IDS is doubly wrong on housing benefit and rent inflation

IDS’s parliamentary gaffe on 9 November, when he attributed data downloaded from a property market website to the Office of National Statistics, has rightly attracted a lot of attention. But what about the substantive claim that IDS was making, that Local Housing Allowance (the new form of housing benefit for the private rented sector) has been driving rents for claimants above market levels, as landlords opportunistically raise rent levels to the maximum that LHA will support?

A lot turns on this claim: if it were incorrect, the government’s argument that that the burden of the cuts would fall on landlords, in the form of lower rents, rather than on tenants in the form of reduced incomes, involuntary moves and homelessness would look even less convincing than it already does

Commentators have already noted that the data on private rents cited by IDS is of dubious relevance to this issue. But IDS’s figures on increases in LHA rates are also open to question. In most areas, LHA rates are lower now than they were when LHA was introduced, a fact which is hard to square with claims that LHA fuels rent inflation. The implication is that any increases in national average LHA rates have more to do with the fact that the LHA caseload has grown more in more expensive areas, especially in London, than with  increases in rents within areas. That would mean that IDS’s figures offer no evidence whatsoever to support the substantive claim that LHA has led to rent inflation.

This is what IDS told the House of Commons on the 9^th:

‘We now know that, according to the Office for National Statistics, the private marketplace in housing-Labour Members are completely wrong about this-fell by around 5% last year. At the same time, LHA rates, which the previous Government had set and left to us, had risen by 3%. There is thus a 7% gap with what is going on in the marketplace.’ Hansard 9 November 2010 Column 163

So according to IDS, LHA rates- the maximum rent for particular types of accommodation that LHA will support in each area- have risen by 3%. This figure may be accurate, but is it relevant to the argument which is being made? The latest data on LHA rates, recently released in response to a parliamentary question by Karen Buck MP, shows that in the great majority of areas, rates for one and two-bed properties are lower now (November 2010) than they were in April 2008,when LHA was introduced nationally. In only a small minority of areas have these rates risen by 3% or more, the figure cited by the Secretary of State. Within rental market areas, rates for one- and two-bed flats have fallen on average by 2.3% and 2%  respectively since April 2008 (see table below).

Why are these figures so different to those presented by IDS? Part of the reason is that they cover the entire period since LHA was introduced, while ministers have focussed on the period November 2008 to February 2010. The fall in rates occurred between April and November 2008, so it is not reflected in ministers’ figures. However, this can’t be the only difference, as even between November 2008 and February 2010 the rise in LHA rates for one and two-bed properties is far less than 3% (less than half of one percent for one-beds, 0.8% for two-beds- in both cases far lower than RPI inflation over the same period).

The main reason for the difference seems to be that while our figures show changes in LHA rates within rental market areas, the DWP figures are based on the average LHA rates faced by claimants nationally. As such, any changes they show will reflect changes in the share of the LHA caseload in different areas as well as any changes in LHA rates within areas. If the caseload grew more in more expensive areas, this would push up the national average even if there were no change in LHA rates in any area, and the caseload did in fact grow more in London than in other regions (see table below). To illustrate how these inter-regional shifts can drive up the national average, we have calculated the effect these changes would have if they were applied to regional average LHA rates for March 2010.  The effect would be an increase in the national average of 2.2%.

As the growth in LHA rates within rental market areas between November 2008 and February 2010 was so much less than the 3% cited by government, it seems very likely that shifts in the composition of the caseload are the major drivers of that change. This may involve not just shifts between regions but also between types of accommodation, if for example, the share of families with children has increased.  It would obviously be wrong to interpret any increase in the average LHA rate arising from this sort of change in the caseload as evidence of LHA driving rent inflation.

To date the evidence that ministers have offered to back up their assertions about LHA and rent inflation have been irrelevant to the case they are trying to make. Scepticism about government predictions that the LHA cuts will lead to falling rents remains fully justified.