From The Metro:
Cuts in housing benefit that come into effect today will help reduce private sector rents, the government claims. The maximum housing benefit payment will be cut from 50 per cent of average rents to 30 per cent to save £1 billion from the £22 billion annual bill...*
With 40 per cent of all private rents paid for by housing benefit - 4 million homes** - Work and Pensions Secretary Iain Duncan Smith believes the move could reverse rent rises. 'What we do has a big effect on the cost of the rental market,' he said in an interview with Metro.
'Many workers commute for three hours a day to get to work and back,' he said 'while thos on benefits are living in homes they could not dream of affording in Chelsea and Kensington and it is simply not fair.'
Shadow work and pensions secretary Liam Byrne said the system needs to change by insists landlords won't cut rents in response to the changes.
IDS is hamming it up a bit, but by and large he talks sense. Housing Benefit is a rent subsidy, and as housing is in fixed supply at any location, all the subsidy is push up prices, in many cases beyond that which a normal worker (who does not qualify for housing benefit) can afford it (in effect, the rate of tax on that worker's income is in excess of 100%).
Now, my dear Faux Libertarian chums - do you agree with IDS' predictions or with Liam Byrne's predictions? Which of the two understands the free market better?
Consider this - a tax is the opposite of a subsidy, so if you agree with IDS, you agree that reducing a subsidy reduces the rent and the reduction in the subsidy is borne by the landlords almost in its entirety. So conversely, increasing the tax on housing (i.e. Council Tax or the income tax rate on rental income) cannot possibly increase total rents (rent + Council Tax) and any tax increase is borne in its entirety by the landlord (similarly, reducing the tax on housing does not lead to a reduction in rents); unless you genuinely believe that a tax and a subsidy (which are opposites) can have the same effect on the prices charged.
* Not actually true - the total cost of Housing Benefit paid to private landlords is about a third of that, call it £7 billion, which explains why this measure will only save £1 billion or so.
** Not true either, about 3 million households rent privately, so 40 per cent of that is 1.2 million.
Friday, 1 April 2011
Liam Byrn-onomics
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5 comments:
I'm surprised that there haven't been any comments yet.
A little thought experiment:
What would happen if we tripled housing benefits? My answer is that rents would rise steeply, we'd probably see adverts for tenants that said 'DSS claimants only' and almost nobody on benefits would want a job.
Now suppose that after the next general election, the new government decided to lower housing benefits by two thirds? I would expect rents to drop sharply, the return of the familiar 'no DSS' adverts for tenants and a lot more benefits claimants would be interested in working for a living (and there would be a lot of very upset landlords.)
I have chosen extreme housing benefit changes to make the case that IDS is fundamentally correct. In the real world, however, these changes will probably take at least a year to messily work themselves out and the tenants will probably have to shoulder some of the costs.
QG, that is a splendid thought experiment and the results would be as you expect.
Rememebr: housing has several different demand curves (for existing owner-occupiers is different to the one for potential FTBs) and the one for HB claimants is different to the one for normal workers.
So let's assume the max rent which a worker can afford is £80 a week and the max that an HB claimant can afford is £10 a week (out of his dole money) + HB. If HB is £100, then the (distorted) market rent appears to be £100, if HB drops to £70, then HB claimants can still bid as much as normal workers, it is only if HB drops to £60 that the normal worker can outbid the HB claimant.
At that stage, HB claimed drops to £ zero because the HB claimant is outbid every time.
So it then makes little difference whether HB is £50 or £40 or £30, market rent levels out at £80, which is the true market rate.
There was a landlord on the radio today with 50 houses, 35 let to HB claimants. He said that in future he would not accept HB tennants due to the cuts. Is he going to let 35 properties stand empty, I think not as he will be bust in weeks not years, he will have to accept lower rents or sell up, either is good news.
There are two distortions in the rental market not mentioned here, firstly HB claimants generally have no money for a deposit and secondly insurance companies don't like DSS claimants. So the HB claimant is not competing with the normal workers for the same properties. In fact, property available to HB claimants in in a market of its own.
Personally, I think that HB is a good way of housing the poor, however, I think that historically it has been set too high and probably still is. There is nothing to say that bureaucrats make any better landlords than private individuals and organisations and if councils, paying inflated public sector salaries, can make a small surplus running council housing, then a private organisation should be able to provide the same service at the same rents for a larger profit.
Anon, let's hope he's bust within weeks not years; or we could scrap HB and impose LVT instead and he'd be bust within days.
B, yes, the HB market is a separate market, but it still overlaps with what normal people pay. And as a matter of £-s-d, assuming that the cash cost of housing 'the poor' falls on taxpayers, then social housing is better value for taxpayers. It just is, it's a simple verifiable fact.
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