Crash course in social housing etc.

There has been some confusion over my proposal to replace existing cash benefits (and various other bits and pieces) with a single flat-rate universal non-means tested cash benefit (often referred to as a Citizen's Income). The detractors say that this wouldn't be enough to cover housing costs, and as I keep saying, housing costs are a separate issue, and can be dealt with completely separately to any reform or simplification of cash benefits.

Before you think up ways of sorting this out, it is useful to have some knowledge on how it actually works in practice, so here goes. This is all from memory and is simplified version of what really goes on, so don't quote me on exact figures:

1. There are two types of social housing.

Council housing and housing owned by Housing Associations (which are ultimately financed by and owned by the government).

There is no real fundamental difference between the two, except:
* They have slightly different criteria as to whom they accept as tenants.
* HAs tend to set ever so slightly higher rents.
* There was never a right-to-buy with HA housing.
* About two-thirds of social housing is council housing and one-third is HA housing.
* UPDATE: HAs have much more freedom in how they are financed and what they can do with capital receipts (to which see item 4. below and Nick Drew in the comments)

2. Tenants and rents

* 18% of UK households are in social housing, i.e. about five million households.
* Nearly a third of social tenants are pensioners.
* Turnover in social housing is very low, even lower than with owner-occupiers, about 3% of units change tenants every year.
* Average headline rents in social housing are about £70 a week, about half the equivalent open market rent.
* Social housing is subject to Council Tax, average maybe £18 a week.
* Unsurprisingly, there is a lot of sub-letting going on, you'd be daft to hand back the keys to the council when you move out, you just sub-let. Nobody knows how much social housing is sub-let in this way, but it must be between 5% and 10%.

3. Council house sell-off

* At its very peak in the 1950s or 1960s, about 30% of the UK population lived in social housing. Our population was smaller and households bigger then, over the years about two or three million units have been sold off.
* There are about 1.6 million households on the waiting list - there is massive 'pent-up demand' for more social housing.
* The proportion of social tenants who are not in work has gone up a lot over the last twenty years. In round figures, from one-half to three-quarters. This can be largely explained by the sell-offs and is down to basic maths. Let's say that there used to be six million households in social housing, three million of whom had jobs so half were 'workless' households. Two million units were sold off to people with jobs. This leaves us with four million households in social housing of whom only one million have jobs, so three quarters are 'workless' households.

4. Finance

This is where it gets really murky.
* When Whitehall is allocating grants to local councils, it deducts an amount equivalent to the rent it is collecting. In other words, rents are ring-fenced. There is little financial incentive to local councils to increase collection rates above and beyond a certain minimum.
* HAs appear to be able to keep their rental income and capital receipts in full.
* HAs are allowed to borrow money to build more housing, local councils aren't.
* The headline figure for total HB of £17 billion (to which we could add £2 billion in CTB claimed by social tenants) is highly misleading. Maybe a third of that goes to private landlords (update 12/1/2011: 40% of HB claimants are in 'private' rented accommodation from ONS, and these rents tend to be higher, so actually it's probably half of all HB) and is a real cost to the taxpayer. The rest is money shuffled between departments (see below) in ever decreasing circles.
* The cost to the taxpayer of people in social housing is NOT £12 billion (or whatever), the real cost is merely the difference between the cash costs of running it and the £30 or £40 average rents paid (i.e. the cost to the taxpayer is negligible and it might even be a small profit). Feel free to add notional interest to the costs side, but if you do that it is only fair to include notional capital gains on the income side!

5. Housing & Council Tax Benefit (HB and CTB)

You could hardly design a more stupid system if you tried. The council and HA ask the tenant for below market rent (which some of them can't afford) and then also ask them for Council Tax (which some of them can't afford either). So they invent HB and CTB. The way they are calculated and withdrawn again is fairly similar, but we end up with several departments involved and several streams of money going back and forth: one department ask for rent; another asks for Council Tax; another deals with HB claims; another deals with CTB claims; then the council department has to claim it back from the DWP and so on.

This leads to ridiculous situations - when I was clearing up one of my rental properties after a tenant had moved out, I found one cheque from the housing department to cover the rent he paid me; and a last reminder from the council tax department asking him to pay arrears of Council Tax.

