Welfare Reform Bill: Council of Mortgage Lenders comment

The Council of Mortgage Lenders (CML) believes that the Local Housing Allowance (LHA) will damage investment in the Private Rented Sector (PRS) and will lead to a decrease in provision for tenants on HB.

DWP should reconsider its proposals and undertake further consultation; the experience of the pathfinders does not support national roll out of the LHA.

The CML is the representative trade body for the residential mortgage lending industry. Its 156 members currently hold over 98% of the assets of the UK mortgage market. The CML members have lent over £83.9 billion to the PRS by way of buy-to-let mortgages. There is also substantial commercial lending to the PRS.

The HB proposals for the Private Rented Sector (PRS) (Clause 27) should not be considered in isolation from the burdens imposed by other government initiatives. As a result of the Housing Act 2004, private landlords are confronting licensing of Houses in Multiple Occupation (HMOs), selective licensing of the wider PRS, compulsory tenancy deposit schemes and the implications of the health and safety rating scheme.

In addition, landlords must take account of the Disability Discrimination Act 2005. Landlords are predominantly small business people, as government's own surveys indicate. As such, they have limited resources to keep up with new regulations.

There is an inevitable trade off for government between raising standards and/or achieving wider policy goals and reducing investment in the sector, as landlords are deterred from entering or continuing to invest in the PRS. The Regulatory Impact Assessment for the Bill does not deal with this broader context.

The government commissioned evaluation of the pathfinders (which has yet to publish all its final results)1 suggests that the pathfinders have not met some of the government's own objectives and that the LHA has caused serious unintended consequences. In relation to the government's own objectives a three of points must be made:

Choice:

There appears to be no evidence from the interim evaluation that significant additional numbers of tenants have moved or otherwise exercised choice relative to what might have been expected in non-pathfinder areas. 
 
Personal responsibility

It appears that many tenants remain confused about the rules relating to LHA. In addition, in spite of the increased payments received by many tenants, there is evidence that arrears of rent have risen. This raises doubts as to the extent to which LHA is successfully promoting responsibility and awareness amongst tenants.

Reduced barriers to work

The proposal in the paper A new deal for welfare to reduce payments to some tenants on national rollout highlights the fact that the evaluation suggests that there has been no significant increase in the proportion of HB tenants returning to work. This was a key objective for HB reform.

In relation to the impact on landlords and investment, a number of disturbing trends have emerged in the evaluation:

 Arrears

The CML has consistently argued that the relative generosity of the pathfinders in terms of the levels of LHA paid together with the guarantee of "no losers" has undermined the relevance of the Pathfinders in identifying the likelihood of increased arrears if the scheme is rolled-out nationally. Nevertheless, evidence of increased arrears exists. Inevitably, higher arrears reduce the ability and willingness of landlords to invest for the future. 
 
Costs of collection

The evaluation has also thrown up evidence that landlord rent collection costs have increased – in part because many landlords now feel the need to collect rent in person. This, inevitably, affects the overall rate of return for landlords and their ability and willingness to invest in provision for HB tenants.

Administration

The majority of respondents to the landlord survey indicated that, overall, administration was much the same in terms of speed/efficiency. Only a minority felt that administration had improved.

 Landlord attitude to HB tenants

The pathfinder landlord survey clearly indicated a significant shift in landlord attitudes away from letting to tenants on HB. 65% of landlords indicated that they would be less likely to let to tenants on HB. This will impact directly on choice and availability for tenants.

As the final evaluation report on landlords and letting agents cautiously concludes: "Overall, it is possible to conclude that although the introduction of the LHA has not resulted in a substantial reduction of lettings to claimants, these have reduced. The LHA comprises a distinguishable factor in the reduction of lettings to claimants with landlords and letting agents being particularly concerned about the accrual of arrears".

Inevitably, the current plans to roll out the LHA nationally will cause some review of lending policies in this area to reflect the higher financial risks for landlords and this will contribute to a reduction in the level of investment to the HB sub-sector of the PRS.

The pathfinders suggest that the LHA has failed to achieve a number of key government objectives and that it is likely to disadvantage tenants and damage the PRS. In these circumstances, the government should withdraw its proposals from the Bill pending further consideration. Failing that they should be rejected.

For further information please contact Andrew Heywood CML Deputy Head of Policy:
Telephone 020 7440 2227
Email Andrew.Heywood@cml.org.uk