Housing and Social Security: follow-up paper on Welfare Reform

3 Key areas

3.1 Local Housing Allowance in the private rented sector

The apparent intention of the LHA changes made through the Welfare Reform Act 2012 was to ensure that households could access accommodation at the cheaper 30% of the local market (rather than 50% as before), but that those desiring or requiring more expensive accommodation can be expected to pay for this through their own resources, or wider benefit awards. The impact of LHA can be considered both in terms of this original intention, and in terms of whether rates still fulfil this apparent intention in the context of the subsequent freeze in these rates by the UK Government.

In terms of the original intention, households may wish to access more expensive or larger accommodation for a number of reasons, disabled or older households may require level access accommodation, in close proximity to amenities and public transport links. Such tenancies will be less common, and may attract higher rents. Some households may also wish to remain in a more expensive part of a Broad Rental Market Area ( BRMA, the geographical areas over which the LHA rates are set and calculated) due to education, work or family links. Some BRMA cover wide geographical areas with substantial variation between rents, especially those BRMA which cover rural and urban areas. It was because of such cases that the DWP provided additional DHP funding alongside the introduction of the LHA policy.

This section considers the policy in its own terms, and is intended to highlight the divergence between what LHA rates were set at in 2013, and what they now afford. It is important to consider that the impact of the freeze compounds the impact on those for who may already not have been able to access or easily access suitable accommodation within the LHA rates, but will also spread the level of impact to a wider range of claimants.

The freeze on uprating has been criticised as in many areas LHA rates are no longer sufficient to access the bottom 30% of the market. This will make it increasingly difficult for households to access accommodation without drawing on other resources (especially for those with more specific requirements). Stakeholders and groups representing private sector tenants have highlighted that in some areas only a very small portion of the market is now available under LHA levels, and that as such a high proportion of tenants need to make substantial additional contributions to their rent.

The tables below show the rates that will apply from 2018/19 and how they relate to the rental market. These tables take the approach taken by the Chartered Institute of Housing ( CIH) in their report 'Mind The Gap', but use more recent data. ^[25] Table 1 shows the rates that will apply from April 2018, in most cases these are the same as those rates that applied in the current year 2017/18, but highlighted are those rates which have actually fallen, to match the true 30 ^th percentile, and those rates that have been uprated by up to 3% through the targeted affordability fund ( TAF). The TAF is a UK measure to reinvest some of the savings from the ongoing LHA freeze into increases for those LHA rates that have fallen furthest from the 30 ^th percentile, the majority of such rates are concentrated in London and the south east of England.

Tables 2 and 3 represent two different ways of putting the LHA rates into context. Table 2 shows the portion of the actual rental market in the area that the LHA rate can access, Table 3 shows the difference in cash terms (per week) between the LHA rate and a property at the actual thirtieth percentile of the rate. Table 2 therefore shows how close or how far the LHA rate is to achieving the original intention of allowing those in receipt of support for private sector housing costs from accessing accommodation in the cheapest thirty percent of the local market. Table 3 shows the amount of additional funding that would be required to afford the rent on a home that was at that actual 30 ^th percentile. Taken together they demonstrate the loss to individuals of the policy, and give an indication as to how easy it is likely to be for someone to move to accommodation that is within the relevant rate.

Table 1 demonstrates the geographical variance between rates, with the biggest variance in the 4+ band (With Dumfries and Galloway attracting the lowest level of support at £129 and Lothian the highest level at £277). Across Table 2 and 3 it is clear that the relevant impact of the LHA freeze varies substantially on a geographical basis, and also in terms of the bands. For instance it is clear that in the Aberdeen and Shire area, the LHA rates continue to meet their original intention of covering the bottom 30% of the market in 4 out of 5 rates, and where it falls short it does so only slightly in cash terms, on the other hand Greater Glasgow and Lothian both diverge significantly from the actual 30 ^th percentile in most bands, and there are significant cash shortfalls. There is not a clear correlation between the overall level of the rates and the degree to which there is a shortfall between those and the true 30 ^th percentile. This is because the shortfalls are a function of the movement in rents since 2012, not the relative level of the market.

