On 13 September CIH and the British Property Federation published analysis which challenges the government assumption that local housing allowance feeds rent inflation in the private rented sector.

1. Leading the market?
A research report into whether Local Housing
Allowance (LHA) lettings are feeding rent
inflation
Chartered Institute of Housing
British Property Federation
September 2011

2. Chartered Institute of Housing
The Chartered Institute of Housing is a registered charity and not-for-profit organisation. This
means that the money we make is put back into the organisation and funds the activities we
carry out to support the sector. We have a diverse and growing membership of over 22,000
people who work in both the public and private sectors, in 20 countries on five continents
across the world.
Chartered Institute of Housing
Octavia House
Westwood Way
Coventry CV4 8JP
Tel: 024 7685 1700
Web: www.cih.org
Email: customer.services@cih.org
British Property Federation
The British Property Federation is the trade association for property investors in the UK. It
represents landlords in the commercial and residential sectors.
So far as residential is concerned this means a number of affiliated national and regional
landlord associations across England, who between them represent 15,000 landlords. It is
also the representative body for larger private sector landlords, who although few in number,
will have 100,000 private rented sector homes under their management. The BPF also has a
number of housing associations, private student accommodation investors and support
organisations such as agents and lawyers in membership.
Along with the National Landlords Association and Residential Landlords Association we are
one of the main three residential landlord representative organisations in the UK.
British Property Federation
5th Floor
St Albans House
57-59 Haymarket
London SW1Y 4QX
Tel: 020 7828 0111
Web: www.bpf.org.uk
Email: info@bpf.org.uk
© Chartered Institute of Housing / British Property Federation 2011
Written and researched by Sam Lister, Christoph Sinn and Thomas Younespour
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3. Contents
1. Executive summary
2. Background:
The Emergency Budget and Spending Review 2010
The scope and purpose of this report
3. The case against the LHA: a review of existing evidence
4. Methodology
Adjusting for the effects of caseload composition
LHA inflation rates and the proportion of housing benefit lettings
5. Results and findings
Adjusting for the effects of caseload composition
LHA inflation rates and the proportion of housing benefit lettings
Other reasons for apparent inflation compared with non-LHA awards
6. Conclusions
7. References
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4. 1. Executive summary
1.1 In attempting to reduce public expenditure, Government have sought to decrease
spending on levels of housing benefit through the local housing allowance (LHA) paid
to private and social housing tenants. Substantial changes to the LHA and to welfare
provision in general have resulted in a number of assumptions and information
circulating about the potential savings from this.
1.2 In June 2010 the new Coalition Government unveiled its strategy to eliminate the
budget deficit over the life time of Parliament largely through reductions in public
expenditure
1.3 Housing benefit is the second largest item of social security expenditure and so it was
always likely that it would be the target of cuts. The total package is expected to
reduce housing benefit expenditure by £1.8 million a year by the end of the
Parliament.
1.4 The housing benefit cuts are to be implemented by a series of changes between April
2011 and April 2013 but the majority of the immediate changes affect private tenants
and will start to take full effect from January 2012.
1.5 Announcing the changes in the Budget the Chancellor said that spending on housing
benefit had risen by around 50% in ten years from £14 billion to £21 billion and that
costs were „completely out of control‟.
1.6 This argument was elaborated further in Governments impact assessment which
implied that the rapid rise in expenditure was at least partly due to the introduction of
LHA in April 2008 and noted that average rent levels in LHA awards were on average
£9 more than awards under the previous scheme.
1.7 Ever since the LHA scheme was first announced in 2002 it has been criticised as
being inflationary because the rent levels to which the claimant is entitled are
published. The contention has been that landlords will simply raise their rents to LHA
rates creating a continuous feedback loop whereby the rents paid by housing benefit
rapidly inflate.
1.8 The belief that the LHA is inflationary is supported by the Welfare Reform Minister.
His evidence to the Work and Pensions Select Committee showed that between
November 2008 and February 2010 the average rent paid to LHA claimants
increased by 3% whilst in the wider (non-housing benefit) market average rents fell by
5%.
1.9 An extension of this argument is that housing benefit rent levels will inflate more
rapidly in markets where housing benefit tenants form the majority of lettings. The
strategy is that by bearing down on the level of awards they will be able to influence
local rents and that landlords will be forced to follow because housing benefit tenants
make up around 40% of the private rented market.
1.10 CIH and the BPF have collaborated on research to review available data on the LHA
to see what if any effect it has on rent inflation. In particular we looked at whether the
increase in average rents for LHA claims could be caused by other factors such as
changes in the composition of the caseload.
1.11 Caseload composition can cause an uplift in average rent levels if the proportion of
claimants shifts from between regions where rents are relatively inexpensive (such as
the North and the Midlands) to more expensive areas (London and the rest of
Southern England).