* Two-thirds of social tenants claim Housing Benefit and Council Tax Benefit (HB and CTB) for all or part of their rent/Council Tax. Having ground the figures, it appears that the overall average rent paid by tenants is about £30 to £40 a week, in other words, taken as a whole, the actual net rents collected are roughly equal to the cost of running it.
* Conversely, about three-quarters of HB and CTB claimants are in social housing.
* HB and CTB are savagely means-tested. Remember that most families with low incomes will be claiming Tax Credits, which give them an overall withdrawal rate of about 70% (for every £1 earned, they lose 39p Tax Credits and lose 31p in PAYE). HB and CTB are then withdrawn at 65% and 20% of the balance, i.e. out of the 30p you're left with, you lose another 25.5p in HB and CTB withdrawal.
* I once calculated the percentage of income that people pay in rent and Council Tax, plotted against incomes. Clearly, if you earn £nil then you pay 0%; the percentage then increases sharply - if you earn £150 a week, the actual rent you pay (plus Council Tax, net of HB and CTB) is about about a third of your gross pay (so you are no better off by working longer hours, see above); and once you get to £350 a week or so, your HB and CTB are tapered to nil anyway, so the total rent plus Council Tax you pay is about one-fifth of your gross income (and the percentage goes down from there, of course) and the percentage declines from there on.

6. My suggestions...

This is primarily about simplification, and can be seen as a straight swap for HB and CTB for social tenants (if it's in conjunction with other measures like Citizen's Income or at least reducing the withdrawal rates, so much better, but that is by the by):

* instead of councils and HAs asking for rent and Council Tax separately, there would just be one, all-inclusive bill.
* Instead of there being separate HB and CTB, which are withdrawn at different rates depending on income, there would be one system of abating the rent-inclusive-of-Council Tax for no- and low-income households.
* Instead of asking for the full amount and then giving people HB and CTB which pay the full amount but then withdrawing these with rising income, why not just ask for an 'affordable' amount, in other words a certain percentage of people's income?
* Tracking down people's income is notoriously difficult, of course, so why not do this at source? The normal rate of PAYE (income tax plus Employee's NI) is 31% and there is such a thing as a K-code for PAYE where the tax rate is 50%. So if social tenants were not asked for rent, as such, but instead were given a K-code, then to the extent they are working, the rent gets collected automatically. They will overpay while they are working and underpay when they are not working.
* Under the already existing PAYE system, K-codes are set so that the worker pays the lower of (a) an extra 19% of his wages and (b) the actual liability (in this case rent).

PS, item 6 wasn't originally my idea. I explained items 1 to 5 to a UKIP MEP a few years ago, and genius that he is, he asked me why they don't just collect a certain percentage of income and have done with it? The more I thought about it the more I liked it. Collecting it via a K-code was my idea, of course.

7. Intended consequences

The knock-on effects would be that:
* If councils wished, they could nudge the better-off poor out of social housing by setting the headline rents at higher than market rents (i.e. the maximum amount that would be deducted under PAYE). Once your income reaches a certain level, you'd be better off renting privately. This may or may not be a good idea.
* The marginal withdrawal rate for low earners would be significantly reduced, so they are more likely to look for a job.
* Non-earners would not be affected in the slightest by the change (they still would pay net rents and Council Tax of £nil), except they'd suffer a lot less form-filling and hassle.
* Nobody knows what the Laffer Curve for welfare claimants looks like, but a rate of 95.5% must be on the downward slope. I guess that a 50% rate is near the top of the Laffer Curve, so if you care about reducing the net cost to the taxpayer of social housing (and welfare payments generally), then reducing the withdrawal rate has to be a good idea.
* If councils were paid over, and allowed to keep, the full amount of rent collected, then they would have a direct financial interest in maximising their rental income, i.e. maximising the amount that their tenants earn; i.e. attracting businesses to the area etc.
* Applying the reverse logic to the last point under 3. above, if councils built more housing, then instead of just housing the lowest two income deciles, they would be housing the lowest three income deciles, so the average income of social tenants would go up, and the marginal extra income collected from the third decile would certainly be more than the marginal cost of providing that extra housing. And with shorter waiting lists, it would be much easier for social tenants to move elsewhere if that's where they can find work. It's a win-win for tenants, the economy and taxpayers alike.

8. Fraud etc

And yes, of course there would still be fraud and sub-letting and jiggery-pokery, but:
* There would be a lot less than now.
* As the system would be greatly simplified, some of those people currently involved in pointless paper shuffling could be moved to tracking down fraud instead.
* Sub-letters would be easier to spot - if they have moved elsewhere in the country and are working, then a council in Yorkshire will wonder why it is being sent rents collected by a PAYE district in Kent.
* If a couple split up, then the one who has left social housing will be keen to point this out to the council to get his K-code scrapped and his tax rate reduced to 31%. So this helps the council identify which flat is now 'over-occupied' and perhaps shuffle the sitting tenant into a smaller unit, freeing up the larger one for somebody else.