Before I wade in here, let me set out my values. I believe the State has the responsibility to protect the vulnerable in society and to ensure that they are adequately housed. I also believe that all state benefits should be “smart”, crafted to minimise distorting markets if and when such distortions create socially negative externalities.
Much is said about housing benefit engendering dependency and complacency amongst the unemployed. Less is mentioned about how housing benefit creates the same dependency and complacency amongst landlords. Or about the negative consequences that landlords' benefit calculations can have on inner-city neighbourhoods.
Here are some typical figures. A four bedroom terrace in LS7 can be purchased and set up as a “small” HMO catering for four people for as little as £100,000.00. Leeds Housing Allowance rate for a single person is £63.96 a week. Typically rent is set at exactly this amount. Multiplied by 16 that gives a monthly rental income of over one thousand pounds. Allowing for maintenance costs, tenant changes and bills there should still be an annual return on investment approaching 10%!
This is about the highest rate of return of any rental sector in Leeds. With generous rents both guaranteed and capped and tenants little able to employ discretion there are few incentives for landlords and investors to improve their properties much less convert them into quality, self-contained units.
Nor is there any incentive to increase the desirability of the surrounding area. Worse still, investors looking to expand their portfolios may actively reduce the value of surrounding properties so they can buy them up.
This is not an idle claim. Three simple ways that landlords across Leeds’ inner-city continually reduce the desirability of neighbourhoods are: 1) letting front gardens overgrow, 2) leaving bins out in the street, and 3) leaving “to Let” boards up permanently. The result is that government money is paid into the pockets of landlords who intentionally, or unintentionally, obstruct government plans for inner-city rejuvenation.
There are, of course, landlords letting to waged tenants who do the same. However their “rational” behaviour is to care for the surrounding area on the grounds that a flourishing neighbourhood means rising property values and rising rents. Intuition tells us that an investor who put in money to improve and maintain a property wants to see the surrounding area well maintained as well.
What to do
One answer is simply to reduce housing benefit or calibrate it so that landlords don’t get more income by renting to tenants on benefits.
The obvious objection is that this may lead to a reduction in the supply and quality of low end rental accommodation at a time when there is serious shortage. Furthermore, capping housing benefit could lead, in the short term, to further stagnation of inner city house prices.
Option two would be for local councils to build more of their own low cost housing. This is actually happening in Leeds where the Council is currently building 1,000 homes. There are, however, obvious limits to the amount of housing cash-strapped councils can build.
There is something to be said for combining the two approaches. Money saved by cutting housing benefit could be reinvested into affordable housing.
This would need to be combined with two initiatives: Firstly, greater regulation of all HMOs is required. At present “large” HMOs let to five or more tenants are regulated. There is far less regulation of small HMOs. Secondly, serious inner-city rejuvenation is only going to happen if serious grants and incentives are made available to investors and home owners wishing to improve their properties.
The combination - capping housing benefit, building more low cost housing, regulating all HMOs and giving serious incentives for restoration of inner-city properties – could help spring the housing benefit trap and just might help transform the Council’s lofty pretention - to make Leeds “the best city in the UK” by 2030 - into a reality.