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5. 1.12 Likewise a shift in the composition of the caseload away from single person
households towards a higher proportion of families would also cause some uplift in
average rents because larger properties are more expensive.
1.13 A simple comparison of the LHA rates at the start and end dates will show whether
rents levels have generally risen or fallen and the size of any caseload effect can be
estimated by superimposing the caseload characteristics at the start date onto the
LHA levels at the end date.
1.14 We also tested whether there was any evidence for a relationship between the
proportions of the market that is let to housing benefit claimants and LHA inflation by
applying a standard statistical test.
1.15 We found that between November 2008 and February 2010 the number of areas in in
which LHA rates had fallen outnumbered those in which there had been an increase
by a ratio of more than 2:1.
1.16 This pattern was repeated in all the regions and if anything was more marked in
London and the rest of southern England. This trend was also stronger in the one to
three bedroom property sizes that together account for over 85% of all claims.
1.17 The increase in average rent levels during this period is entirely due to a shift in the
relative distribution of the caseload from the North and the Midlands towards London
and Southern England. After adjusting for this „caseload effect‟ average housing
benefit rent levels fell by 1% (instead of the reported 3% rise).
1.18 We found no evidence for a relationship between the LHA inflation rates and the
proportion of the market that is let to housing benefit tenants.
1.19 Overall it seems that LHA rates do broadly reflect what is happening in the wider
(non-housing benefit) market and this should not be surprising because LHA rates
are set from data that excludes housing benefit lettings. There is no evidence to
support the contention that the LHA is inflationary or produces a feedback loop.
1.20 Our findings call into question the Government‟s strategy that it can use its power as
a bulk purchaser to force landlords to reduce their rents. If LHA rates do not
contribute towards rent inflation then conversely they cannot be used as a tool to
force rents down.
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6. 2. Background:
The Emergency Budget and Spending Review 2010
2.1 In June 2010 the new Coalition Government unveiled its Emergency Budget. The
principal aim was to eliminate the budget deficit over the life time of Parliament. The
elimination of the deficit was largely to be achieved by reductions in public
expenditure.
2.2 Social security is the largest item of public expenditure and since housing benefit is
the second largest component (or the third if tax credits are included) after retirement
pensions it was always likely that it would be the target of cuts. Following the
Emergency Budget further cuts to housing benefit were announced during the
October 2010 Spending Review.
2.3 The cuts to housing benefit were to be implemented by a series of changes between
April 2011 and April 2013 affecting both private and social sector tenants. The
majority of changes will however affect private tenants and will start to take effect
(when transitional protection has expired) from January 2012. The total package is
expected to reduce housing benefit expenditure by £1.8 million a year by the end of
the Parliament.
2.4 The main changes affecting private sector tenants are:
 The £15 weekly excess provision for both new and existing claimants is removed
the purchasing power of local housing allowance (LHA) is set at the bottom 30%
of the market instead of the bottom 50%
 the LHA rates set as described above are subject to overall caps with the upper
maximum based on a four bedroom instead of a five bedroom property size
(further severely limiting the purchasing power of the LHA in London)
 the upper age limit for single adults to qualify for the shared accommodation rate
is raised from under 25 to 35 years old.
2.5 Announcing the changes in the Budget the Chancellor said that spending on housing
benefit had risen by around 50% in ten years from £14 billion to £21 billion and that
costs were „completely out of control‟.
2.6 This argument was elaborated further in the DWP‟s July 2010 impact assessment of
the private rented sector changes. Although the impact assessment did not directly
blame the rapid increase in costs on the LHA reforms introduced in April 2008 it did
imply that it was partly responsible. It noted that “the average housing benefit award
for local housing allowance cases is over £9 per week more than for customers still
on the previous scheme for the private rented sector”.
2.7 The impact assessment set out the Government‟s justification for each of the
changes:
 the overall caps address the excessively high rates paid to some customers
 the removal of the five bedroom rate will bring the housing choices of larger
families more in line with those that do not claim housing benefit
 reducing rates to the 30 percentile will bear down on rental values being met by
th
housing benefit
 the £15 excess is not justifiable in the current fiscal climate.
The scope and purpose of this report
2.8 This aim of this report is not to challenge the Government‟s strategy to reduce the
budget deficit or indeed it strategy to reduce housing benefit expenditure but to
examine in detail the proposition that housing benefit expenditure is „out of control‟
and, if it is, to test whether the local housing allowance scheme has been responsible
for the rapid increase in the level of awards.