Table 1: 18/19 LHA rates

	Shared	1 bed	2 bed	3 bed	4+ bed
Aberdeen and Shire	£75.63	£105.86 -	£138.08 -	£172.60 -	£228.99 -
Argyll and Bute	£61.36	£84.23	£103.85	£120.29	£180.00
Ayrshires	£62.69	£80.55	£97.81	£115.07	£158.90
Dumfries and Galloway	£59.44	£80.77	£97.81	£108.26	£129.47
Dundee and Angus	£57.69	£79.24	£103.85	£128.19	£189.07
East Dunbartonshire	£68.42 +	£97.81	£116.53	£160.38	£221.42
Fife	£59.95	£81.58	£102.56	£120.29	£174.81
Forth Valley	£62.38	£83.91	£103.56	£126.58	£181.80
Greater Glasgow	£68.28	£92.06	£116.53	£137.31	£206.03
Highland and Islands	£59.04	£91.81	£110.72	£126.92	£160.38
Lothian	£68.27	£123.62 +	£149.79 +	£186.47	£276.92
North Lanarkshire	£59.44	£80.55	£99.06	£113.92 -	£167.31
Perth and Kinross	£57.69	£82.40	£105.94	£137.31	£183.46
Renfrewshire/ Inverclyde	£60.00	£80.55	£101.54	£125.42	£190.80
Scottish Borders	£56.96	£72.00	£92.05	£109.62	£138.46
South Lanarkshire	£63.46	£80.55	£103.56	£126.92	£180.00
West Dunbartonshire	£63.29	£86.30	£103.56	£113.92	£169.69
West Lothian	£60.03	£98.08	£117.69	£133.85	£180.45

^- Highlighted Cells are those where the LHA rate has reduced to the 30 ^th percentile.
⁺ Highlighted Cells are those where the LHA rate was increased by 3% through TAF
All other rates frozen at same level as preceding year

Table 2 Actual percentiles

	Shared	1 bed	2 bed	3 bed	4+ bed
Aberdeen and Shire	25%-29.99%	>=30%	>=30%	>=30%	>=30%
Argyll and Bute	25%-29.99%	20%-24.99%	25%-29.99%	20%-24.99%	25%-29.99%
Ayrshires	15%-19.99%	>=30%	>=30%	>=30%	20%-24.99%
Dumfries and Galloway	25%-29.99%	25%-29.99%	>=30%	25%-29.99%	25%-29.99%
Dundee and Angus	20%-24.99%	15%-19.99%	20%-24.99%	20%-24.99%	15%-19.99%
East Dunbartonshire	5%-9.99%	25%-29.99%	5%-9.99%	10%-14.99%	10%-14.99%
Fife	15%-19.99%	15%-19.99%	15%-19.99%	10%-14.99%	20%-24.99%
Forth Valley	10%-14.99%	25%-29.99%	10%-14.99%	20%-24.99%	10%-14.99%
Greater Glasgow	10%-14.99%	10%-14.99%	5%-9.99%	15%-19.99%	5%-9.99%
Highland and Islands	15%-19.99%	15%-19.99%	15%-19.99%	15%-19.99%	25%-29.99%
Lothian	10%-14.99%	<5%	5%-9.99%	15%-19.99%	20%-24.99%
North Lanarkshire	10%-14.99%	25%-29.99%	25%-29.99%	>=30%	25%-29.99%
Perth and Kinross	15%-19.99%	5%-9.99%	10%-14.99%	15%-19.99%	10%-14.99%
Renfrewshire/ Inverclyde	20%-24.99%	>=30%	20%-24.99%	25%-29.99%	20%-24.99%
Scottish Borders	25%-29.99%	15%-19.99%	15%-19.99%	25%-29.99%	25%-29.99%
South Lanarkshire	25%-29.99%	20%-24.99%	15%-19.99%	25%-29.99%	15%-19.99%
West Dunbartonshire	25%-29.99%	25%-29.99%	15%-19.99%	15%-19.99%	15%-19.99%
West Lothian	10%-14.99%	15%-19.99%	5%-9.99%	5%-9.99%	15%-19.99%

