates do broadly reflect what is happening in the wider

(non-housing benefit) market and this should not be surprising because LHA rates are set from data that excludes housing benefit lettings.

6.10 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.

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6.11 These findings are consistent with earlier studies such as the LHA pathfinder evaluation

11 that found that any assumed inflationary caused by landlords raising their

rents to the LHA rates is at most only slight. 6.12 Our findings call into question the Government‟s assumption that rents increases can

be controlled by forcing down LHA rates. If LHA rates do not contribute towards rent inflation then they cannot be used as a tool to force rents down.

11

DWP (2007)

19

7. References DWP (2007) Local Housing Allowance Evaluation 16: The housing and labour market impacts of the Local Housing Allowance. http://www.dwp.gov.uk/docs/16-housing-labour-market-impacts.pdf DWP (2010a), Explanatory Memorandum for the Social Security Advisory Committee: Housing Benefit Amendment Regulations 2010. http://ssac.independent.gov.uk/pdf/housing-regulations-2010.pdf DWP (2010b) WPSC inquiry: analytical supplement annex – 3 November 2010. http://www.dwp.gov.uk/docs/wpsc-analytical-supp.pdf DWP (2011) Two Year Review of the Local Housing Allowance http://www.dwp.gov.uk/docs/lha-review-feb-2011.pdf HC (2010), Work and Pensions Committee, Changes to Housing Benefit announced in the June 2010 Budget, Second Report of 2010-11, HC 469 http://www.publications.parliament.uk/pa/cm201011/cmselect/cmworpen/uc469-ii/469ii.htm