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7. 2.9 The question as to whether the LHA has encouraged landlords to increase their rents
is important because it is central to the Government‟s strategy to keep costs under
control. There is an important but subtle distinction to be made here between
controlling costs and reducing expenditure. There is no doubt that the reforms will
make savings but that is not the same as saying that the reforms will tackle the
underlying causes that have led to the increase in expenditure.
2.10 Nor can any savings made justify the proposition that housing benefit policy can be
used as a tool to drive down private sector rents or, on the other hand, that the local
housing allowance has been responsible for driving up private sector rents in local
markets where housing benefit lettings predominate.
2.11 This report explores the arguments and the evidence as to these key questions and
in particular tests the following propositions:
 the rapid rise in expenditure has been partly driven by LHA inflation
 the LHA scheme encourages landlords to increase their rents
 the rate of increase in the housing benefit rents is related to the proportion of the
market that is housing benefit lettings (i.e. the bigger the share of the market that
are housing benefit lettings the faster the increase in LHA rates)
 the rents charged in the housing benefit sector have risen at a faster rate than in
the wider (non-housing benefit) market; and
 that LHA rates have risen at an unsustainable speed.
We do this through an examination of the existing evidence and some new analysis.
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8. 3. The case against the LHA: a review of the existing evidence
3.1 The policy of calculating housing benefit on a flat rate local housing allowance has
attracted strong opinions both for and against ever since it was first proposed in 2002.
The policy has attracted criticism on a number of different grounds. One of the most
persistent claims has been that the improved transparency resulting from publication
of the LHA rates will result in rent inflation as landlords with properties at rents below
the LHA rate will simply raise them to that level.
3.2 This belief is so commonly held that it has become conventional wisdom. There is no
doubt that instances of this kind of behaviour do occur and anecdotes are rife. But
anecdotes, even those that can be proven to be true, do not constitute robust
evidence and on their own cannot be sufficient to support the general proposition that
the LHA is inflationary.
3.3 The DWP‟s evaluation programme of the LHA pathfinders concluded that “while the
more generous [Pathfinder] LHA regime may have contributed to some small uplift in
1
overall rent levels […] there was no substantial impact ”. Some have since (rather
unfairly) criticised the findings on the basis that the conditions in the pathfinders are
unique. Never-the-less the evaluation programme remains the most comprehensive
study of the housing market impacts to date.
3.4 Likewise others have expressed concerns that the transparency of the LHA regime
(i.e. publication of the LHA rates) would simply result in landlords raising their rents to
the LHA levels. The Select Committee Inquiry found that there was some
convergence of rents around the LHA rate but noted that there was more downward
convergence on rents above the LHA rate than upward convergence of rents below
2
the LHA rate .
3.5 The housing benefit reforms following on from the June 2010 budget and the
Government‟s claim that housing benefit is „out of control‟ have heightened interest in
the idea that the LHA is inflationary and that the LHA regime is at least partly
responsible for the rapid rise in expenditure.
3.6 Outside of the anecdotes there have been a number of official studies into the LHA
and its effects. The most important and substantial are the DWP‟s Evaluation Reports
of the Pathfinder stage and the Two Year Review of the Local Housing Allowance.
3.7 A number of the headline facts from the Two Year Review were cited by the Welfare
Reform Minister in his evidence to Work and Pensions Inquiry on the Budget 2010
reforms. The Welfare Reform Minister cited powerful evidence from the Review that
suggested that the LHA was inflationary:
“One of the most shocking things that has been happening in the market,
when you look at the marketplace, is what happened after the crash and the
onset of the recession. From November 2008, for the next 15 months, the
property index declined by 5% and our HB claimants‟ payments went up 3%,
which shows the disconnect there is between what is happening in the
marketplace and what we are paying. It is one of the reasons that we took the
view that we have to break this feedback loop of us pumping in money that
pumps up the amount of money we have to pay. That is a very, very good
example of what has been going wrong in the marketplace as a result of us
3
being pretty unsmart buyers of private rented accommodation ”.
1
DWP (2007) page 67
2
HC (2011) Table 1 and paragraph 32
3
HC(2011) Oral Evidence, Ev 25, Q132
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9. 3.8 When this is considered alongside evidence of the higher awards received by LHA
tenants compared with tenants on the previous scheme (i.e. the pre-LHA method of
assessment) (paragraph 2.6) then there appears to be a strong case that the LHA is
inherently inflationary.
3.9 An extension of this line of reasoning is that because housing benefit tenants
comprise a significant proportion of the market, if LHA rates are forced down then this
will in turn, help force down the rents charged by landlords of housing benefit tenants.
As the Welfare Reform Minister put it when asked about the effect of the reforms:
“[…] the bulk of people who have relatively small reductions in their Housing
Benefit-[…] we would expect to be able to establish new rates with their
landlords. The reason we are expecting that to happen is not very far to seek.