Table 2 shows how much of the local market can be accessed within the cost of the LHA rate. It demonstrates that in only 10 out of 90 rates does the LHA policy meet its original intention of allowing a household to access a property in the 30% of the local market, in half of the LHA rates less than 20% of the local market can be accessed at the level payable, and in nine rates only the bottom 10% of the market is accessible. In these areas it is seriously questionable whether a household would be able to access suitable accommodation without having to meet at least some of their housing costs out of the household's other resources, including other social security benefits. The most limited market is the Lothian 1 bedroom rate. Fewer than 5% of newly advertised tenancies are accessible at the LHA rate.

Table 3: Cash shortfall between LHA and real thirtieth percentile

	Shared	1 bed	2 bed	3 bed	4+ bed
Aberdeen and Shire	£0.32	£0.00	£0.00	£0.00	£0.00
Argyll and Bute	£1.93	£3.22	£5.47	£6.29	£21.37
Ayrshires	£1.75	£0.00	£0.00	£0.00	£13.70
Dumfries and Galloway	£1.55	£4.23	£0.00	£1.06	£2.86
Dundee and Angus	£5.60	£1.31	£10.07	£9.89	£18.05
East Dunbartonshire	£8.36	£5.75	£10.05	£22.58	£54.74
Fife	£7.79	£4.72	£3.30	£6.29	£9.30
Forth Valley	£7.81	£2.39	£5.76	£11.50	£24.17
Greater Glasgow	£9.97	£11.50	£21.55	£18.03	£81.64
Highland and Islands	£7.70	£6.00	£4.35	£12.31	£0.72
Lothian	£9.98	£23.82	£32.93	£32.16	£33.76
North Lanarkshire	£6.15	£2.30	£4.50	£0.00	£2.42
Perth and Kinross	£5.05	£8.50	£9.13	£18.03	£23.66
Renfrewshire/ Inverclyde	£3.29	£0.00	£2.02	£1.16	£10.57
Scottish Borders	£0.78	£2.79	£2.31	£4.30	£11.13
South Lanarkshire	£0.98	£5.75	£0.00	£5.41	£27.12
West Dunbartonshire	£1.15	£0.00	£0.00	£12.55	£20.17
West Lothian	£7.71	£5.48	£14.64	£14.59	£20.92

Table 3 shows the cash shortfall, there is an apparent discrepancy compared to Table 2, in that although only ten rates appear to meet the 30 ^th percentile, fourteen show here as requiring no additional funding to access a property in the 30 ^th percentile, in a further four rates the shortfall is less than a pound a week. Table 3 and Table 2 need to be considered in conjunction to get a true sense of whether the LHA rate is sufficient to allow a household to access accommodation. Where the shortfall is negligible in cash terms between the LHA rate and the actual thirtieth percentile it is likely that a household will be able to access accommodation with only a limited impact on their overall spending power. On the other hand in some areas there may be a substantial cash shortfall but households may still be able to access affordable accommodation if a substantial portion of the market (albeit it less than 30%) is available under the LHA rate. For instance in Argyll and Bute the shortfall for the 4 bedroom rate is more than £20 a week, but more than 25% of the new tenancies in the area do fall below the LHA rate. Overall in 26 out of the 90 rates the cash shortfall is more than £10 a week. A small number of rates show substantial shortfalls with the most extreme example being the Greater Glasgow 4 bedroom rate of £206.03 a week which falls more than £80 short of that required to access a tenancy advertised at the true thirtieth percentile. It is worth considering that even apparently small shortfalls may have a substantial impact on the outgoings of a household. An under 25 receiving the shared accommodation rate will also be eligible for a lower level of JSA or a lower standard allowance in Universal Credit. The UC standard allowance for a single under 25 year old is £251.77 a month, if such a tenant needs to pay only £6 a week towards their housing costs, that will represent more than 10% of their standard allowance. The highest shortfalls under the shared accommodation rate appear in the Greater Glasgow and Lothian BRMA, and in these areas that shortfall is likely to represent 17% of an under 25s standard allowance.

