LHA was introduced in 2008 as a way of setting housing benefit entitlements for tenants living in the private sector. The LHA rate a household can receive depends on the number of bedrooms they are entitled to and which ‘Broad Rental Market Area’ they live in. Bedroom entitlements range from a single room in a shared house for single claimants under the age of 35 (known as the Shared Accommodation Rate) to a maximum of four bedrooms.
A series of changes made since 2011 to how LHA is calculated has severely restricted the pool of properties affordable to London households reliant upon support to pay their rent. The first major change was the reduction in LHA from covering the bottom 50 percent of the market to the cheapest 30 percent (or the level of the LHA cap, whichever is lower). Following this, in April 2013, the link between LHA rates and actual rent increases was broken when they were uprated by CPI, followed by a two year 1 per cent rise and then a four-year freeze from April 2016.
Since 2015 the 30th percentile rent level has risen in 68 of the 70 LHA rate areas and in 66 of these the increase was by 5 per cent or more. As rents have continued to increase there is a growing disparity between LHA rates and market rent levels in London. All 70 London LHA rates are now well below the 30th percentile. New analysis of Valuation Office Agency data by London Councils shows that the proportion of properties affordable on LHA is now well below 20 per cent for all 70 of London’s LHA rates and on average only 8 per cent of the market is affordable across all of London.
How is LHA calculated?
LHA entitlements are calculated by assessing the rent levels being charged in the local geographic area; these areas are known as Broad Rental Market Areas (BRMA). Currently, there are 14 BRMAs that apply to Greater London. Five different LHA rates are set for different property sizes in each of the BRMAs – these included the Shared Room Rate, and then properties up to and including four-bedrooms.
Since 2011, significant changes have been made to the way that LHA is calculated:
- In 2011, LHA entitlements for each of the five property sizes within the BRMA were pegged to the 30th percentile of local rents, meaning that tenants could only receive support for the cheapest 30 per cent of rented homes in the local area. Previously, LHA would cover up to the median cost of renting (the 50th percentile).
- The uprating of LHA rates were also detached from the local rent level. LHA rates were initially uprated by the Consumer Price Index. In 2014/15 and 2015/16, LHA uprating was limited to a maximum increase of 1 per cent. Between 2016/17 and 2019/20, LHA will be frozen at 2015 levels.
- Nationally applicable caps on weekly LHA receipt were also introduced in April 2011. Housing Benefit claims cannot exceed these levels, even where the 30th percentile rent is higher. Currently, these caps are:
- £260.64 per week for a one-bed property
- £302.33 for a two-bed property
- £354.46 for a three-bed property
- £417.02 for a four-bed property
Given that Greater London has experienced strong and sustained growth in rent levels, the effect of the LHA reforms has been to create a growing gap between the cost of private rented accommodation and the amount that housing benefit will pay for.
Impact of the LHA changes
Using London Councils’ analysis, the following maps illustrate the percentage of properties affordable in 2019/20 on LHA in each Broad Rental Market Area for the five room rates:
London Councils’ work
As the current freeze in LHA uprating comes to an end in 2020, London Councils wants to see a commitment in the Spending Review to realign LHA entitlements with current market rents up to at least the 30th percentile of the local market. In addition, LHA should track market rents into the future and London Councils would want to see a mechanism introduced to ensure that rates continue to be uprated (or downrated) in line with actual market conditions.
Increasing rates in this manner will bring at least the bottom third of the market back within the scope of those supported by LHA. This will place downward pressure on homelessness presentations as tenants are better able to sustain their tenancies, and they (often supported by their local authority) are able to access a greater proportion of the privately rented market. It will also allow claimants to find homes meeting minimum health and safety standards.
There would also be a wider strategic gain from increasing LHA to bring a significant proportion of the private rented sector back into reach of those that would otherwise face homelessness. This supports Government objectives to reduce homelessness but would also reduce the wider costs to the public sector – and individual families - that homelessness creates. It would allow claimants to self-serve in the rental market, rather than needing local authority support.
Raising LHA entitlements is also a key means of ensuring that Universal Credit is delivered successfully. The housing element of Universal Credit for those in private rentals is set at the LHA and this means Universal Credit claimants are exposed to the same affordability limitations as those on Housing Benefit. If Universal Credit is rolled out to existing and more complex households without addressing the LHA affordability problem, it will replicate many of the problems of the legacy system it was designed to solve and expose claimants to the danger of homelessness.
In the long run, the key to addressing homelessness will be to build more homes, and specifically more affordable social rented accommodation. But in the short term increasing LHA rates is the most effective tool currently available to the Government to prevent and reduce homelessness.