In many, many markets, [the Government through housing benefit] is a 40%
purchaser and you are changing the terms of trade, there is nowhere else for
many landlords to go. Now, I know that is not the case in every market […],
but as an average and as a whole, that is what we would expect to happen.”
3.10 Taken together the case against the LHA as feeding inflation appears to be powerful.
However, the weakness in the argument is that average awards (and rent levels) are
dependent on caseload composition. In other words the average is weighted towards
the most common types of case so that if larger households and households that live
in the south of the country form the majority of cases then this will skew the average
upwards. Therefore when comparing the average rents between two points in time
adjustments need to exclude the effects of caseload before conclusions can be drawn
as to whether the LHA is inflationary.
3.11 The remainder of this report re-examines the evidence set out in this section and
tests the assumptions that the LHA is inflationary and in particular tests whether:
 whether changes in caseload composition had any influence in the apparent uplift
in the rent levels of housing benefit awards
 there is any real relationship between the proportion of the market that is let to
housing benefit tenants and the rate at which LHA levels increase (or decrease).
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10. 4. Methodology
4.1 Statistical analysis of available data sources were deemed the most appropriate
method for reviewing the evidence on whether the LHA is inflationary and whether
there is a relationship between the proportion of the market let to housing benefit
tenants and the rate at which LHA levels increase or decrease and whether changes
in caseload composition had any influence in the apparent uplift in the rent levels of
housing benefit awards.
In completing our review we split our analysis into two different elements:
 firstly, the effects of caseload composition on average rent levels
 secondly, the relationship between LHA inflation and the proportion of the market
let to housing benefit tenants.
This section sets out the methodology used to analyse the above data.
Adjusting for the effects of caseload composition
4.2 We started by taking the same comparison points as in the LHA two year review
study (November 2008 and February 2010). The simplest way of removing the
caseload effects is to compare the actual LHA rates as at the two dates. This data
can be obtained from the Direct Gov website. The only complication is that some of
the LHA boundaries have changed between the two dates which make comparisons
unreasonable and there are also a small number of missing data sets.
4.3 We started with the current boundary set for England (152 areas) and assumed that
broad rental market areas (BRMAs) with the same name were broadly comparable.
The overall number of areas since 2008 has decreased slightly (from 156), but there
are some new areas as well. There were 13 areas in total in which data was missing
or which were new or defunct. These were recorded as no data.
4.4 We then compared the caseload composition for LHA cases, and sorted the data into
English regions to see if there was any shift in the composition of the caseload
between the cheaper and more expensive regions.
4.5 In order to make a proper comparison between November 2008 and February 2010
and to estimate the true size of any increase or fall in the level of rents paid by
housing benefit claimants the ideal would be to superimpose the November 2008
caseload characteristics onto the February 2010 LHA rates.
4.6 Unfortunately we do not have access to the full DWP Single Housing Benefit Extract
dataset and so were unable to sort and select the data sets we would have wished.
However, Parliamentary questions have provided a breakdown of the LHA caseload
4
by local authority for November 2008 and March 2010 , including a breakdown of the
caseload by property size for the March 2010 data. This data (March 2010) is
sufficiently detailed and close to the ideal (February 2010) to enable an estimate of
the size of any uplift in rent levels caused by changes in the regional caseload
composition.
4.7 The LHA caseload figures for November 2008 do not provide any breakdown by
property size so the March 2010 figures were used to estimate the proportions and
were applied to the November 2008 caseload figures.
4.8 The main challenge to overcome was to select and match the two sets of data. LHA
rates are derived from rents within areas set by the rent officer (BRMAs) which are
not coterminous with local authority boundaries, and are (very roughly) around twice
the size of the average local authority. Another problem is that some of the BRMAs
have been substantially revised and redrawn within the chosen period.
9

11. 4.9 The Valuation Office Agency (VOA) supplied a dataset that set out which BRMA(s)
covered each local authority, and if there was more than one for a particular authority,
the proportion of that authority (by geographic area) that each BRMA covered. The
dataset was used to assign a single BRMA to each local authority being the one that
covered the largest proportion.
4.10 The final data sets for analysis were then selected by applying the following criteria
 A sample of local authority areas was selected from each region with the aim to
keep the same caseload proportions as in the full dataset for November 2008
 Where possible authorities were selected that were covered by a single BRMA or
where the coverage of the dominant was at least 80%. However, in order to
achieve the regional caseload targets this minimum threshold was not achieved
in a small number of cases. The final dataset comprised of 126 local authorities in
England (38% of all English authorities).
