Income Support in the Private Rented Sector: Options

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A decision made 3 May 2013:

Decision Reference: MD-S-2013-0040
Decision Summary Title :	DS - Options for Income Support in the Private Rented Sector		Date of Decision Summary:	1 May 2013
Decision Summary Author:	Policy and Strategy Director		Decision Summary: Public or Exempt?	Public
Type of Report: Oral or Written?	Written		Person Giving Oral Report:	N/A
Written Report Title :	WR - Options for Income Support in the Private Rented Sector		Date of Written Report:	1 May 2013
Written Report Author:	Policy and Strategy Director		Written Report : Public or Exempt?	Public
Subject: Options for Income Support in the Private Rented Sector
Decision(s): The Minister decided to present a report to the States entitled “Options for Income Support in the Private Rented Sector”
Reason(s) for Decision: Following a major review (the Housing Transformation Programme), the Council of Ministers has lodged P.33: The Reform of Social Housing, which proposes changes to rental policy for tenants living in social rented accommodation. As a consequence, it is necessary to examine the support available to income support tenants living in the private rented sector who currently receive the same level of support as social rented tenants. The report examines a number of options and makes a recommendation for the future level of support available to private sector tenants under the income support scheme.
Resource Implications: The full year cost of the recommended option is £1 million. The Medium Term Financial Plan includes additional funding for private sector tenants under the income support scheme from 2014, £750,000 in 2014 and £1 million recurring from 2015, in the Central Growth Allocation. The allocation of Central Growth will be agreed by the States as part of the 2014 Budget in December 2013.
Action required: Policy and Strategy Director to request the Greffier of the States to arrange for the report to be presented to the States as soon as practicable.
Signature:		Position: Minister
Date Signed:		Date of Decision (If different from Date Signed):

Income Support in the Private Rented Sector: Options

Income Support -- Support for rental costs in the private sector

Over the last three years the Housing Department has undertaken extensive research to prepare a new strategy to cover all aspects of the future provision of social rented housing in Jersey. This work has been undertaken under the auspices of the Housing Transformation Programme (HTP) and both the previous and current Ministers for Social Security have served on the political steering group.

The HTP proposes changes to rent levels for new tenancies within the social sector, and these will be reflected within the income support system. These will ensure that all existing income support claimants renting in the social sector are fully protected from the impact of rent increases.

At present, the income support scheme provides the same maximum level of support for rental costs in the social sector and in the private sector. Given the changes to the social sector rentals, it is appropriate to review the support available in the private sector. To this end an independent review, commissioned by Social Security, has been undertaken by Michael Jones of the Cambridge Centre for Housing and Planning Research and his report is published herewith.

The recommendation of the report is that rental protection for income support claimants renting in the private rented sector should be set separately to social sector protection and that the income support limits for rents in the private rented sector should be increased to the average equivalent open market rent of States properties for each property type (e.g. one-bedroom flat, three bedroomed house, etc.).

For example, suppose that three bedroom houses owned by the Housing Department have market rentals of between £250 and £350 per week, with an average rental of £300. In this example, the maximum rental component in the private sector for a three bedroom house would be set at £300 per week. In the social housing sector, rents charged will be in the range £225 (90% of £250) to £315 (90% of £350) per week and will be supported up to these levels through income support.

Capacity in the social sector is not currently sufficient to provide housing for all types of tenant. At present, access is limited to low income tenants who are aged 50 and above, or who have young children, or need special housing due to a disability. Many low income households do not meet these criteria and remain in private sector rental accommodation. Income support tenants make up about 20% of the private rental market.

Mr Jones’ report shows that just over half (56%) of all income support tenants renting in the private sector pay rent that is above the maximum level available under income support. To meet the full cost of their rent, these families need to restrict other areas of household expenditure. The recommended option would increase support for private sector tenants so that two thirds (67%) of income support tenants in the private sector would have their rent fully included within the income support calculation.

