By Jon Franklin, Chief Economist at PBE

Across the country, there were sighs of relief last week as the Chancellor announced that the local housing allowance – housing benefits for tenants renting from private landlords – would rise in cash terms for the first time since 2020. This is a move that the Treasury says will benefit 1.6 million low-income households who will be around £800-a-year better off in 2024-25.

This provides vital and long-overdue support that directly impacts households at immediate risk of becoming homeless. Since the start of the pandemic, the average level of private rent is estimated to have risen by almost 13%, leading to around 4 in 10 (39%) renters finding it difficult to afford their rent payments. As a result, homelessness has been rising too. Prior to the Chancellor’s statement, the number of households in temporary accommodation was due to double in just 20 years. The costs of managing this have had such an overwhelming impact on statutory homelessness support services that local authorities are struggling to cope. Polly Neate, Chief Executive of Shelter, underlined the importance of the Chancellor's announcement last week in tackling these near-term challenges, saying that “unfreezing housing benefit to cover the bottom third of local rents is an essential lifeline to keep people in their homes”.

However, there is a risk that this sense of relief will be relatively shortlived, as increases in housing benefit may be passed on to landlords in the form of higher rents. The nature of the housing market means that the supply of houses cannot change very quickly, and demand does not respond significantly to price changes because housing is essential. It therefore seems an economic inevitability that, over time, increased housing benefits will result in rising rents. To be clear, this does not require landlords to be rubbing their hands together waiting for the moment to snaffle their tenant’s extra housing benefit. It is more likely to emerge from thousands of uncoordinated decisions as the messy process of the market works through this additional funding – twentysomethings moving out of their parents’ homes because they can now afford to, tenants moving because they realise their budgets can now stretch to an additional bedroom for their growing families, landlords having more interest than expected in their empty properties, or rent reviews which identify that neighbouring properties are charging an extra £80 per month. 

Over time, all these decisions will eat away at the benefits to renters and put more money in landlords’ pockets. There is little evidence on the scale of this effect within the current housing allowance system, but a study of housing benefit reforms in the 1990s suggested that if housing benefit changes by £1 then between 60p and 66p is passed through to landlords as changes in rent. While some of this additional money may support landlords to invest in their properties and provide better quality accommodation, or improve energy efficiency, I suspect that this is not what most people think levelling up is about.

Even more worrying is the prospect of a resulting cost spiral for government housing support, as rising rents lead to another round of declining housing affordability and rising pressure on homelessness services. If the government reacts only by increasing housing benefits again, then the cycle starts over. 

Timeline Cycle Visual Charts Presentation in Blue White Teal Simple Style by Pro Bono Economics

This spiral stands to emphasise the burning need that exists for a serious, ambitious long-term plan for housing in the UK to accompany the shorter-term solution of increasing housing benefits. There is no answer to this long-established challenge which does not involve building hundreds of thousands more houses, but it is clear that other action is required too. Specifically, government should do far more to work in partnership with social sector organisations, not just through social housing provision but in targeted homelessness prevention services which tackle the underlying causes of homelessness before it reaches crisis point.

Ultimately, we need to move beyond sticking plaster solutions and agree a long-term approach to fixing our broken housing system. A failure to do so will keep the government on an unsustainable merry-go-round of rising costs to manage an ever-growing homelessness crisis.

Image attribution: Centre for Homelessness Impact/ Liam McBurney/PA