New analysis: The impact of the broken link between LHA rates and rents

The broken link between LHA rates and rents means that housing is becoming increasingly unaffordable for people within the private-rented sector, according to new analysis from Policy in Practice and Learning and Work Institute for the Local Government Association. By 2020, nearly 1.5 million private renters will need to contribute significantly more to their housing costs.

In addition, the analysis shows how working families will lose out if Universal Credit work allowances are not restored, and how people highly impacted by welfare reforms, many of whom are particularly vulnerable, will be impacted by the limited funding available to local authorities to support people toward independence.

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The cumulative impact of welfare reform: a national picture

Policy in Practice, in partnership with the Learning and Work Institute (LWI) and the Local Government Association (LGA), has recently undertaken a detailed analysis of the cumulative impact of welfare reform across the whole of Great Britain. In light of the many often complex changes introduced, this work aims to provide a holistic picture of low-income households and their changing circumstances, and in turn help local authorities shape support strategies and responses to these reforms.

The new analysis builds on previous work into the local impacts of welfare reform, carried out by LWI and published in 2013. Since then, the welfare reform agenda has continued, yet limited analysis is available on the cumulative impact that this is having on people individually. Most of the analysis has focused on the aggregate impact of individual reforms across groups of people, an example being the government’s impact assessment of the benefit cap. To understand the impact at the local level, it is equally important to take a single view of a household, and consider all welfare reforms together in combination with other changes around taxation, wages, inflation and private rental prices.

This analysis has looked at the way many policies affect one household, rather than the other way around

Using data from the Family Resources Survey (FRS), together with our Better Off Calculator, Policy in Practice has both modeled the cumulative impact of welfare reform today, plus projected what the picture will look like in 2020. The main findings, and four key considerations of relevance to local government, are examined in more detail below.

Setting the scene

Over 9 million people in Britain currently receive means-tested benefits

The datasets used for this analysis represent 9.1 million households in receipt of either DWP benefits or Tax Credits, of which about 7 million are of working-age and the remaining are pensioners (who are largely unaffected by welfare reform). There are a total of 6.9 million children in the cohort.

Of the working-age households:

• 37% are single people; close to a third are households with children
• 45% are in work and nearly a quarter are not in work due to disability
• 40% are in the social rented sector, 31% are private renters and a further 29% are not in receipt of housing benefit

The private-rented sector is disproportionately impacted by pre-2017 reforms

The average working-age, low-income household has lost £22.91 per week as a result of the four main reforms that were implemented before 2017, namely the changes in the Local Housing Allowance (LHA), the localisation of Council Tax Benefit with the associated cut in funding, the under-occupation charge and both benefit caps.

Nearly 40% of all working-age private tenants have faced an income loss of over £30 per week due to pre-2017 reforms. The LHA reforms, which up to now only affect the private rented sector, have had the greatest impact on household income, making private tenants disproportionately highly impacted by reforms implemented before 2017.

By 2020, over 2 million households face significant further income losses

Compared to November 2016, the combined impact of Universal Credit and increases in the National Living Wage and Personal Tax Allowance will mean that the average working-age, low-income household is £7.62 per week worse off by 2020.

However, because most benefits rates are frozen until 2020, the rising cost of living means that, in real terms, the average household will be £40.62 per week poorer by 2020. Over 2 million households will face a weekly income loss of more than £50 per week.

A postcode lottery? Local differences matter

A regional analysis of the impact of welfare reform shows that local differences in the cost of living and rental increases matter. A comparison of the North East of England (a low wage-growth, low rent-growth area) with the South West of England (a low wage-growth, high rent-growth area) shows that households in the South West are likely to have a greater income loss due to welfare reform than households in the North East.

Because the net impact of inflation and higher rents will be higher in the South West, households there will see real income losses that are over £10 per week greater than in the North East. In fact, before these local differences in living costs are factored in, households in the South West would actually fare better in 2020 than households in the North East.

4 key challenges for local government

1. The link between LHA rates and rents is broken

While rents faced by private tenants across Britain are rising, the LHA rates at which housing support is paid will be frozen until 2020. For many private renters, this will create an income shortfall, shown below, that could lead to a crisis in household finances.

Private renters would actually be better off on average by 2020, were it not for the negative impact of this LHA freeze. The impact of the freeze exacerbates regional differences affecting some local areas more than others – a significant issue for local authorities. Restoring the link between LHA rates and the actual rent prices faced by private tenants can help to ensure that housing in the private rented sector becomes affordable in all areas of the country, and that situations of financial strain and crisis – including homelessness – become less common.

Average change in private rent prices, social rent prices, and LHA rates, 2016-2020

2. Working families will suffer by 2020 if UC work allowances stay the same

Of the 2.14 million working-age households losing more than £50 per week in real terms by 2020, over 1 million are currently in work and most are currently in receipt of Working Tax Credit. These households will face a significant loss in income when they transition to Universal Credit because there is less in-work support under the new system. Watering down Universal Credit in this way raises the risk of working poverty, and reduces the incentive for low-income households to enter or stay in work. Work will not pay as well as under the current tax credits system. As wages fall behind the cost of living, regional differences in living standards will also create differences in impact across the country.

Investing in work incentives through Universal Credit can ensure work does pay for working families, although this cannot overcome the regional differences in the cost of living. In the meantime, in addition to regional strategies to improve living standards, local authorities should consider measures they can put in place to support affected households. We know of local authorities investing in strategies to help local populations via assessments on household living standards that inform poverty support, introducing CTS schemes that are socially fair and financially viable, and the using benefit calculators to help residents make informed choices.

3. Local authorities need sufficient funds to help those hardest hit

The loss of household income due to welfare reform is greater than the funds local government currently have at their disposal to mitigate high impact. The overall DHP funding for 2017/18 is £185 million, a figure dwarfed by the combined annual income loss associated with the benefit cap (£486 million), the under occupation charge (£557 million) and those paying rent above the Local Housing Allowance (£3.7 billion).

Local authorities will require additional funding to support these households, either via Discretionary Housing Payments or properly funded local support. The Work and Health Programme should be sufficiently resourced to ensure that local authorities can provide focused assistance to households facing high barriers to employment.

4. Many heavily impacted households are particularly complex cases

Households who have someone in receipt of disability or sickness benefits are more heavily impacted by reforms than others. This is particularly true of households with a person in receipt of Disability Living Allowance or Personal Independence Payment. In other words, a significant number of households highly impacted by welfare reform are households likely to face complex needs, and for whom work may not necessarily be the answer. Support for these households requires an holistic approach to health, well-being and relevant employment.

Acting on the findings

The findings in this analysis are derived from a single snapshot of household circumstances and only longitudinal analysis can capture the response of households to the pressures of welfare reform. Follow up analysis is planned to compile several snapshots of households, looking at the possible dynamic changes in behaviour as households adjust and respond to new circumstances.

Policy in Practice has already pooled data on over one million low-income Londoners in order to understand the causes and consequences of poverty in the capital in a project supported by Trust for London. You can download interim findings here.

Some local authorities have taken this approach themselves using a Low-Income Family Tracker (LIFT), a tool that enables them to track the impact of reforms on their residents, assess the impact of interventions and proactively target support. They have gained invaluable insights to inform support strategies and create more outcome-focused interventions.

For further information on the research call 0330 088 9242 or email hello@policyinpractice.co.uk.