4.11 The November 2008 caseload figures (with property size proportions based March
2010) were then applied to the November 2008 and February 2010 LHA rates and
average rents calculated. To test the accuracy of the calculations the average rent
derived was compared with the DWP average for March 2010, after making an
adjustment for Scotland and Wales. The average rent figure (and the adjustment) for
5
March 2010 was taken from the DWPs impact assessment based on the same date .
LHA inflation rates and the proportion housing benefit lettings
4.12 The method employed was as follows:
 a standard statistical test was applied to the dataset to establish whether there
was any correlation between the proportion of the local market let housing benefit
tenants and the rate of increase (or decrease) in the LHA and
 LHA inflation rates were sorted according to their frequency within a particular
band to help reveal whether there was any clear bias towards an inflationary
effect.
The main challenges to overcome concerned the sources and selection of data.
4.13 The VOA has published the LHA rates on a monthly basis since the national start of
the LHA scheme in April 2008 which provided an accurate and reliable data set from
which to calculate the LHA inflation rates. The rate of inflation was April 2008 to
March 2011: the maximum period over which the LHA was calculated according to
th
the original rules (i.e. 50 percentile, no caps).
4.14 We used the dataset supplied by Lord Freud (the Welfare Reform Minister) to the
Work and Pensions Select Committee on the size of the local private rented sector
combined with caseload data from the DWP Single Housing Benefit Extract to
calculate the proportion of the local market let to housing benefit claimants. There is
some weakness in the data on the size of local markets but it is generally accepted
as being the best source available.
4.15 The final data sets for analysis were then selected by applying the following criteria
 BRMAs had been substantially been redrawn since 2008 were discarded
 The new unitary local authorities created in 2009 were discarded
 As with the estimate of the caseload effects, a single BRMA was assigned to
each authority by the proportion covered. Each BRMA was selected once only
and if it applied to more than one local authority the one with the highest rate of
coverage was preferred. If there was still more than one (e.g. where a single
BRMA completely covered two or more authorities the authority with the largest
housing benefit caseload was preferred.
 A minimum threshold of BRMA coverage was set (at 85% and 95%) to minimise
any distortion caused in their being more than one LHA rate operating across the
5
DWP (2010a)
10

12. same local authority (we analysed the data for both 85% and 95% minimum
coverage).
4.16 Applying these criteria with the threshold set at 95% generates a dataset of 125 local
authorities (38% of English local authorities) covered by 89 BRMAs (59% of BRMAs)
and the 85% threshold 177 local authorities (54%) accounting for 111 BRMAs (73%).
The results were very similar for both datasets.
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13. 5. Results and findings
Results: adjusting for the effects of caseload composition
5.1 Although average rents for housing benefit claims rose by 3% during the period
6
November 2008 to February 2010 the actual changes in LHA rates provide a
completely different picture. Table 1 shows that in England 61% of LHA rates fell and
a further 1% experienced no change at all. Only 30% of LHA rates actually rose
during this period. The proportion of rates that fell compared to rate rises is in the
ratio of 2:1. It should be noted that this general pattern is slightly stronger among the
1 bed to 3 bed property sizes which (as at March 2010) represented 88% of the
caseload.
5.2 We can therefore be confident that any increase in the average rent levels has not
been caused by inflation in the LHA rates. It also suggests that the majority of any
increase in the average rent levels has been caused by changes in the relative
regional distribution of the caseload rather than the relative distribution of property
sizes.
Table 1: Net change in LHA rates November 2008 to February 2010 English BRMAs
LHA rate Fall No change Rise No data Total
Shared 69 8 62 13 152
1 Bed 97 1 41 13 152
2 Bed 104 0 35 13 152
3 Bed 100 0 39 13 152
4 Bed 95 0 44 13 152
5 Bed 90 0 49 13 152
Total 555 9 270 13 912
% of total 60.8 1.0 29.6 8.6 100
5.3 Table 2 confirms that there was shift in the regional distribution of the caseload
between the two sample dates – and significantly the region that experienced the
greatest change was London which has by far the highest LHA rates. This is almost
certainly the major factor behind the rise in the average rent level received by
claimants.
5.4 It is noticeable that the two sample dates in the review fall either side of the financial
crisis (September 2009). In the six month period from September 2009 to March 2010
the private rented sector caseload in London increased by 11.5% compared with
10.4% for the rest of Great Britain. The same is true of the whole of the south of
England (11.0%) compared with the rest of Great Britain (10.3%).
5.5 The economy had already started to slow down prior to the financial crisis and its
impact would have likely been felt earlier in the Midlands and North old industrial
regions before the South where the economic base is more diverse. Following the
financial crisis, and with the finance industry being centred in London, it would not be
surprising if the relative rates of increase were higher in London and the South
immediately following the crash.