In addition to the work undertaken by Mr Jones, a separate analysis has confirmed that approximately 14% of current income support tenants in the private sector are identified as being resident in Jersey for less than 10 years and are unlikely to have residential qualifications. This group accounts for approximately 4% of all income support claims. An analysis of the remaining 86% of income support private sector tenants who have been resident in Jersey for at least 10 years and are likely to have residential qualifications, indicates that 50% of this group are paying rents in the private sector above the maximum level set for income support.

The full year annual cost of the proposed additional support is approximately £1 million. A bid to cover these costs was included in the Medium Term Financial Plan (MTFP). An amendment of the MTFP approved that £750,000 in 2014, and £1 million recurring from 2015 be held in the Central Growth Allocation for 2014 and 2015. The allocation of Central Growth will be agreed by the States as part of the 2014 Budget in December 2013.

Changes to the income support regulations to take account of the changes to the social sector rent levels will be published towards the end of 2013, for debate by the States Assembly. Proposals will be put forward at the same time in respect of ongoing support for private sector tenants. It is currently planned that the changes to income support would be effective from April 2014, in line with the change in rent policy for the social sector.

Options for Income Support in the Private Rented Sector

Michael Jones

Cambridge Centre for Housing and Planning Research

Department of Land Economy

University of Cambridge
Context

This paper has been commissioned by the Social Security Department in order:

To set out a range of options for setting the maximum rent limits in the private rented sector that would be eligible for Income Support;
to analyse the numbers of tenants in the different bed sizes and types of properties who currently receive Income Support and who would be affected by revised limits; and
to estimate the possible costs of each option.

Recommendation

That the Income Support limits for rents in the private rented sector should be increased to the average equivalent open market rent of States properties.

Background

The Housing Transformation Programme in Jersey has agreed that rents in the social rented sector should be returned to the policy objective of setting the rent of each social rented property at 90% of the rent which it is estimated that that property would attract in the open market.

Income Support in the private rented sector is currently capped at the ‘fair rent’ for each bed size and type of property which is applied in the social rented sector to determine the maximum rent which can be charged, irrespective of the possible open market rent for any particular property.

At present, rents in States housing have drifted well below 90% of the relevant open market value, and would need to increase by some 25% to reach the 90% target. The open market rents of States properties are assessed at up to some 40% more than current States rent levels.

The rent proposals in the Housing Transformation Programme will bring the rents of social housing for new lets roughly into line with the average levels of rents in the private rented sector. This is because while the rents of social housing properties will be set at 90% of the current open market rent of the property, many rents in the private sector are not adjusted regularly to keep in line with current open market conditions, with the average rent lagging the market by a small margin.

The Census 2011 counted 7,806 dwellings in the qualified private rented sector. In addition, there were 1,274 dwellings provided as service or tied accommodation, and 1,070 lodgers renting accommodation in other people’s homes. There were also 2,563 other non qualified households renting accommodation.

Income Support in the Private Rented Sector

There were 1,522 tenants in the private rented sector (PRS) in receipt of Income Support at October 2011, or 19.5% of the 7,806 qualified private sector tenants. (A relatively small number of tenants without residential qualifications in the PRS are in receipt of Income Support)

80% of tenants in receipt of Income Support occupy bedsits, 1 bed and 2 bed flats and 1 bed houses.

In practice, private sector rents do not ‘cluster’ around the Income Support limits: 44% of tenants are paying rents below the current maximum limits for Income Support, and 56% of tenants are paying the balance of their rent, above the Income Support limit, from their other resources. Tenants in smaller properties tend to pay smaller weekly amounts in ‘excess’ rents above the IS limits, and tenants in larger properties tend to pay larger weekly amounts in ‘excess’ rent.

Options for setting rent limits for eligibility for Income Support in private rented sector

Seven options for setting Income Support limits for private sector rents are set out below.

One option is simply to continue to use the current limits, uprated annually by the Jersey Private Rents Index, or a similar, future index

Three of the options would link the Income Support limits to different percentiles of rents in the private sector, at the 20th percentile, the 25th percentile, or the 30th percentile.