Comparison to the work by CIH on the same subject shows the shift in these patterns over time. In 2016 CIH found that 20 out of the 90 LHA rates ( e.g. the rates for 2016/17) met the 30 ^th percentile of actual market rents, whereas for the 2018/19 rates only 10 do so, at the other end of the range the number of rates where less than 10% of the market is available at the LHA rate has increased from 4 to 9. In terms of shortfall CIH reported 4 rates where the shortfall between the rate and the true 30 ^th percentile was more than £20, whereas this is now the case in 14 of the 90 rates. A comparison shows that the pattern of change is not even across Scotland, for instance the worst affected area identified by CIH was Aberdeen and Shire, but the 2018/19 rates now match the 30 ^th percentile for all but the shared accommodation rate (where the rate is in the 25-29% range and the shortfall is only £0.32). This shift will not be surprising to those familiar with the dramatic shifts in the Aberdeen rental market, largely driven by the fortunes of the oil industry over this period.

Case studies

N.B. Illustrative only, calculations of eligibility based on published rates and broad assumptions as to circumstances.

Single under 25 in Glasgow.

"Anita" is a single claimant of Universal Credit under the age of 25 and is eligible to the reduced standard allowance of £251.77, in the Glasgow BRMA she is also entitled to a housing element of up to £295.88, which is the shared accommodation rate. Between 10 and 15% of studio or shared lettings are available at a price of this or lower. To access the bottom third of the market would require a top up of up to £43.20 a month. This would represent around 17% of the standard allowance, and thus be a substantial portion of the funds available for other costs including bills and food. Sharing accommodation is common amongst younger adults, who will frequently rely on arrangements made with peers in similar broad circumstances, for those without peers in a similar situation rooms can be found, usually through sharing websites, there will be challenges, especially for more vulnerable tenants, in identifying a suitable let in an existing flat share or bedsit accommodation.

As a single unemployed individual Anita is not tied to a certain location because of work or children schools as many others are. She may however have family links in certain areas of Glasgow that she wants to maintain, but this will further reduce her options for affordable accommodation.

If Anita was over the age of 25 she would be entitled to the full single rate of Universal Credit (£317.82), the difference between this and the reduced rate would be enough to cover the difference between the shared rate payable and the actual thirtieth percentile of shared lets. If she were over 35 Anita would be able to access the 1 bedroom rate, which in Glasgow is £398.93.

Couple with three young children in Edinburgh

"Will and Catherine" are a couple with three children who live in Edinburgh, assuming that one or both of them are over 25 they are eligible to a shared standard allowance of £498.89. Assuming at least that their eldest child was born before 6 April 2017, and that the household are not affected by the two child cap (either because of the age of the children or because of an exemption.) then they will also be eligible for £740.42 Child Element. They will also separately receive Child Benefit totalling £156.43. The household will be entitled to the three bed rate of £808.01, which is sufficient to access between 15 and 20% of the local market. The monthly shortfall for a flat at the full thirtieth percentile is £139.36, this represents 28% of the couples standard allowance or 10% of their combined standard allowance, child element and child benefit.

The Lothian BRMA covers a highly localised market, and Will and Catherine may not wish to move if their children are in school, or if they are used to family support for those children. As such they may struggle to find suitable lets even at the thirtieth percentile rate in some areas of Edinburgh, if either of the couple work they will further have to balance any savings in cheaper accommodation against travel costs.