6
HC(2010) and DWP
12

14. Table 2: Percentage distribution of caseload by region Nov 2008 to March 2010
Region November 2008 March 2010
North East 5.27 5.34
North West 16.46 15.41
Yorkshire & Humber 12.48 10.34
East Midlands 6.51 7.20
West Midlands 9.67 9.45
East of England 8.54 8.65
London 16.45 18.79
South East 14.79 14.51
South West 9.82 10.32
North & Midlands 50.39 47.74
Greater South (East of 49.60 52.27
England, South East and
West, London)
5.6 The power of the caseload effect on average rent levels is illustrated in table 3. Even
though LHA fell across all regions in property types that represent almost 90% of the
caseload and the relative frequency of falls was more marked in the higher rent
regions the caseload effect was still sufficiently strong to cause uplift in average rent
levels.
Table 3: Falls and gains in LHA rates for 1 bed to 3 bed properties by greater English
7
region (Nov 2008 to Feb 2010)
Region 1 Bed 2 Bed 3 Bed
Fall Gain Fall Gain Fall Gain
North & Midlands 39 27 45 21 43 23
London 10 2 8 5 10 3
Rest of Southern 49 12 52 9 48 13
England
Totals All Falls All Gains
North & Midlands 127 71
London 28 10
Rest of Southern 149 34
England
5.7 To estimate the scale of the change in average rent levels we need to take account of
size of the rise or fall in each individual LHA rate as well as their frequency Table 4
shows the average (mean) and median change (expressed as a fall) in LHA rates
without taking account of any caseload characteristics (i.e. based only on the number
of BRMAs).
Table 4: Average percentage fall in LHA rates by property size
Shared 1 Bed 2 Bed 3 Bed 4 Bed 5 Bed
Median 0.14 0.28 0.27 0.27 1.73 1.88
Mean -0.87 0.99 1.26 1.17 2.03 2.96
5.8 Table 4 shows the median fall in LHA rates between November 2008 and February
2010 to be around ¼ of 1% with larger falls in the larger property sizes (but these
property sizes also had the largest individual increases. The mean fall was around
1% - although the shared room rate showed an increase of about the same size.
Although these figures take no account of the caseload (i.e. they give the same
weighting to fall or increase regardless of whether the caseload is very small or large)
they provide a useful check as to whether our estimate of the overall average change
is reasonable.
7
Excluding cases where there was no data or there was no change.
13

15. Table 5: Average rent level March 2010 and estimate of average rent levels after
adjusting for caseload changes November 2008 to February 2010
DWP Average LHA rent March 2010 Great £126
Britain
Sample estimate Great Britain February 2010 £127 (99% accurate)
England only estimate average rent £136.14
November 2008
England only estimate average rent February £134.82
2010 if no change in caseload composition
since November 2008
% fall in average rent level after adjusting for 0.9903
caseload
5.9 Table 5 shows the average rent level for March 2010 and the estimates of average
rent levels after adjusting for caseload changes between November 2008 and
February 2010. The sample generates an estimate of the average rent level for
February 2010 that is very close to the DWP published figure for March 2010. This
gives confidence in the accuracy of the estimates for the adjusted average rent levels
for February 2010 (i.e. after stripping out uplift caused by caseload changes).
5.10 The results in table 5 show that average LHA rates fell by around 1% after stripping
out the changes in the regional distribution of the caseload. The estimate falls
between median and the mean for the „raw‟ LHA rate changes (Table 4) and provides
further confidence in its accuracy.
5.11 The estimate takes no account of any effect due to changes in the caseload
composition arising from property size (the data sets did not provide a property size
breakdown for November 2008). It seems likely that this would also create some
uplift– although somewhat smaller than the regional effect.
5.12 Between November 2008 and February 2010 the LHA caseload more than doubled
from around 400,000 cases to almost 1,000,000. The very steep rise is only partly
due to an increase in the number of claims but also reflects the gradual transfer of
non-LHA cases into the LHA system as claimants moved home (the non-LHA
caseload declined about 3% a month). Given that smaller households tend to be
more mobile they would have formed a greater proportion of the LHA caseload earlier
on. Therefore the apportionment used in the sample (which was based on the March
2010 property distribution) is likely to overestimate the actual number of larger
properties.
5.13 The actual effect is however likely to be small, probably no greater than ½ of 1%
because the larger properties form only a small part of the caseload.
5.14 Our estimate of the actual change in rent levels during the period November 2008 to
February 2010 is within the range of 1% to 1¼%. This is still somewhat smaller than
the 3% fall reported in the Two Year Review that was derived from the Find A
Property index. However, in order to make a fair comparison the property index
should also be weighted so that it reflects the caseload characteristics of housing
8
benefit claimants, rather than simply reflecting the volume of properties on offer .
