Benefit uprating about fairness? No. The OBCs systemic flaw makes that clear

  • London social housing rent will increase 96% in real terms by 2040
  • Provincial social housing rent will increase by 78% in real terms by 2040

Has that got your attention reader? Those two startling facts is what freezing welfare benefit levels and the cap figure at 1% produces while rent increases by 3.1% – the current known situation – and that is the Systemic Flaw in the overall benefit cap, a theory I developed last year that has been agreed universally to be valid and correct. Simply, when rents increase at a higher rate than welfare benefit and/or the benefit cap figure we get such significant consequences.

Today we see the House of Commons discussing the welfare benefit uprating at just 1% and not in line with CPI inflation of 2.2% and this is a heated political debate that many see as a key electoral issue.  Yet, the politics is politics and less important than the real consequences which need to be understood. Here is one such example.

The Smiths are a London family with 4 children living in a 4 bed house and not working and when the OBC starts this year they will have to pay on average £17.09 per week towards their rent.  Currently they pay nothing towards their rent as HB will cover this as they rent from a social landlord.  The initial OBC change is a small change yet is a cut of £891.73 per year and this £17.09pw is also 3.42% of the £500pw cap figure in 2013.

  • In 2040 this same family will have to pay £146.74pw towards their rent.
  • This tenant make-up becomes 22.4% of the cap figure of £654.10 in 2040 a near 7-fold rise
  • The average rent of a London social property rises from 24.33% to 47.60% of the cap figure or total benefit income or in these real terms by 96%

These startling figures are the impacts of the systemic flaw in the OBC.

The Overall Benefit Cap of £500pw for families and £350pw for single households is due in the summer of 2013 having been delayed from April 2013.   I have argued successfully that it holds a systemic flaw which is difficult to explain yet in simple terms the Systemic Flaw is explained using the proposed 1% increase in overall benefit cap; the 1% increase in welfare benefits; and the 3.1% increase in social housing rent.

What seem like tiny differences in inflation figures soon mount up and the above consequences only become apparent when you project this using a simple spreadsheet.  This reveals the systemic flaw which occurs over time and the fundamental flaw which is evident from day 1.

The fundamental flaw sees the OBC penalises ‘large’ families from the outset and means in broad terms:

  • A 5 child family cannot afford social housing rent from day 1 across the UK
  • A 4 child family cannot afford social housing rent in London from day 1
  • A 3 child family cannot afford private rent from day 2 across the country
  • A 2 child family cannot afford private rent in London from day 1

All of these family compositions gets worse with the systemic flaw in the OBC and sees ever smaller families getting caught by the cap.  When that happens the tenant has to make up the rent and thus these tenants run a much higher risk of arrears, of eviction for arrears and then being homeless.

Yet, if such families cannot afford the cheapest form of rented housing i.e. council housing, then where are they to go from the temporary accommodation provided for their homeless state?

Where will larger families live?

When the overall benefit cap figure comes in this year the 5 child family cannot afford to live on benefit anywhere in the UK as the cap process allows just £34pw or so in housing payment towards rent.  To keep a roof over their heads they have to work.  If they don’t either through choice or lack of employment they will forever be in temporary homeless accommodation.

Note well there is no exit route from TA as they cannot afford to be workless and live anywhere else as even the cheapest accommodation, i.e. council housing, cannot be afforded from just £34pw. Even if this family moves or is moved into the cheapest rent areas in England such as Stoke or Hull they cannot afford to reside there.  The only option they have is take a low-paid job and then tax credits will kick in and thus exempt the family from the OBC altogether; OR split the family into two households.

The 5 child household and their treatment under the OBC is the fundamental flaw in the OBC from the outset as it directly penalises existing large (to mean here 5 child) families however they have arrived at that situation, whether through the (political myth of?) intergenerational worklessness or because they are a striving family working and living week to week and the parent has lost their job.

It is important to note the OBC like all other parts of the welfare system simply entitles recipients to benefit on their current situation and not how they got there! (And that includes contributory or non-contributory JSA as both at same level of payment.)

The systemic flaw then kicks in.

By the end of the next parliament in 2020/21 the same situation will happen to 4 child families because of the systemic flaw.  The ‘large’ family thus becomes redefined as 4 children from 5 children.

By 2040/41 a 3 child family in London will be in the same situation and the ‘large’ family again becomes redefined to be an ever smaller composition – again the systemic flaw at play and remember this is with welfare benefits being cut in real terms year on year as is now being proposed by Osborne

My simple workings are shown below in a spreadsheet table which gives the impacts of the systemic flaw.

