Memorandum-to-the-Prime-Minister-on-Unaffordable-Housing

Appendix 7 - Some problems of
demand side support
The rising cost of housing related benefits
(Peter Ambrose and Paul Nicolson)
An inevitable consequence of <strong>the</strong> rise in all categories of rent evidenced in Appendix 3 has been <strong>the</strong> increasing
cost <strong>to</strong> <strong>the</strong> Exchequer of housing benefits and related allowances.The average benefits paid weekly <strong>to</strong> housing
association tenants rose from £32.20 in 1992 <strong>to</strong> £58.00 in 2003 while for private tenants <strong>the</strong> rise was from
£40.70 <strong>to</strong> £71.60 (Wilcox 2004,Table 116b).The national cost rose from £5.4 billion (1986/87 outturn) <strong>to</strong>
£15.8 billion (2002/2003 outturn) and <strong>to</strong> a planned £19.7 billion in 2007/08 (Wilcox 2004,Table 114).This
form of housing support makes up over 14% of all social security benefits and tax credits.
This raises <strong>the</strong> strategic issue of <strong>the</strong> longer term rationality of spending so much housing support on <strong>the</strong>
demand side, where it works <strong>to</strong> support rising rents, ra<strong>the</strong>r than on <strong>the</strong> supply side, where it would work <strong>to</strong>
stimulate housing production (Strategic Issue 4 in Appendix 1).
How it fits in with <strong>the</strong> Appendix 1 model
In terms of <strong>the</strong> framework in Appendix 1 <strong>the</strong>se payments flow along line B at <strong>the</strong> bot<strong>to</strong>m of <strong>the</strong> diagram. Until
<strong>the</strong> 1990s <strong>the</strong>re were also substantial flows along line B in <strong>the</strong> form of MIRAS, <strong>the</strong> tax concession <strong>to</strong> purchasing
owner-occupiers.The cost of this concession peaked at £7.7 billion per year in 1990/91 when it was worth
£800 per year <strong>to</strong> each recipient (Wilcox 2004,Table 105).
By <strong>the</strong> end of <strong>the</strong> 1990s MIRAS had effectively been ended. It had become obvious that <strong>the</strong> concession, which
was available <strong>to</strong> <strong>the</strong> purchasers of existing as well as new homes, simply worked as an additional fac<strong>to</strong>r pushing
up house prices ra<strong>the</strong>r than as a stimulant <strong>to</strong> increase housing production.The same argument, in relation <strong>to</strong>
rent levels, applies <strong>to</strong> housing benefits.There is little evidence that this increasingly expensive form of support
helps <strong>to</strong> increase supply but clearly it increases rents <strong>to</strong> <strong>the</strong> evident benefit of <strong>the</strong> owners of rented property. It
is widely and correctly seen as a subsidy <strong>to</strong> landlords. But as long as housing costs remain at current levels of
unaffordability it is also essential <strong>to</strong> <strong>the</strong> incomes and well-being of <strong>the</strong> unemployed and low paid.
A ‘gap-plugging’ measure - opportunity cost of <strong>the</strong> support
This form of support is a clear example of a self-defeating ‘gap-plugging’ subsidy (discussed fur<strong>the</strong>r in Appendix
16) that is a clear second-best <strong>to</strong> policies geared <strong>to</strong> reducing rents.
Over much <strong>the</strong> same period as housing benefits have at least doubled in real terms <strong>the</strong> investment in local
authority and housing association new build and renovation and private renovation has fallen in real terms from
£6.1 billion in 1983/84 <strong>to</strong> £2.8 billion in 2000/01 (Wilcox 2004 Table 62b).Thus in very rough terms over <strong>the</strong>
past 20 years <strong>the</strong> ratio of public investment in <strong>the</strong> production of rented housing compared <strong>to</strong> public funds spent
on supporting rent levels has fallen from near parity at a ratio of 6 <strong>to</strong> 5 <strong>to</strong> a much lower ratio of 3 <strong>to</strong> 16.This is
equivalent <strong>to</strong> a fall from over 54% of <strong>to</strong>tal support <strong>to</strong> about 15%.The relationship between <strong>the</strong> two trends is
Zacchaeus 2000 Trust - <strong>Memorandum</strong> <strong>to</strong> <strong>the</strong> <strong>Prime</strong> <strong>Minister</strong> - May 2005 47