8
See also HC (2010) for a discussion about the limitations of this index.
14

16. LHA inflation rates and the proportion housing benefit lettings
5.15 Table 6 shows the distribution of LHA inflation rates from the selected sample since
th
the introduction of the LHA in April 2008 until the changes (caps and 30 percentile)
came into effect on the 1 April 2011.
5.16 Over this longer period the number of gains is larger than the number of falls but in
the vast majority of LHA rates (85%) fall within the modest range of bands from
annual falls of up to 2% to annual increases of up to 4%. This pattern is even more
marked in the 1 bed to 3 bed properties where 93% fall within this relatively narrow
band width.
Table 6: Distribution of Gross annual LHA inflation rates 1 April 2008 – 31 March 2011
Negative Positive
6.01+ 4.01 - 2.01 - 0.01 – 0.00 0.01 – 2.01 - 4.01 - 6.01+
6.00 4.00 2.00 2.00 4.00 6.00
Shared 1 4 11 28 4 22 23 11 5
1 Bed 1 0 2 15 30 41 15 4 1
2 Bed 0 1 2 10 30 50 12 4 0
3 Bed 1 0 2 7 21 50 23 5 0
4 Bed 1 2 9 21 15 16 33 6 6
5.17 Over the same period retail price index (RPI) inflation increased by an average of
2.77% per annum so that in the majority of cases LHA rates will have fallen in real
terms. All this strongly suggests that regardless of any influence that a high
concentration of housing benefit lettings might exert on the local market, it seems
extremely unlikely that it will be significant.
5.18 Figure 1 is a scatter graph for 1 bed properties from the data sample that plots gross
LHA inflation rates against the proportion of the whole market (by local authority area)
that is let to housing benefit tenant. There is no evidence of a correlation between the
two variables (if there were the data points would cluster close to a diagonal line
rising from left to right). Very similar plots were obtained for all other property sizes.
Figure 1: LHA inflation rates and the proportion of the market that is let to housing
benefit claimants (April 2008 –March 2011)
10.00% 1 Bed
8.00%
6.00%
LHA inflation rate 2008-2010
4.00%
2.00%
0.00%
-2.00%
-4.00%
-6.00%
-8.00%
-10.00%
0.00% 20.00% 40.00% 60.00% 80.00% 100.00%
Private rented sector lettings on HB (%)
15

17. 5.19 A linear regression analysis was applied to the data for all property sizes the results
are in table 6. At best only 2.1% of the variation in rent inflation is due to the
proportion of the market that is let to housing benefit claimants. This leaves 97.9% of
the variation unexplained. In all instances, the relationship between the two variables
is not statistically significant..
Table 7: Percentage of the variation in rent inflation due to the proportion of the market
that is let to housing benefit claimants by property size
Shared 1 Bed 2 Bed 3 Bed 4 Bed 5 Bed
1.5 0.7 1.0 0.2 2.1 0.2
5.20 On reflection this should not be surprising because the method by which the LHA is
calculated specifically requires rent officers to exclude data from housing benefit
9
lettings . The results appear to support the current robust method employed by rent
officers to calculate LHA rates and suggest that even in markets where housing
benefit lettings dominate the possibility of feedback occurring is minimal.
5.21 Overall the results provide confidence that the method used to set LHA rates is
sufficiently robust to ensure that they reflect changes in the wider market and that the
LHA figures derived from the rent data are not distorted by housing benefit lettings.
Other reasons for apparent inflation compared with non-LHA awards
5.22 The above analysis does not explain the difference in rent levels between LHA and
non LHA awards, which as at March 2010 were around £9 per week (paragraph 2.6).
Although there are many similarities in the calculation of the Local Reference Rent
(LRR) used in non-LHA cases and the setting of the LHA there are some important
differences both in the way these are set and in the method to calculate the award
(the eligible rent).
5.23 The main differences are as follows:
 under the LHA (prior to April 2011) the claimant was able to keep up to £15 more
than their actual rent if the LHA rate was higher (the „excess‟)
 ineligible service charges (such as fuel and water) are not deducted from the
claimants eligible rent in LHA cases (because they are already taken account of
in the setting of the LHA rate) and so would not be counted towards the „excess‟,
whereas for non-LHA claimants the excess is always deducted
 in non LHA cases the eligible rent is the lowest of either the LRR or the rent
officers market valuation
 there are certain differences in the calculation of what constitutes an appropriate
size; and
 the LRR is calculated from a trimmed mid-point between the highest and lowest
rent whereas the LHA is based on a median (the middle item of all the rents in the
evidence base in ascending order). If anything the LRR calculation is very slightly
more generous.
