Poverty and Income Inequality in Scotland 2013/14

Poverty before and after housing costs

The way in which housing costs are treated when measuring income has some important implications for poverty analysis and conclusions about the anti-poverty effects of policy reforms. This is because the number of people counted as poor (e.g. with income falling below a threshold) depends crucially on the income concept adopted. Housing benefit is included in income. Therefore, when rent values increase faster than income, while poverty before housing costs may decrease, poverty after housing costs may stay the same or increase, reflecting no improvement in standard of living. Within the UK, poverty is measured both before and after housing costs. There are a range measures of poverty, including absolute poverty and material deprivation – all to capture different dimensions of living standards.

Poverty before and after housing costs

Prior to welfare reform, it was recognised that housing benefit in the UK had a positive effect in reducing the link between housing poverty and income poverty. Up to 2011/12, while poverty after housing costs was higher than poverty before housing costs, the difference between the two measures was relatively stable. However, since 2011/12, there has been a divergence between relative poverty before and after housing costs. There have been a number of factors affecting this:

Housing benefit reforms:
In April 2011, the first reforms to housing benefit were implemented. This is particularly noticeable in 2013/14, which includes the reforms to housing benefit recipients in the social rented sector as well as those in the private rented sector.

The key changes to housing benefit were reducing local housing allowance (LHA) for those in private sector rental from the median local rent to the 30th percentile, freezing LHA rates in 2012, before uprating LHA capped by CPI inflation in 2013, removal of the £15 excess, restriction of LHA to the four bedroom rate, extension of the shared accommodation rate from under 25 year olds to under 35 year olds and the ‘bedroom tax’ for those in the social rented sector.

These reforms acted to reduce housing benefit for claimants – the reduction dependent on household circumstances. If rents increase and housing benefit continues to cover rent, then standards of living remain constant but poverty BHC may decrease as housing benefit is counted as income.

Evidence at the UK level showed the LHA reforms had reduced existing claimants’ maximum entitlements in given property types, and the majority of the impact fell on tenants rather than landlords. In 2010, across the UK, 55 per cent of tenants were renting a property that cost more than the maximum LHA entitlement, and therefore had to contribute to their own rent. Following the reforms this had increased to 62 per cent (and 68 per cent for new claimants). Reforms had a greater impact on those who had higher entitlements to start with. These include claimants in higher rent areas, lone parents, 25-34 year olds included in the extended scope of the Shared Accommodation Rate (SAR), and those affected by the national LHA caps and the abolition of the five-room rate.

Increases in rental values:
For households in employment, and so not in receipt of full housing benefit, poverty after housing costs increases if rent increases more quickly than earnings. In Scotland over the period 2010/11 to 2013/14, private sector rents (for a 2 bedroom property) have increased by 9 per cent, while those in social rented sector (registered social landlords only) have increased by 11 per cent. These increases in rental values are significantly higher than increases in gross annual earnings (slightly less than 6 per cent increase over the same period), and most working age benefits have been uprated in line with earnings in recent years.

However, it is important to note the level of social rents remains significantly below the level of private rents, so social rents are still helping households to be better off than if they were in the private sector.

Little change in mortgage interest rates:
Households further up the income distribution are more likely to own their own homes – either outright or with a mortgage. Mortgage interest rates have remained flat over the period. As relative poverty measures whether the standard of living forlow income households (who are more likely to be in rented accommodation) is keeping pace with middle income households, tenure affects this. Housing costs for those in rental accommodation have been increasing at a faster rate than mortgage interest rates and income, meaning housing costs for low income households have been increasing more quickly than those for middle income households.