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What goes up won’t come down

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.

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Housing demand: the good the bad and the ugly

<strong><span class="has-inline-color has-accent-color">Steve Hilditch</span></strong>
Steve Hilditch

Editor and Founder of Red Brick. Former Head of Policy for Shelter. Select Committee Advisor for Housing and Homelessness. Drafted the first London Mayor’s Housing Strategy under Ken Livingstone.

Tony obviously spent much of the weekend counting up the number of housing reviews and commissions taking place at the moment for his post yesterday. One of those he listed has already produced some interesting research for its launch event last week – the Institute for Public Policy Research (ippr) fundamental review of housing policy.

The project, led by Andy Hull, Senior Research Fellow (a.hull@ippr.org) will have four streams of work. It will look at housing’s role in the economy and how housing could play a less destabilising part in the macro-economy; housing supply and how to meet the projected increase in housing demand between now and 2025; housing allocation and use, and how to achieve a fairer and more efficient use of the housing stock we have; and housing management, looking mainly at the need to professionalise the private rented sector and encourage mixed communities.

The project’s first report on housing demand to 2025 presents a detailed model for estimating the number of households in each region requiring homes, which as they rightly say, should underpin the development of housing and planning policy. The model looks at how housing demand might vary according to changes in the growth path of the economy – the good, the bad and the ugly as they call their various economic growth scenarios.

This is a detailed and slightly techie read, but the headlines are clearly presented. Housing demand will outstrip supply by 750,000 by 2025 ‘equivalent to the combined current housing demand of Birmingham, Liverpool and Newcastle’. Between 3.3 million and 4.5 million additional households will be formed by 2025. Household growth will vary by region, with the fastest growth expected to continue to be in the South East and London, but even in the region with least pressure, the North West, the increase in overall housing demand relative to current demand will be in the range 9–15 per cent: ippr say there will be ‘a substantial imbalance in the supply and demand of housing in all regions’.

The demand for homes in the different tenures is seen to be closely linked to economic performance – the poorer the performance, the greater the demand for social rented homes. The demand for social rented homes (supply of which the government has just reduced to zero in the future) will still be high under all scenarios.

It will be worth keeping an eye out for further publications and events by ippr as the research progresses.