In terms of value the first two points are the most significant. There is no doubt that
overall the LHA is more generous in the setting of eligible rents than the non-LHA
scheme.
10
5.24 DWP‟s impact assessment shows that £5 of the £9 difference is wholly accounted
for by the excess. There are no published figures on the average value of ineligible
service charges but a figure of between £2 and £4 would seem a reasonable
estimate. After deducting these two, the uplift arising from any assumed remaining
inflationary tendency is at best very modest or at worst negligible.
9
The Rent Offiers (Housing Benefit Functions) Order 1997, SI No 1984
10
DWP (2010a)
16

18. 6. Conclusions
6.1 There are a number of aspects in the calculation of the eligible rent for LHA claims
(prior to April 2011) that make it more generous than non-LHA awards. The most
important are the £15 „excess‟ and the lack of deduction of ineligible charges. Taken
together these almost wholly account for the difference between LHA and non-LHA
awards. After taking these into account any supposed remaining inflationary effect is
nil or negligible.
6.2 Since the start of the LHA scheme in April 2008 until March 2011 actual increases in
LHA rates have been modest. In the vast majority of areas and across all property
sizes the change falls within the band from a low of a 2% per annum fall to a 4% per
annum rise. Theses changes do not take account of RPI inflation which over the
same period has averaged 2.77%.
6.3 Prior to March 2010 the number of areas in England in which LHA rates fell
outnumbered the areas in which there were rises by a ratio of more than 2:1. This
pattern was repeated in all the regions in England and if anything was more marked
in London and the rest of southern England.
6.4 The general pattern of LHA falls and rises noted above is even more marked in the
one to three bed property sizes and these account for over 85% of all claims. There
appears to be some evidence for a very slight increase in volatility in the rarer
property sizes (shared accommodation, four & five bed) but this applies to falls as
well as increases. If there is an effect here then it maybe due in part to the scarcity of
evidence used to set LHA rates but this would require further investigation.
6.5 The apparent 3% inflation in average rent levels in the period prior to March 2011 is
entirely due to changes in the caseload composition the most significant being a shift
in the relative distribution of the caseload from North towards London and Southern
England.
6.6 Our estimate of the actual change in rents during this period without this „regional
effect‟ (in other words what the average rent change would have been if the caseload
composition had remained the same) is that rents fell by an average of 1%. Therefore
the total uplift caused by this regional effect is equivalent to a 4% rise (turning a 1%
fall into a 3% increase).
6.7 We also have reason to believe there would be a somewhat smaller effect due to an
increase in the number of claims in larger properties because of the gradual transfer
of non-LHA cases (larger households tend to move less frequently) although without
the further release of data we are unable to estimate its size.
6.8 Our estimate of the fall in housing benefit rent levels during the period November
2008 to February 2010 is still somewhat smaller than the 5% fall in market rents
reported by the Find A Property index over the same period. However, in order to
make a fair comparison the property index should also be weighted in the same way
as the caseload characteristics before any inference could be made that the LHA is
inflationary.
6.9 Overall, it seems that LHA rates do broadly reflect what is happening in the wider
(non-housing benefit) market and this should not be surprising because LHA rates
are set from data that excludes housing benefit lettings.
6.10 We found no evidence for a relationship between the LHA inflation rates and the
proportion of the market that is let to housing benefit tenants.
17

19. 6.11 These findings are consistent with earlier studies such as the LHA pathfinder
11
evaluation that found that any assumed inflationary caused by landlords raising their
rents to the LHA rates is at most only slight.
6.12 Our findings call into question the Government‟s assumption that rents increases can
be controlled by forcing down LHA rates. If LHA rates do not contribute towards rent
inflation then they cannot be used as a tool to force rents down.
11
DWP (2007)
18

20. 7. References
DWP (2007) Local Housing Allowance Evaluation 16: The housing and labour market impacts
of the Local Housing Allowance.
http://www.dwp.gov.uk/docs/16-housing-labour-market-impacts.pdf
DWP (2010a), Explanatory Memorandum for the Social Security Advisory Committee:
Housing Benefit Amendment Regulations 2010. http://ssac.independent.gov.uk/pdf/housing-
regulations-2010.pdf
DWP (2010b) WPSC inquiry: analytical supplement annex – 3 November 2010.
http://www.dwp.gov.uk/docs/wpsc-analytical-supp.pdf
DWP (2011) Two Year Review of the Local Housing Allowance
http://www.dwp.gov.uk/docs/lha-review-feb-2011.pdf
HC (2010), Work and Pensions Committee, Changes to Housing Benefit announced in the
June 2010 Budget, Second Report of 2010-11, HC 469
http://www.publications.parliament.uk/pa/cm201011/cmselect/cmworpen/uc469-ii/469ii.htm
19