Housing benefit reform: recent developments

This page contains information on the following:

• Housing benefit reforms and the private rented sector  - NEW
• Housing benefit reforms and the social rented sector - NEW

Housing benefit reforms and the private rented sector

The government first aired its proposals to reform housing benefit (HB) in the paper building choice and responsibility: a radical agenda for housing benefit (2002). This set out the government's aims to:

• promote greater tenant responsibility through awareness of what is paid on their behalf;
• provide a shopping incentive enabling tenants to shop around for the best deal from local landlords;
• provide a "back-to-work" incentive to discourage worklessness; and
• streamline administration of HB.

An unacknowledged aim may also be to gain greater control over the totality of HB paid out by detaching the assessment of claims from the rent actually paid by the tenant.

The government developed the concept of a local housing allowance (LHA), which is:

• paid direct to the tenant rather than the landlord;
• based on the tenant's circumstances, rather than the rent actually paid;
• reassessed periodically according to prevailing rental values by the rent service within local "Broad Market Rental Areas".
• portable; and
• contain no provision for automatic annual increases.

These proposals were further developed in the 2006 green paper  A new deal for welfare: empowering people to work.

The proposals were extensively tested in a series of pilots in the private rented sector (PRS), and with minor revisions, the government rolled out the LHA nationally on 7 April 2008, phasing it in to new tenants. The powers to implement the reforms are contained within the Welfare Reform Act 2007. More information on the LHA can be found here

There remains longer-term concern that the proposals may cause landlords to cease taking HB tenants due to increased arrears and higher collection costs. The pathfinders did not allay these fears. There are also doubts about the extent to which LHA actually promotes shopping around or job seeking in practice. In the short term, however, it appears that LHA is more generous than previous assessments for the majority of tenants and this has allayed the immediate fears of many landlords about arrears. 

Back to top

Housing benefit reforms and the social rented sector

In the 2002 paper, the government signalled its intention to introduce the LHA into the social rented sector, once choice-based lettings had been introduced and when rent restructuring had brought more coherence to rent levels, particularly between local authorities (LAs) and housing associations (HAs).

This proposal generated widespread fears that LHA would increase arrears in the sector, and that collection costs would escalate. In particular, lenders and HAs were concerned that competitively priced private finance for HAs (facilities total around £45 billion) could be jeopardised as LHA prejudiced HA cash flow and asset values. This view was strengthened following a pilot by London & Quadrant Housing Trust of payment of HB direct to tenants, which confirmed a rapid rise in arrears to unacceptable levels and an escalation of collection costs.

In the 2006 green paper, the government indicated that it now recognised the particular problems of the HA sector, and that it was now prepared to consider other alternatives for reform as well as the LHA. Nevertheless, it appears that the government remains committed to payment of HB to tenants rather than direct to the landlord, so concerns remain.

A new joint Department for Work and Pensions (DWP) and Treasury review of HB in the social rented sector was announced in the budget speech in March 2008. This is very much an internal review and as such there is no formal consultation to be undertaken until after the review has concluded and proposals are made by the end of 2008. However it is clear from a speech made by the Rt Hon Stephen Timms, MP, Minister for Employment and Welfare Reform, that extending LHA and direct payments to the social rented sector is still being considered. 

The concerns shared by lenders and HAs still remain and are heightened due to the very different environment in which HAs now find themselves operating in compared to 2002 when government first stated its wish to implement HB reform.  The impact of the credit crunch and deteriorating markets mean that HAs financial viability and growth are already under pressure and timing could not be worse for uncertainty around income and operating costs. 

Back to top