Housing Benefit: do awards cover rents?

Local Housing Allowance (LHA), the maximum amount of Housing Benefit private renters are able to receive, is now capped and “frozen” until 2020. This means that over the next Parliament LHA rates will remain static while rents continue to rise or fall with changes in the market.

Concerns have been raised that this could result in LHA rates drifting further away from actual rent levels, meaning it could become increasingly difficult for claimants to use LHA to cover their rent.

We look here at the data available to see how closely LHA rates and rents match, and what the effects of the changes to LHA might be over time.

What is Local Housing Allowance (LHA)?

LHA is not a benefit in its own right – it is Housing Benefit for most claimants in the private rented sector. LHA was rolled out nationally for new claimants in the deregulated private sector from 7 April 2008.

The LHA is a flat-rate allowance for different sizes of properties within a Broad Market Rental Area (BMRA); the level of assistance an individual actually receives depends on their personal circumstances.

When first introduced LHA rates were calculated by reference to the median rent (the “50th percentile”) within a BMRA but, since April 2011, they have been based on the “30th percentile” of market rents in those areas.

At the same time, LHA rates became subject to national caps which were initially set at:

  • £250 per week for a 1 bedroom property;
  • £290 per week for a 2 bedroom property;
  • £340 per week for a 3 bedroom property; and
  • £400 per week for all properties with 4 bedrooms or more
How often are LHA rates updated (“uprated”)?

When first introduced, LHA rates were reviewed monthly.

The Coalition Government, as part of its policy to reduce spending on Housing Benefit, moved to annual “uprating” in line with inflation (using the Consumer Price Index). It then capped increases at 1% per year in 2014 and 2015, with some limited flexibility for areas experiencing the highest rent increases

As part of the Summer Budget 2015 the Chancellor announced that LHA rates would be “frozen” (that is, not uprated) for four years from April 2016.

Does LHA cover rents in the private rented sector?

The move to basing LHA rates on the 30th percentile of market rents within an area has meant that claimants are restricted to renting properties in the bottom third of the market.

Concerns have been raised (e.g. by the Chartered Institute for Housing) that the Government’s changes could result in LHA rates drifting further away from actual rent levels.

Data from the Valuation Office Agency and Scottish and Welsh Governments let us see how closely LHA rates match 30th percentile rents in practice.

Where is the discrepancy highest?

The chart below shows regional differences in LHA and rent for a two-bed property. Each dot represents a Broad Market Rental Area (BMRA). If a dot sits on the black dashed line, then LHA exactly matches rent in the area. The further away from the line the dot is, the bigger the discrepancy.
LHA rates compared to rents
There is less discrepancy in areas with lower rents – these tend to be in Wales, Scotland and parts of England outside of London. LHA is less likely to keep up with rents in more expensive areas, and this is particularly true in London. For example, in Central London and parts of ‘inner’ London LHA is capped at £302 for a two-bed property, even though rents can be considerably higher.

This issue isn’t exclusive to London: Aberdeen and Shire, South West Hertfordshire and Brighton and Hove are amongst the BMRAs with high discrepancies.

What impact will the freeze have over time?

Private sector rents are on the rise nationally. How will this interact with the LHA freeze in the coming years?

The chart below indicates how the distribution might change. The first frames of the chart (2013-14 to 2015-16) show how LHA and real rents have matched up in recent years. The following four years are a projection assuming that rents increase nationally in line with average earnings. This is a bit of a simplification – rents aren’t actually likely to go up by the same amount everywhere – but it gives an idea of how trends could play out.
LHA rates compared to average rents, animated
After the freeze was introduced for 2016-17, LHA rates stopped rising in line with rents. Assuming that rents continue to rise, this will lead to more and greater discrepancies over time.
 
The Library’s new briefing paper on Housing Benefit measures announced since 2010 offers more detail on changes to Housing Benefit policy and their potential impact.

Picture Credit: Bessermer Terrace near Stocksbridge Steel Works by Johnthescone; Creative Commons Attibution 2.0 Generic (CC by 2.0)