The problem with Universal Credit and the Private Rented Sector

Different groups have very different experiences of the Private Rental Sector (PRS). Amongst those on low incomes, benefit claimants have a particularly problematic experience. They have a very limited pool of housing to choose from, since many landlords do not accept benefit claimants as tenants.

Furthermore, this has got worse in recent years: according to the National Landlords Association this number fell from around half in 2010 to less than a quarter in 2013.

The lack of choice benefit claimants have in the PRS market undermines the reasons housing benefit was brought in to begin with. Public subsidies were moved from social housing and into the PRS market. This was intended to make the housing markets work better by allowing low income tenants to choose a home that is most suited to them. This in turn should have driven up standards of housing conditions, as low income tenants were now able to choose better quality homes. Restricting benefit claimants to a small pool of (mostly poorer quality) housing undermines these aims.

There are many reasons why landlords may be reluctant to let to tenants on housing benefit, but three are of particular concern. First, some landlords are concerned about the administration of housing benefit. Delayed payments are common. In 2008, rules were changed such that the majority of housing benefit payments went to the tenant rather than directly to the landlord – a change that was not popular with landlords as it was seen as creating additional risk. Evaluations of the effect of making this change have shown an increase in arrears. And in cases where payments are made directly to landlords, they are not made in advance (as is usual with other private tenants), but at the end of the month. Plans for Universal Credit, however, will see all payments being made directly to tenants in future.

Second, landlords with tenants in receipt of housing benefit have limited options with regard to their buy-to-let mortgage and buildings insurance. Many buy-to-let mortgage companies, and many insurance providers, provide their products on the condition that landlords do not let to tenants in receipt of benefits. This prohibits many landlords from accepting benefit recipients; and those that do have limited choice in the mortgage and insurance markets.

Third, there are important legal differences between tenants in receipt of benefits, and other tenants. If a tenant is in rent arrears, landlords can take them to court. But landlords are generally not able to take a tenant to court if they have been in receipt of housing benefit. Furthermore, if a tenant makes a fraudulent housing benefit claim, the local council is able to reclaim overpaid housing benefit directly from the landlord, even if the landlord was not aware of the claim.

Each of these issues provides a disincentive for landlords to let to benefit recipients. This in turn reduces competition for business from benefit recipients, reducing the choice of these tenants. It also undermines some of the main aims of housing benefit – to increase choice and drive up housing standards. And it reinforces a distinction between housing benefit claimants and other tenants, separating benefit claimants into their own sub-market.

Another key issue is how landlords, mortgage companies and insurance providers will respond to the planned full introduction of Universal Credit (UC). A key element of UC is the integration of six benefits and tax credits into one unified credit payment. There will no longer be an identifiable group of ‘housing benefit recipients’, since anyone claiming one or more benefit or tax credit – from Employment and Support Allowance to Child Tax Credit – will simply be a ‘Universal Credit recipient’. The number of Universal Credit recipients is likely to be substantially larger than the current number of Housing Benefit recipients. In particular, it is likely there are families currently claiming Working Tax Credit and Child Tax Credit – but not housing benefit – that will in future be classed as ‘Universal Credit recipients’.

In the PRS market, it is crucial to understand the ways in which landlords, mortgage companies and insurance providers will respond to this. In the absence of a ‘housing benefit’ criterion, mortgage and insurance companies may respond by preventing landlords from letting to anyone in receipt of Universal Credit. But this will affect even more people than it does currently; and may affect families in particular. A one child family earning £25,000 can currently claim Child Tax Credit; and for larger families the income threshold is even higher. Under Universal Credit, even more tenants may have a restricted pool of PRS housing to choose from.

Perhaps mortgage and insurance companies will use a different criterion for determining the type of tenant to whom the landlord is allowed to let. Even better still, they could drop restrictions on tenant type altogether. But a lot is likely to depend on how the legal differences between benefit recipients and other tenants are interpreted by the courts under Universal Credit. In any case, there is at the moment considerable uncertainty for PRS benefit recipients, and it is crucial to investigate how each of the important players in the market will respond. This would go some way to maximise competition and improve choice and value for low income tenants.

This blog originally appeared on the Competition and Markets Authority website.


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