A History of Rent and Housing Benefit

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Last week saw an announcement about Housing Benefit that has extraordinarily far reaching effects that most of the population are yet to grasp. Until last week the principle of the UK Social Security System was that those unable to earn their own income would be supported by the State, and part of that support was the provision of reasonable quality accommodation where the recipient lived. Last week saw that tenet deleted and I think we are all left wondering what the future will bring.

The documented history of social housing in Britain starts with Almshouses which were established from the 10th century, to provide a place of residence for “poor, old and distressed folk”. The first recorded Almshouse was founded in York by King Athelstan, and the oldest still in existence is the Hospital of St. Cross in Winchester, dating to circa 1133. During the Industrial Revolution factory owners built entire villages for their workers such as Saltair (1853), Bournville(1879), Port Sunlight, Stewartby, and Silver End. After the first world war a campaign known as Homes fit for heroes initiated state provision of working class housing, and in 1919 the Government first required councils to provide housing, helping them to do so through the provision of subsidies, under the Housing Act 1919. The campaign to provide decent housing for the common man in quantity was interrupted by the Second World War but continued through the 50s and 60s, housing was considered such a priority that Housing Minister was a Cabinet post, and political parties vied with each other at election time to commit to greater targets for house building. During this period provision of Social Housing was seen as responsibility of Central Government, implemented by Local Authorities, and by 1979 almost half of the British population lived in council housing.

That all came to a shuddering halt in 1980 when Margaret Thatcher reversed the concept of local authorities as providers of housing and supported a free market approach allowing Council Tenants “the Right to Buy” in the Housing Act 1980. Proceeds of the sales were paid to the local authorities, but they were restricted to spending the money on reducing their debt, rather than being able to spend it on building more homes.

So from 1980 the onus for the provision of social housing increasingly fell on the Private Rental Sector, and in 1982 Housing Benefit was created in order to provide a mechanism whereby Social Housing could be funded from the private sector. At the time things were quite straight forward – the 1977 Rent Act provided a clear system whereby tenants had security of tenure (provided they paid their rent they couldn’t be evicted, and they were known as “Protected Tenants”), and a mechanism for establishing a “Fair Rent” which was defined as the rent that would apply in a market with an equal number of tenants and landlords. There were no issues about Housing Benefit – the Rent Officer would assess the “Fair Rent” and the Local Authority would pay it.

Unfortunately the market didn’t fall into line with the system. Rent Officers assessed “Fair Rents” at about 30% of the market rate, and Banks and Building Societies wouldn’t lend money to purchase property where the owner couldn’t evict the tenant, and consequently the Private Rental Sector had all but disappeared. Even when a property owner was vacating their property for a number of years (e.g. a job move overseas) they dare not risk renting the property out lest on their return they were unable to re-occupy their home. In 1900, 90% of all UK households were tenants, by the year 2000 70% of households were owner-occupiers, and only 9% rented from private landlords.

It would be logical to say that Government recognised the issues, the problems, and introduced legislation in the form of the 1988 Housing Act to rectify the problem, and revive the PRS – for that is what happened. But as with much of politics it happened by accident, although no doubt when the history books are written they will tell a tale of logic and sense. Whatever you have heard, in 1988 the Government had no intention of changing the basis of rental law, and had no idea that Banks might make commercial loans to Landlords. The Tenancy Agreement that the 1988 Act introduced was the Assured Tenancy Agreement which retained the tenants right of tenure, but established a new basis for Rent Officers to assign rents. Instead of  assuming a perfect market of equal numbers of tenants and landlords rents were now to reflect market reality. Given the acute shortage of rental property the government looked to bring back into rental the empty properties and in an aside to the 1988 Housing Act the government added an alternative tenancy agreement called the Assured Shorthold Tenancy Agreement. The intention of this tenancy was to be a niche product allowing empty homes to be temporarily rented out, and an Assured Shorthold Tenancy Agreement wasn’t valid unless a “Section 20 Memorandum” had previously been served on the tenant warning them to take legal advice, and that they no longer had security of tenure under an AST. Solicitors at the time advised  professional landlords not to use the AST because it was not intended for long term tenancies, and it hadn’t been tested in the courts. Nevertheless Landlords recognised that the value of their property would increase by 40% if they had “vacant possession” and from the moment that the 1988 Act was introduced the Assured Tenancy was dead in the water, and the only tenancy agreement offered was the Assured Shorthold Tenancy Agreement.

The next jigsaw piece in the accident that defines where we are is “Buy to Let”. Letting Agents had suffered from the decline in the PRS and in 1995 ARLA (Association of Residential Letting Agents) marketed “Buy to Let” as a way of boosting their member’s business. At the time loans for landlords were rare and difficult to obtain, ARLA arranged for loans to be available on the condition that properties were let out through an ARLA agent and soon after a whole new business model was born. These two changes came together, fertilised, and gave birth to the new Private Rental Sector, and as with everything Darwinian – it was a total accident!

So where does Housing Benefit fit into this? ….. The Market. Between Housing benefit’s introduction in 1982 and the establishment of a Private Rental Sector market in the late 1990s rents were controlled, but since then Housing Benefit has been at the mercy of the market.

DHSS tenants bring a host of extra costs, and management issues to Landlords. Rental law is based around a monthly tenancy paid in advance, but Housing Benefit is paid in arrears weekly. Housing Benefit tenants generally come with special needs and since “Care in the Community” it is often the Landlord at the frontline of addressing those needs. Additionally a generation of “Benefit Tenants” have grown up, making their living out of living off the Housing Benefit before moving on to another Landlord. Local Authorities are obstructive to landlords trying to recover these bad debts allowing the claimants to move between authorities and landlords, “earning” massive salaries from their fraud. When Benefit is paid to tenants rather than Landlords around 30% of Housing Benefit goes into fraud of this kind.

To date the Government/Local Authorities have looked to landlords to accept those extra costs, and the looseness of the rent assessment system has allowed landlords to cover their extra costs by charging higher rents to Housing Benefit Tenants. At various times in the last 10 years the Benefit System has tried to cap the Housing Benefit available, the most effective being the “Reference Rent” system. The fundamental truth that the Government has never grasped is that in a Capitalist Market Economy the product is traded at the market price. Once the “Reference Rent” bit Landlords stopped renting to DHSS tenants so Westminster City Council had to start paying a £2000 bounty to Landlords who would rent to DHSS tenants……

So that’s how we got to where we are last week. We have a healthy Private Rental Sector operating in a market economy. We have a total lack of building of homes, and a social housing sector which is looking to the PRS to provide the supply to meet it’s demand, but doesn’t want to pay the market rate. That’s my summary, without any political bias – now what is your view?