Basic working table

2013/4

2015/6

2020/21

2025/26

2030/31

2035/36

2040/41

Benefit Cap Figure

£500.00

£510.05

£536.07

£563.41

£592.15

£622.36

£654.10

Welfare Ben 3ch

£325.56

£332.10

£349.04

£366.85

£385.56

£405.23

£425.90

Welfare Ben 4ch

£395.81

£403.77

£424.36

£446.01

£468.76

£492.67

£517.80

Welfare Ben 5ch

£466.05

£475.42

£499.67

£525.16

£551.95

£580.10

£609.69

3ch HB residual

£174.44

£177.95

£187.02

£196.56

£206.59

£217.13

£228.21

4ch HB residual

£104.19

£106.28

£111.71

£117.40

£123.39

£129.69

£136.30

5ch HB residual

£33.95

£34.63

£36.40

£38.25

£40.20

£42.25

£44.41

3 bed London rate

£110.25

£117.20

£136.52

£159.96

£187.43

£219.61

£257.31

4 bed London rate

£121.28

£128.92

£150.18

£175.96

£206.17

£241.57

£283.04

5 bed London rate

£133.41

£141.81

£165.19

£193.56

£226.79

£265.72

£311.35

Avg rent of cap %

24.33%

25.35%

28.10%

34.35%

38.30%

42.70%

47.60%

3 bed London rate

£64.19

£60.75

£50.50

£36.60

£19.16

-£2.48

-£29.11

4 bed London rate

-£17.09

-£22.63

-£38.47

-£58.56

-£82.78

-£111.88

-£146.74

5 bed London rate

-£99.46

-£107.18

-£128.80

-£155.30

-£186.58

-£223.47

-£266.94

3B provincial

£85.50

£90.88

£105.87

£124.05

£145.35

£170.30

£199.54

4B provincial

£100.62

£106.96

£124.59

£145.99

£171.05

£200.42

£234.83

5B provincial

£116.88

£124.24

£144.73

£169.58

£198.69

£232.80

£272.77

Avg rent of cap %

20.12%

20.97%

23.24%

25.91%

28.89%

32.20%

35.90%

3 bed result

£88.94

£87.06

£81.15

£72.52

£61.25

£46.83

£28.67

4 bed result

£3.57

-£0.67

-£12.89

-£28.58

-£47.66

-£70.73

-£98.53

5 bed result

-£82.93

-£89.61

-£108.33

-£131.32

-£158.49

-£190.55

-£228.36

The above table starts from average figures in the second column for 2013/14 and then the cap and welfare benefit amounts are inflated by 1% per annum and the rents figures inflated by 3.1% per annum.

The rows entitled “Avg rent of cap%” is the average 3/4/5bed rent figure expressed as a percentage of the cap figure.  The first for London social tenants and the second one for provincial (ie average excluding London) As you can see the rent percentage of total income which is what the benefit cap becomes to those not working rises dramatically – a 96% real term increase in London social rents and a 78% one in the provinces

What the systemic flaw means is large then ever smaller families cannot afford to rent even the cheapest council housing unless they work

Note well I am not making any comment or embarking on any discussion of the morality of that or even the ‘fairness’ of that as the current coalition are labelling it. Rather I am saying categorically that it is a fact and will happen unless the systemic flaw is removed from the OBC.  Yet the only way that can be done is to limit social rents to 1% increases per year as then the systemic flaw disappears because all 3 variables (the cap, welfare benefits and rents) all rise or inflate at the same rate.

Yet that cannot happen for many reasons.

Firstly, social landlords have huge threats to income and to arrears build-up from direct payments which even the contrived pilots show double arrears and the pilots exclude likely non-payers / high risk cases.  Then we can see the financial risk to social landlords from the bedroom tax which is well known and amounts to £500m per year or so.  The many other risks to non-payment of rent and arrears build up as prices inflate by 2.2% (much more for utilities) and from likely 17% council tax benefit reductions in yet another ‘reform’ from the coalition and a few more.

What this means is simple.  Social landlords who will be restricted to raising rents to 3.1% in April 2013 need – out of financial necessity – at least this level of increase to mitigate and try to recoup the expected losses from the increase in rent arrears.  Further if they need this in 2013, then the systemic flaw which each year (a) catches more tenants in the cap and (b) reduces tenant income as benefits rise slower than prices, means they will need this and more in each subsequent year.

Does the systemic flaw mean that each subsequent year social landlords will have to introduce more and more ‘affordable rent’ lettings at up to 80% of gross market rent to survive and maintain services too?  The answer to that has to be yes.  Does the systemic flaw also mean social landlords will have to reduce services to tenants too?  Probably!

What else does the systemic flaw in the OBC mean?

  • Social landlords won’t in future be able, economically, to house ‘large families’
  • Social landlords won’t be able to develop new properties larger than 2 bedrooms
  • Social landlords will need to fundamentally rethink their entire business model
  • Private landlords won’t be able to accommodate benefit claimants at all
  • Private landlords will need to fundamentally rethink their business models
  • Tenants will be evicted in their droves from both private and social properties
  • Huge additional numbers of homeless families – all at huge cost – will ensue

In short the rented housing models we now know are no longer fit for purpose and will need to be drastically rethought.