Will and Catherine may also be affected by the benefit cap. Unless one or both are working for more than sixteen hours a week, or has an exempting disability, then their UC award will be capped. Without the cap their maximum award is likely to be £2047.32, but the couple will be limited to a total of £20,000 a year or £1666.67 a month, the cap includes Child Benefit as well as UC. As such their UC award will be reduced by £537.08. It is unlikely to be possible to access any suitable accommodation in the Lothians area without the costs being met substantially from other parts of the award, or without access to other sources of funding.

3.2 Impact of welfare reform and Universal Credit on rent arrears

The impact of welfare reform and Universal Credit on rent arrears has been substantially discussed in the media and in parliament. In any case where the means of an individual or household to pay their housing costs have been reduced there is a risk of rent arrears, however the causes of rent arrears are complex and not simply or directly attributable to changes in income. The relationship between welfare reform and rent arrears will depend in part on the response of an individual or household to changes in their income. In some cases a budgeting or wider behavioural response will protect the payment of rent, e.g. where a household reduces other expenditure, increases hours of work or raises formal or informal debt to allow them to pay their rent. Other households may not be able to take effective action to avoid rent arrears, or may choose not to do so. As discussed elsewhere the impact of welfare reform on the ability to pay rent is not limited to the impact on housing related benefits, as deductions in other benefits may lead to rent payments being missed if a household meets other costs and liabilities from their Housing Benefit award, or from the UC award without setting aside money for rent.

In particular Universal Credit has been widely singled out as a cause of increased rent arrears, the relationship between UC and rent arrears has been a feature of wider inquiries into the operation and roll out of UC for both the UK Parliaments Work and Pensions Committee and the Scottish Parliament Social Security Committee. ^[26] Much of the focus was on the initial transition into Universal Credit, and a number of UK Government budget measures announced in November 2017 were aimed at addressing issues (or perceived issues) at the start of a new claim and/or tenancy. ^[27] The key changes were the removal of the seven waiting days from those claims were they applied and the introduction of a housing benefit run on period for those moving from legacy benefits including housing benefit. DWP have also increased the availability of advances, in order to support budgeting in the early stages of a claim.

Despite the evidence reported by landlords and councils of their experience of UC the official data concerning the relationship between rent arrears and Universal Credit is not robust enough to draw firm conclusions as to the extent of the impact on arrears. UC has been introduced in a staged approach which means numbers are still small and it is not possible to identify any overall increases in rent arrears (still less, evictions or other negative outcomes) from the data available that can be directly and solely attributed to the roll out of UC. To thoroughly understand the impact that UC has on households would require detailed case level data which is not currently available. This may be an area for future third party research, but could most effectively be carried out by the DWP themselves. As a result it is also not possible to effectively or robustly assess the impact of the changes announced in November, and it may never be possible to do so. Over time, data availability will improve and Scottish Government will continue to consider the data available and whether it is possible to draw any conclusions from that data.

In the meantime it is possible to consider the information that is available, but which taken together may allow conclusions to be drawn. Local Authorities, and Social Landlords have both provided evidence based on their own experiences, and that of their tenants. The data available at this time is in the form of management information collected by local authority and other landlords, on the impact of UC in the social sector on their tenants. This data has been published and publicised elsewhere, and a short summary of the evidence is presented below. The available evidence allows a reasonable conclusion that Universal Credit, especially the full service of UC, has a substantial impact on levels of arrears in terms of the numbers affected and the average level. There is not currently any evidence available to support the suggestion that arrears for individual households may spike initially and then fall over time, however this is the DWP's hypothesis. Even if arrears can be expected to fall for individual cases it is not clear whether they will fall to the same levels as are seen in the Housing Benefit caseload.