Three of the options would link the Income Support limits to different levels of average rents in properties administered by the States owned housing association:

at the average of the proposed level of States housing rents, set at 90% of the assessed market rent of each property. This would provide the same average level of cash support to private sector tenants as social tenants, for each property type.
at the equivalent average of States housing rents if these were set at their assessed 100% of the market rent of each property. This would recognise that private sector tenants have to pay 100% of the market rent of a property, not 90%.
at the 90th percentile of the open market rent of States housing, recognising that a small proportion of States properties have high open market values.

The table below sets out the average weekly rent limit that would be created for each bed size and type of property under each of the seven options.

The table below shows the numbers of tenants who would be affected by each option.

The percentage of tenants whose rent would be fully supported is the sum of the existing 44% of tenants in that position, plus the total at the bottom of each option column: the recommended option would therefore provide full support to 67% of tenants (44% + 23%).

The costs of raising the limit rents for Income Support

The table below shows the costs of each option, by bed size type and total.

Points to note:

Setting limit rents at the 20th percentile would incur gross additional costs of £488,084, offset by savings of £97,360 from introducing limits for bedsits and 1bed flats that would be lower than the current limits, to produce the net cost of £390,725 shown in the table.
The least cost option would be to set the limit rents at the average rents in States housing (i.e. at the average of 90% of the assessed market rent of each bed size type in the States sector).
This option would raise the proportion of tenants whose rent are within the limit from the current 44% to just over half, at 51%.
This option is the least costly primarily because it sets lower limits for 3 bed and 4+ bed houses than options based on private sector rents, reflecting the lack of a ‘luxury’ market in the social housing sector.
The option of setting the limit rents at the average of 100% of the assessed market rent in the States sector has the advantage of raising the limits for the 80% majority of tenants in bedsits, 1 and 2 bed flats and 1 bed houses, while restricting the increase in the limits for 3 bed and 4+ bed houses.
Setting IS rent limits at the average of States market rents would raise the proportion of tenants whose rent are within the limit from the current 44% to just over two thirds, at 67%.

The choice of rent limit

There are a number of advantages in using States housing rents as the reference point for setting rent limits for Income Support to private sector tenants.

The States owned housing sector is relatively homogenous, with a narrow spread of rents. There are few properties with very low rents, and there is no ‘top end’ or ‘luxury’ segment (with the exception of a very small number of acquired properties, most of which are under consideration for eventual disposal).
The standard of construction, amenity and location of States owned housing is (by definition) considered to represent an appropriate standard for tenants on lower incomes (once the stock is improved to the Decent Homes standards).
The States owned housing sector stock is only likely to change very gradually over a period of years, and is unlikely to experience the sharp fluctuations in values which can occur from year to year in the private sector, depending upon short term changes in the balance of supply and demand in the market. This offers a more stable basis for setting rent limits.
Rent setting in the States owned housing sector will need to be updated on a regular basis, in order to avoid rents drifting away from 90% of market value. This is presumably best achieved by an annual revaluation of a sample of the stock. If changes in rents are averaged over a two, or three, year period then this will further even out fluctuations and give a less volatile basis for budgeting.
If the rent limits for Income Support in the private rented sector are similarly set on a rolling average, then this should also reduce budget volatility for Income Support.

The impact of changes in Income Support limits

The calculations of the cost of each option assume that there would be no behavioural impact of higher Income Support limits: existing tenants would continue to rent their existing properties at their existing rents.

Most new Income Support claims from families will already be established in rental accommodation. Most new claims in respect of young adults leaving home or individuals needing accommodation upon release from prison are limited to hostel and bedsit accommodation.

Nearly half of all tenants (44%) are currently choosing to rent for less than the Income Support limit, when, in theory, they could have the difference between their current rent and the limit paid for by Income Support

The current distribution of rents charged to income support tenants in the private sector does not indicate that landlords are setting rents in line with maximum rental limits. Income support claimants make up just under 20% of the total (residentially qualified) rental market.

Tenants receiving Income Support who have a valid reason for needing to move within the private sector in the future will be able to consider a slightly wider range of properties within the Income Support limit.

Given the current distribution and the relatively small proportion of private rental properties occupied by income support tenants (compared to other jurisdictions) , there is no evidence to suggest that relatively small adjustments in the maximum income support levels available will have any significant impact on the rental levels in the private sector.