Yet this is only the tip of the iceberg.  What will the impact be on the economy as a whole if more and more tenants have less stability?  Think that through and especially with more and more people having to rent and the OBC consequences become apocalyptic – for once used in the correct context and valid. The real impacts are far more than the leaked Pickles letter from July 2011 which revealed the government knew that the OBC would cost more than it aimed to save and I discussed here.  It is much more than that.  That analysis was done way ahead of the systemic flaw theory being developed and like all matters the systemic flaw makes the situation worse year after year after year.

It doesn’t need a complex Treasury model to see the accumulated and ever worsening impact of the systemic flaw, the crude and simple initial spreadsheet I started with in developing the theory is suffice for that purpose.

So why is the OBC going ahead?  Why despite it being obvious that it will cost more – to everyone – than it will save?  Why are even the pilots going ahead when as I said yesterday they can’t possibly project what will happen given the complexity of housing benefit variables? Why are social landlords still focussing on the bedroom tax or the direct payments issue when the OBC with its systemic flaw is so much more a threat not just to finances but to social landlord’s survival? Why is it going ahead when private landlords are waking up to the impact it will have on them?  Couple that with the fact LHA is only rising 0.59% on average and in some cases reducing by more than 7% and all on top of a zero per cent freeze in 2012/13 and rethink what PRS landlords will do!

I predict this will see at least 15% of all PRS LHA claimants being evicted in the first full year of the OBC? That is about 250,000 households evicted and I think that is a conservative figure and a direct impact of the OBC.

Work that through as what percentage of private tenants on LHA has 3 children or more? It must be higher than 15% and these are the tenants that make LHA a risk too far right across the country for private landlords.  There are 1.65m private tenants claiming LHA and rising by 10,000 per month on average.  Then ask what impact that will have on homeless public purse costs?  Then ask what impact this will have on social housing demand and allocations and the social housing model? Then go back and ask what will this do to the economy!

The OBC has to be halted forthwith for the good of the country and for the economy and it should be challenged on that basis and not on the morality / amorality angle that it is currently being challenged.

The morality issue is a sideshow and not needed and only serves to obfuscate the real issue of the economy.

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3 thoughts on “Benefit uprating about fairness? No. The OBCs systemic flaw makes that clear

  1. cupcakesatdawn (@siobhan1222) January 5, 2013 at 3:48 pm Reply

    The “Smith’s” sound like a very lucky family. We are a 2 parent, 2 child family crammed into a tiny two bedroom flat for which we are paying extortionate rent in full to a private landlord. We don’t get any benefits help as we both work. Two of the Smith children have a bedroom each (which is a real luxury and not something I anticipate my kids ever having) and they have such a big property without even having to pay towards it! This is not an example of poverty, they live in a country where they have been given a 4 bedroom house in one of the most expensive cities on earth which they currently don’t pay anything towards. Bloody lucky indeed!

  2. joehalewood January 6, 2013 at 10:09 am Reply

    The issue is not poverty, the issue is what the changes mean. The Smiths may well be a family who previously worked and both lost their employment and the changes they will face are the issue.

    The Jones could be a 2 parent 2 child London family both working living in a 2 bed private property who both lose their jobs. Until OBC comes in they would receive £260pw or so in welfare benefits and £290pw in LHA a total of £550pw. Or even £340pw in LHA and a £590pw total if they live in a 3 bed private property The OBC sees a £50pw cut when it comes in or a £100pw cut – thats a 10% to 20% cut.

    How they got there is not the issue, it is how they can remain there and keep their children in school and other social, familial and other support netwroks we all need …..yet they cant as the OBC cuts means they cannot afford to live in private rented property in that area. Their only exit route from the homeless temporary accommodation is find employment or be moved to Stoke or some cheaper rent area.

    If they have 3 children and live in private property that applies across the country not just London. The OBC means lose your job lose your home and significantly whether the family is workshy and feckless or whether they are not and simply lose employment – the morality argument ia an emotive distraction from the real issue of all forms of safety net being removed

  3. joehalewood January 6, 2013 at 3:06 pm Reply

    IF the 2 parent 2 child London household lived in social housing then they would likely qualify for a 3 bed house so each cild could have a bedroom of their own. They also would not be caught by the cap. The working 2 parent 2 child familiy could have a bedroom each and be paying about £8000 per year less in rent.

    The issue is not poverty, the issue is the exhorbitant cost of private rented accommodation creates poverty as the only difference is the cost of PRS property. That 2p.2c household in a 3 bed social property could save £50k in 6 years or so and move up the property ladder if they wanted. Such a family has choices when they live in social housing.

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