How much has housing benefit inflated UK house prices?

A subject raised by many of you in the comments section has been given something of an airing in The Times newspaper. An article has been written by Paul Johnson of the Institute of Fiscal Studies and I welcome some light being shone in a dark area. However we need to tread carefully as Paul was the author of the 2015 Inflation Report which these days even he is admitting misfired. Here is what Housing Benefit is according to the UK Government website.

Housing Benefit can help you pay your rent if you’re unemployed, on a low-income or claiming benefits.

There is also a savings limit of £16,000. First Paul points out that a lot more interest should be taken in it due to the amount of money involved. Along the way I have highlighted the section which makes me think of the house price boom.

It is a curious omission. The government spends an astonishing £22 billion a year on housing benefit. That dwarfs spending on the police, on overseas aid and the budgets of many entire government departments. Spending on this one benefit has doubled since the early 2000s. More than four million households receive it. All that is true despite repeated cuts in generosity such that for most working-age people it covers a lower proportion of their actual rent than was the case in the past.

Once we get over the size of the intervention there are two main themes here I think. Firstly is the flow of £22 billion into the housing market to support house prices and rents. I am sorry to say that Paul rather fumbles this ball.

 If you’re paying that much money to that many people to cover their rent, you might expect that to push up the market level of rent. I say we don’t know because there isn’t a lot of robust evidence telling us that is definitely happening, and indeed some evidence that it doesn’t happen in the short-term.

I would suggest that when you have evidence that water isn’t wet you have a rethink as a simple process of following the money seems a much better guide to me. Also the second theme is common in the modern era where we are told something if being cut back but more money is spent on it in both nominal and real terms.

The problems

Let us work our way through the problems listed.

First, it is an awful lot of money.

As we have done that one let’s move on.

Second, as a means-tested benefit affecting large numbers of people, housing benefit can have substantial effects on work incentives.

This is a point many of you have made in the comments section and we are in an area I feel strongly about called the “Poverty Trap” where marginal tax rates can be very high and on occasion above 100% ( which in spite of the insanity of it has existed). The idea of those on low incomes paying proportionately as much tax as those on very high incomes is madness but also sadly reality for some. Here I am from February 4th 2010.

1. End the poverty trap that has the highest marginal tax rates for our poorest citizens.

Returning to this list.

Third, this scale of spending is itself a reflection of many of the other problems we face in the housing market.

Agreed and it reminds us yet again of the link here between this and other flows of money into the UK housing market and the level of house prices and rents.

Fourth, spending on this scale could itself be exacerbating some of those problems, potentially pushing up rents and acting as a transfer to landlords.

Amazing how Paul seems so doubtful about £22 billion a year having a material impact. But you see this is an area where he went wrong with his 2015 Inflation Report when he recommended the CPIH inflation measure which uses Imputed Rents via Rental Equivalance for owner-occupiers. If you are thinking that seems silly because owner-occupiers do not pay rent you are correct. But you see that line of thought has led to the use of very low numbers for rent rises in the inflation numbers like the latest one shown below.

Private rental prices paid by tenants in the UK rose by 1.0% in the 12 months to January 2019, unchanged from December 2018.

Yet we need apparently to keep pouring extra money into this area suggesting something is very wrong! Conveniently the official inflation measure is kept low by all of this.

And fifth, cuts in recent years mean that, despite the scale of spending, many families are left struggling to pay their rent and to cover other living expenses.

As there is apparently little or no rental inflation and there have been cuts there must be plenty more people claiming this benefit which begs the question why?

What has caused this?

The main drivers of the increase in spending have been the rapid expansion of the private rented sector alongside increased rents in social housing, in part because cheaper council housing has been in decline.

The shift from social renting to private renting is clear although the article suddenly gets rather economical with the truth.

If you own your own home, you are not eligible for housing benefit, so the collapse in rates of owner-occupation has played an important role.

I was curious about the use of the word collapse in reference to owner-occupation as the House of Commons Library put it like this in June 2017.

The rate of owner-occupation is also slightly lower than it was ten years ago.

Also here is the English Housing Survey from last month.

However, the rate of owner occupation has not changed since 2013-14. The increase from 63% in 2016-17 to 64% in 2017-18 is not statistically significant.

People are now paying higher rents which returning to my point above has been missed by the inflation data as private rents are higher than social or council housing ones. Back to Paul’s article.

Rents in the private sector are much higher than those in the much-diminished local authority sector.

There are issues of luck as to geography as well.

 If you live in Liverpool and have no private income, your housing benefit will still cover your full rent if you live in a property in the lowest 30 per cent of local rents. In Greater Manchester you’ll be left with more than 15 per cent of the rent to pay and in much of London you’ll need to come up with more than a quarter of the rent bill from somewhere.

Comment

This is an important issue as we consider this.

In the long run, the solution to these issues can’t come from the housing benefit system itself. The trade-offs are inescapable. It will come from fixing the underlying problems — high rents, high house prices, inadequate social housing.

It can however help as we again mull how rents have got so high with apparently no inflation? Paul continues to have a blind spot here as we have a factor in how people feel they are worse off than the official data tells them.

The idea of a flow of money into the housing sector boosting house prices and rents gets further support from what are substantial sums even after the  cuts.

Even so, if you are entitled to a three-bedroom property, perhaps because you are a couple with two older children, you can easily be entitled to more than £300 a week in London and more than £200 a week in parts of the South East.

Then we finish by mulling the travesty and unfairness of the poverty-trap.

Many people in that position are trapped on benefits. They can’t earn enough to break free of the benefits system and because of the way in which housing benefit is withdrawn at a rate of 65p for every pound as earnings rise, the financial gain from earning more is limited, especially when other benefits and tax credits are also being withdrawn.

Also if we look back in time was the problem even more in the shadows? What I mean by that was there was a form of implicit subsidy in lower council house rents back in the day to the extent that they were below market rents.

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