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Project: Housing benefit changes and their effects on the private rented sector

Housing Benefit reform and the spatial segregation of low-income households in London

Local Housing Allowance (LHA) is a welfare benefit which helps low-income private tenants to pay their rent. The maximum financial help that a tenant may receive is set by reference to the range of local market rents. In June 2010, the new UK government proposed a suite of changes to the way LHA will be calculated. These changes mean reductions in payments to almost all present claimants, and make the maximum rates paid lower relative to market rents.

It is common knowledge that rents and prices of residential property are determined by location as well as by dwelling characteristics. In this paper we evaluate what the government's changes to LHA rates imply about the kind of neighbourhoods that claimants will be able to afford to rent in London in the future. London is of particular interest for several reasons. It has high average housing costs with wide variation around those averages, extremes of income poverty and wealth, and a buoyant rental market which meets demand from diverse groups aside from LHA claimants.

To assess the measures, we estimate current and future local rents for a large number of small neighbourhoods in the city. These rents are compared to the LHA rates that apply now in 2010 under the current system, and those that will apply in 2011 and 2016 after the government's changes have been enacted. Where the local LHA rate is below the lower quartile (bottom 25%) of rents, the neighbourhood is considered to be 'largely unaffordable' to LHA claimants. This means that someone seeking accommodation will find it hard to find a property that is available, affordable, in adequate condition and offered by a landlord who is willing to let to LHA claimants.

We find that the changes to be introduced in 2011 will immediately reduce the proportion of London neighbourhoods affordable to LHA claimants from 75% to 51%. This falls further to 36% by 2016 as a result of the measures' longer-term effects. Our estimates of current neighbourhood affordability are strongly correlated with current observed concentrations of LHA claimants, giving credence to the predictive value of the approach. The estimates for 2016 are highly sensitive to the future relationship between CPI inflation and nominal rent inflation, emphasising that this is a key uncertainty about the long-term effects of the proposed reforms.

Most inner London boroughs are likely to become almost entirely unaffordable to low-income tenants on LHA by 2016. The large clusters of neighbourhoods in outer East, South and West London which our model finds to remain affordable in 2016 are likely to house increasing numbers of low-income tenants as a result of the reforms. The areas which remain affordable are characterised by high rates of multiple deprivation and unemployment among the existing population. We conclude that the reforms will intensify the spatial concentration of disadvantage in the city, and increase the segregation of poor and better-off households within London.

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