Good news for landlords
One element of the welfare bill that's got totally out of hand is Housing Benefit (HB). During the Labour government, it soared by 35% in real terms, and this year it will cost us well over £20bn.
There are currently 4.7m households receiving HB, which is getting on for one-in-five of all households. Or to put it another way, every family paying for its own housing is also paying a quarter of another family's housing costs.
In some areas it's even worse. 30% of all households in inner London are on HB, and in Hackney it's an absurd 43%. This chart shows the 11 Council areas above 30% (Aug 2009):
So what are we going to do about it?
In the June budget, George set out his plan. First, he imposed a fixed maximum cap on the reimbursement of housing costs, irrespective of where they are (£400 a week for a four-bedroom property and £250 a week for a two-bedroom home). Second, he announced that from 2012, the maximum reimbursable rent for each HB local area (there are 153 of them) will be reduced from the median of market rents for that area, to the 30th percentile, and will thenceforth be uprated annually in line with the Consumer Price Index, rather than market rents. He reckons those changes should eventually save £4.2bn pa.
Needless to say, he's picked up some serious flak. The left-wing press warns:
"Thousands of people will be made homeless as public spending is slashed because of a dangerous combination of higher unemployment, increasing repossessions and cuts to housing benefit..."Social cleansing" - a slogan worthy of the great Bishop Snow himself. To be frank, we've never been able to understand why poor families should expect to be housed in rich areas at public expense. Apart from anything else, doesn't the left's position on equality say we're all much happier if our neighbours are not miles richer than us?
The retired, disabled people, carers and working families will be hardest hit and charities predict it will trigger the steepest rise in families living in unsuitable accommodation and individuals sleeping rough since the 1980s.
Those in London will be the worst affected, forcing an exodus of poorer people from the centre to outer boroughs... The homeless charity, Shelter, said that some households in London currently receiving housing benefit will have to find a shortfall of up to £1,548 a month to meet their housing costs. The result, say opposition MPs, will be "social cleansing" of poorer tenants from richer areas."
But setting that on one side, why does the left automatically assume HB recipients will be rendered homeless or otherwise cleansed? Why don't they consider the possibility that many landlords may be forced to cut the rents they charge?
Because what we have here is another classic escapade of the Simple Shopper. The very same S Shopper who managed to bungle us into the ludicrous GPs contract and all those overpriced PFI contracts (see many previous blogs on both). And what he's done here is to bumble his way into the private property rental market and spray huge amounts of our money in the direction of Britain's buy-to-let landlords.
A recent article in the Investors Chronicle gives a good flavour of how it has worked out:
"Nathan is an experienced investor who bought a portfolio of five terraced houses in Burnley in Lancashire five years ago, paying around £35,000 in total. "The houses are well built. The problem is the tenants aren't," he says. "I didn't buy for capital gain, I bought for income. In this area, everyone is on housing benefit, and there are guaranteed rents of £65 a week." In theory, this adds up to an astonishing gross rental yield of 48 per cent...
...Graham owns a substantial portfolio of property in the north east, and says he's been letting to tenants on benefit for donkey's years. "It's like being a second hand car dealer," he says. "The mark-up is high, but it's the shitty end of the stick."
In problem neighbourhoods, it is possible to buy houses for as little as £6,000 from desperate sellers. Graham claims he can receive up to £3,000 a year in rent on these houses from local authorities - a 50 per cent return on equity."
Now gross rental yields of 48% and 50% returns on equity are telling you something. They're telling you someone is paying through the nose. And there are no prizes for guessing who. The S Shopper has come into the market with a fat wad of cash and pushed rents far above where they ought to be.
Consider the facts. As we noted above, since 1997 the cost of Housing Benefits has increased by 35% in real terms. Yet the number of HB recipients has hardly changed - 4.7m now compared to 4.6m in 1997. Which implies that most of the increase has been driven by a sharp rise in rent levels.
So what happens now George has grounded the Shopper? Now that he's imposed his own lower rent levels over the heads of the landlords?
Well, the landlords are naturally saying it could mean the end of their participation. After all, they're dealing with some pretty scummy tenants, and the least they deserve is a sensible financial return. As one of them explained to the Investors Chronicle:
"Every now and then you get a nasty shock. Drug dealers operating from a property; someone found dead after ten days; a tenant who hacked into the attic and sold the hot water tank for scrap metal. The RSPCA once boarded up one of my properties as the tenant walked off, and left behind a menagerie of reptiles...All of which sounds pretty bad.
You don't know the tenant has moved out until the housing benefit stops, then you find out your property's been empty for 30 days and invalidated your insurance. If a tenant trashes the place, you have to fork out £3,000 on magnolia and new carpets."
And as the always instructive Mr S and M points out, the economic research in this area confirms that it is the landlords who will suffer the biggest hit. The evidence says that between half and all of the cut in rental subsidy ends up falling on the landlord not the tenant. In other words, rents fall pretty much in line with the cut in subsidy - just like George intends.
The question then is how much will the supply of private rented housing to those reptile owning HB recipients shrink in response?
And the answer is we don't really know.
But set against returns of 50% on equity, our guess is that rents could fall quite a bit before from current levels before we hit a big fall in supply.
George is quite right to rip up the rent book.
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