Our burgeoning housing benefit bill exposes flaws in housing policy and the tax system

This article first appeared in The Times newspaper on 19 September 2015 and is reproduced here with permission.

At a cost of £25 billion a year housing benefit is a very big part of the welfare budget, and growing fast. About half the people living in rented accommodation get some housing benefit. An increasing proportion are in work but still need a top-up to help pay the rent.

Not surprisingly this has attracted the chancellor’s eye. Yet a series of cuts to the generosity of the benefit has failed to rein in its cost. We spend more now than we did in 2010 before these cuts were implemented. This sounds like the classic welfare spending problem. How can we reduce eligibility, cut generosity and deal with work incentive problems?

Housing benefit does create all the problems associated with means-tested benefits, but at root the spiralling bill is the result of failures elsewhere and can only be tackled by dealing with those failures. It is the price we are paying for making such a mess of the rest of housing policy.

Part of that is simply the failure to build enough houses, both public and private. More than 200,000 were built each year throughout the 1950s, 1960s and 1970s. Since then we have hit 200,000 only once. Last year, we managed a mere 125,000.

The public-sector contribution to this is paltry and has been for 30 years. In the past most of the public money spent on supporting housing costs was spent on building homes and subsidising rents. Now it nearly all goes on means-tested housing benefit.

The problems are much deeper than that. The housing we have is misallocated. The tax system encourages people to hold on to what they have. Stamp duty, which has risen massively in recent years, discourages moving. People stay in big houses because it is costly to move.

The council tax system under-taxes valuable properties, providing no price signal to encourage people to trade down. If you are lucky enough to own a second property, you have a big incentive to hold on to it until death because at that point the tax system will forgive any capital gains. All of this exacerbates the tendency to see our home as an investment rather than just a home.

And change would not be easy. It’s easier to hit people with stamp duty when they buy a house than it is to charge higher levels of council tax while they occupy it. Nobody will get popular by imposing capital gains tax at death. Current homeowners will often do all they can to stop more housing being built in their vicinity.

The failure to build enough and the failure to have a sensible tax system provide a huge benefit to owner-occupiers because both push up the value of their homes. Many are sitting on handsome capital gains and feeling rather well-off. But owner-occupation is now so expensive that young people have little choice but to rent. Those in their twenties are only half as likely to have started their journey up the housing ladder as they were a generation ago. And the rents they pay have, of course, risen. So more of them end up dependent on housing benefit. And so the welfare bill rises. Their incomes may rise enough to take them off benefit later in working life. But those who don’t eventually get on the owner occupation ladder may end up being a burden on the taxpayer again when they reach pension age and need their rent paid.

Many young people are paying a price in higher rents for the decades of failure to come up with a rational housing policy. And while owners may feel smug about the rising value of their homes they are still paying a price through the housing benefit bill.

Housing is the safety valve for the whole system. And when the safety valve does that much work, it’s a sign that problems elsewhere urgently need fixing.