IFS - Low-income households increasingly exposed to rent increases

17 Oct 2017 09:18 AM

The rented sector is growing. The proportion of people in Great Britain living in private rented accommodation has more than doubled, from 8% in the mid 1990s to 19% in the mid 2010s, while among 25- to 34-year-olds this proportion has trebled from 12% to 37%. Over the same period, average private rents have risen by 33% in real terms.

In recent years, low-income tenants have also been affected by substantial cuts to housing benefit (HB), which are currently saving the exchequer around £3 billion per year. The net result is that paying rent now uses up an average of 28% of the (non-HB) income of low-income private renters (defined as those in the bottom 40% of the income distribution in their region). This is up from 21% in the mid 1990s. Reforms in the pipeline mean that, if rents continue to rise, support for housing costs will fall further and further behind the cost of housing.

These are among the conclusions from new analysis published by IFS and funded by the Joseph Rowntree Foundation. Other key findings on the cost of renting include:

• Renters are paying considerably more for their homes than 20 years ago. In real terms, the median private rent paid in London was 53% higher in the mid 2010s than in the mid 1990s, while in the rest of the country it was 29% higher. Those rises mainly occurred in the late 1990s and early 2000s (in London) or the early and mid 2000s (elsewhere). Meanwhile, social housing rents have been consistently growing in real terms since the mid 1990s.
• London renters spend more of their income on rent than those elsewhere and this differential has increased recently. In 2013‒2015, the average share of net household income spent on rent among private renters was 40% in London and 28% in the rest of Great Britain. This represented a 5ppt increase in London since 2006‒2008, but no change elsewhere. This is because the incomes of private renters in London fell sharply during the recession while flatlining in other parts of the country.
• Tenants on lower incomes tend to spend greater fractions of their income on rent, even after accounting for the support they receive through HB. For example, the lowest-income fifth spend an average of 35% of their (non-HB) income to pay the part of rent not covered by HB, compared with 19% for the highest-income fifth.

Around 1.9 million privately renting households (containing 4.8 million people) are entitled to less HB than they would have been without reforms introduced since 2011, by an average of £24 per household per week. Reforms have also cut the entitlements of 600,000 social-renting households (containing 1.3 million people) by an average of £19 per household per week.

The reforms have so far:

• Cut the HB entitlement of two-thirds of low-income private renters and one-sixth of low-income social renters.
• Increased the number of low-income renters facing a shortfall between rent and HB entitlement by 200,000 households in the private sector (containing 600,000 people, or 12% of low-income private renters) and by 300,000 households in social housing (containing 700,000 people, or 10% of low-income social renters).

HB entitlements are forecast to fall further behind rents in the coming years. For private tenants, this is because the locally varying caps on HB awards are no longer updated according to changes in local rent levels. These caps are to be frozen until April 2020 and then increased each year in line with national household inflation as measured by the CPI. For social tenants, it is due to the gradual roll-out of those caps, which currently only apply to private tenants, to those in social housing from 2019. Looking at these upcoming changes:

• If private rents grow in line with earnings, current policy would mean the fraction of low-income private renters facing a shortfall between rent and HB entitlement increasing by a further 4ppts (200,000 people) by 2025.
• The long-run effect of rolling caps out in the social sector is likely to be that another 200,000 low-income social tenants will have a gap between HB entitlement and rent (although it will be some time before these caps are fully rolled out to social tenants).

Taking together the past and likely future effects of changes to HB policy:

• In the private sector, low-income working-age renters with children are the most impacted in terms of the proportion with a shortfall between HB entitlement and rent. Reforms since 2011 have already caused an extra 14% of this group (approximately 500,000 people) to face such a shortfall. Continuing not to increase HB caps in line with rents would cause a further rise of 4ppts (an extra 150,000 people) by 2025 if rents grow with earnings. On the other hand, low-income working-age households without children are most impacted in terms of the proportion paying very large fractions of income in rent.
• In the social rented sector, low-income working-age households without children are hit relatively hard by both past and future reforms. Reforms already implemented have increased the fraction of that group facing a shortfall between HB entitlement and rent by 15ppts (an extra 250,000 people). If future reforms were implemented now, this would go up by a further 6ppts (an extra 90,000 people).

Agnes Norris Keiller, a Research Economist at IFS and an author of the report, said:

“Wider problems in the housing market are pushing up housing costs and increasing the size of the rented sector. While these remain unaddressed there is likely to be an ever tougher choice: continue decoupling support for housing costs for those on low incomes from the rising cost of housing or change policy and accept further rises in the housing benefit bill. The current approach effectively places most of the risk of further rises in costs onto low-income tenants, and little on the housing benefit bill. While containing the cost to taxpayers, it leaves housing benefit vulnerable to becoming increasingly irrelevant with respect to its purpose – maintaining the affordability of adequate housing for those on low incomes.”

Notes to editors

1. "In-work poverty among families with children" by Jonathan Cribb, Andrew Hood, Robert Joyce and Agnes Norris Keiller is available at: The cost of housing for low-income renters, If you have any questions, please contact Emma Hyman in the IFS press office: emma_h@ifs.org.uk / 020 7291 4850 / 07730667 013. 

2. This paper forms a small part of the wider and flagship annual publication 'Living Standards, Poverty and Inequality in the UK'. 

3. This work has been produced with funding from the Joseph Rowntree Foundation (JRF). The Joseph Rowntree Foundation is an independent organisation working to inspire social change through research, policy and practice. For more information visit www.jrf.org.uk JRF is on Twitter. Keep up to date with news and comments @jrf_uk. For press releases, blogs and responses follow @jrfmedia.