Landlord evidence

On 28 September 2017 the Minister for Social Security and the President of COSLA wrote jointly to the then Secretary of State for Work and Pensions collating a range of local authority evidence on the impact of UC, this was taken from work done by Highland, East Lothian, Inverclyde and East Dunbartonshire council, since this letter was drafted further councils have moved into the full service of UC, and reported similar findings. The letter reported that where local authorities had their own housing stock and were able to report on rent arrears rent arrears, which they found to be 2.5x higher for those on UC than for those on Housing Benefit. It also found that there were a number of other administrative burdens on local authorities in supporting households. Similarly in England two organisations representing council landlords ^[28] also published a report that found a seven percentage point increase in tenants in arrears associated with the introduction of UC as well as an increase in the average level of arrears.

East Lothian Council published a paper ^[29] for their Policy and Performance Review Committee on in February 2018, monitoring levels of rent arrears in council housing. As well as being a recent piece of work, East Lothian has a longer experience of full service UC than other areas in Scotland, as such it represents the strongest available case study into the impact of UC on rent arrears. The paper notes that in 2014/15 and 15/16 East Lothian successfully reduced the overall level of rent arrears due to the council (of 10% and 8% respectively), however in 2016/17 overall arrears increased by 30%. Up to the end of quarter 3 arrears had increased by a further 3% in 2017/18. Although this represents an overall slowing of the increase in overall arrears the debt owed by tenants not claiming UC had fallen substantially in this period, and the levels of debt for those claiming UC continue to increase substantially. Considering the volume of tenants in arrears East Lothian found that 72% of Council tenants known to be claiming UC were in arrears at end of December 2017, compared to 30% of all tenants. This report concludes that UC full service has an ongoing impact on the ability of the council to collect rents, in line with evidence from last year. Landlord reporting of arrears cannot control for the characteristics of the UC and non UC caseload, and as such the comparison between these tenants may not be conclusive, but the combination of that comparison with the overall levels of debts recorded in a council with a recent history of reducing areas is indicative that UC full service is driving these levels of tenant rent arrears. COSLA continues to work with local authorities on the evidence for rent arrears related to UC and will publish further information in future.

The Scottish Federation of Housing Associations has been collecting evidence form its members on the impact of Universal Credit since 2015. In evidence to the Work and Pensions Committee in March 2017 ^[30] they reported that the levels of arrears reported by landlords for those in receipt of UC was substantially higher than that for those in receipt of Housing Benefit, both in terms of the proportion in arrears, and the level of average arrears, echoing the LA experience. SFHA report that their most recent figures show a similar pattern, with reports from landlords showing that average arrears for tenants on UC are substantially higher than for those in receipt of Housing Benefit, in most cases twice as high. The National Housing Federation in England has reported similar patterns. Both organisations continue to monitor the impact of welfare reform on their members and will continue to publish the results of their findings.

Causes

Both LAs and RSLs have identified issues at the start of claims as being responsible for a large part of the build-up of arrears, with the delay in the first payment being particularly identified. It is not therefore clear to what degree the recent changes announced to UC will mitigate this issue. More long term factors include difficulty tenants may find in managing their money, especially if not used to monthly payment cycles or to paying their landlord directly. The Scottish UC choices may mitigate these factors by supporting individuals to better manage their own budgets in a way that suit them. East Lothian in their recent report was optimistic that both the Scottish and UK Government changes into the operation of UC would have a positive impact, but it is not clear how strong this would be.

It is reasonable to conclude that welfare reform in general, and UC in particular does increase rent arrears. A particularly sharp impact at the beginning of claims has been observed but the impact of this may be mitigated by recent changes to UC, landlords have also taken a role in taking steps to prepare their tenants for the change, as roll out continues we can expect landlords to continue to develop and improve the way they support tenants. The nature of the data is such that it is not possible to fairly quantify the impact that UC has, and it is unlikely that more robust data will be available any time soon. Although additional Local Authority and Landlord data will become available in future, to truly understand the impact of UC would require consideration of case level data and the organisation best placed to undertake such research would be the DWP itself, such consideration would also allow the DWP to assess the impact of its own changes to UC as well as the introduction of the Scottish UC choices.