Rising housing costs will cause misery for millions in the 2020s, unless social security is reformed

The rising cost of rented housing could turn out to be the greatest social challenge of the 2020s. By the end of the next decade, one in four households are likely to be private tenants and many will not be able to afford rent without the help of social security benefits. But if rents rise faster than inflation, on current plans housing benefit will come nowhere near to meeting the costs of a modest home, new Fabian Society research reveals.

The findings come ahead of a major new Fabian report on the future of social security, which is published next week. The analysis projects a large and rising gap between the cost of modest privately rented homes and housing benefit payments (see table below). Unless the government acts, millions of poorer households could face an acute housing crisis by 2030, with some low income households needing to find around £500 per month on top of housing benefit to meet their housing costs.

The projections suggest that 1.5 million low income households will need to make-up large monthly shortfalls between their housing benefit and the cost of a cheap rent – with a median gap of £108 per month by 2020, for a 2-bedroom flat. In less affordable areas (in the South East of England) the gap is £187. These shortfalls are mainly explained by the freezing of housing benefit for the next four years and assume that rents will rise in line with expected growth in earnings.

For private renters who are on housing benefit, in 2020:

• A single 30 year old living in a room in a shared house would need to make up a shortfall of £56 per month in an area with median rents (compared to a typical benefit income of £252 per month). In an expensive area the shortfall would be £87.
• A single parent with one child, renting a two-bedroom flat, would need to make up a shortfall of £108 per month in an area with median rents (compared to a typical benefit income of £595 per month). In an expensive area the shortfall would be £187.

The research finds that these shortfalls will continue to increase during the 2020s, unless planned policies are overhauled. This is because housing benefit will be increased in line with CPI inflation after 2020, while rent is likely to rise more quickly. If rents rise in line with projected earnings growth, by 2030, the gap between housing benefit and rent for a modest two-bedroom home in a typical housing market will be £283 per month. In expensive housing markets, households will face a huge shortfall between housing benefit and rent of £475 per month.

For the next few years, as the housing benefit shortfall grows, people are likely to make ends meet by giving up on other essentials or by trading-down into over-crowded, unfit housing. But sooner or later, something will have to give. After 2020, without reform, low income households will not be able to find the money to fill such large gaps. Either housing benefit for private tenants must be made significantly more generous, or very large numbers of people will become homeless.

Typical monthly shortfalls

The table presents the monthly shortfall between maximum housing benefit for private tenants (ie local housing allowance) and a modest rent for a locality (30^th percentile of the local housing market). Results are shows for a typical (median) and expensive (90^th percentile) local housing market, in a scenario where rents rise in line with projected national earnings growth (under OBR projections/assumptions).

Next week the Fabian Society publishes For Us All: redesigning social security, for the 2020s. The research is supported by Shelter in association with Legal & General.