Osborne's cap on housing benefits will 'drive poor families into ghettos'

Coalition's welfare cuts will combine with joblessness and home repossessions to leave thousands homeless, charities predict

Thousands of people will be made homeless as public spending is slashed because of a dangerous combination of higher unemployment, increasing repossessions and cuts to housing benefit, housing experts have warned.

The retired, disabled people, carers and working families will be hardest hit and charities predict it will trigger the steepest rise in families living in unsuitable accommodation and individuals sleeping rough since the 1980s.

Those in London will be the worst affected, forcing an exodus of poorer people from the centre to outer boroughs, and adding to the financial pressures on local authorities, which are obliged to find homes, school places and social care for the newly arrived families.

The homeless charity, Shelter, said that some households in London currently receiving housing benefit will have to find a shortfall of up to £1,548 a month to meet their housing costs. The result, say opposition MPs, will be "social cleansing" of poorer tenants from richer areas.

Campbell Robb, the chief executive of Shelter, said: "The consequences have not been thought through by the Government. If this support is ripped out suddenly from under their feet, it will push many households over the edge, triggering a spiral of debt, eviction and homelessness."

There are 4.72 million housing-benefit claimants and 1 million of those receive Local Housing Allowance, the housing benefit for tenants in the private rental sector. In his Budget, the Chancellor imposed caps on housing benefit of £400 a week for a four-bedroom property and £250 a week for a two- bedroom home. Future increases will be linked to retail-price inflation rather than actual rents, which will further erode the value of the benefit.

Since 2000, average rents in London have increased by 65 per cent while the CPI has increased by just 17 per cent. There will also be a 10 per cent cut in housing benefit for those unemployed for more than a year, criticised by the independent Institute for Fiscal Studies as a blunt and "punitive" instrument to encourage people to find work.

Seyi Obakin, the chief executive of Centrepoint said: "The young people Centrepoint supports, who often present complex needs including mental health issues, are already disadvantaged when competing for limited jobs available in the current climate. If these young people have 10 per cent of their housing benefit cut, they will struggle to pay their rent, and could get into arrears and could seriously risk becoming homeless again."

But the pressure on local authorities and the housing-benefit budget could easily intensify if the economy relapses into a double-dip recession. Last week, the IMF radically downgraded its economic forecast for the UK, and the prospect of a weak "jobless recovery" seems certain to push many more families into arrears on their mortgages, or unable to pay the rent.

Some will also find re-financing their home loans much more difficult if house prices continue to slide, thereby automatically pushing more borrowers into negative equity. The Halifax recently confirmed that house prices fell by 0.6 per cent during June, the third month in a row.

Sue Witherspoon, the head of housing at Havering Council, in outer east London, said several authorities in the capital have no private rents below the cap: "The implication for a borough like Havering is we will have a flood of people moving in because of the lower costs. It will lead to a ghettoisation of benefit claimants.' Simon Harris, the chief executive of Stoke Citizens Advice Bureau in Staffordshire, said that the reduction in allowance for long-term jobseekers will "plunge people further into rent arrears".

Mortgage lenders also fear that a review of support for those in arrears announced by Eric Pickles, the Secretary of State for Communities and Local Government, will drive repossessions higher and end the culture of "forbearance" by banks and building societies. Tens of thousands of repossessed homeowners would exacerbate the acute pressures already piling on local authorities. Some 47,000 homes were taken back by lenders in 2009.

Michael Coogan, the director general of the Council of Mortgage Lenders (CML), said: "While low interest rates, lower unemployment than expected, lender forbearance and state support have so far combined to cushion the number of households unable to keep their homes, it is by no means a given that these relatively benign influences will remain indefinitely.

"There is a risk that the relatively muted scale of difficulties to date will come under significant pressure under a less benign set of economic circumstances," he added.

The withdrawal of £185bn of official support to bank lending via the Bank of England's Special Liquidity Scheme, for example, will add to the banks' problems in funding new mortgages to underpin the market, and in exercising patience with those unable to keep up their repayments.

Some fear a return to almost Dickensian conditions in London in particular. James Murray, a cabinet member for housing at Islington Council, said: "In Islington we have thousands of families on the waiting list for housing, many living in desperate overcrowding. It is not rare to see seven or eight people in a two-bed flat – with the children often unable to do their homework, unable to have any privacy, and with the whole family suffering under the stress.

"A cap on housing benefit could put a third of Islington's private-sector tenants who are on housing benefit at risk of eviction," he added. "This will only increase the pressure on social housing, and so more than ever we desperately need more investment in social rented homes. "

Karen Buck, MP for Westminster North, said the changes would result in a mass "exodus" of families from districts such as Westminster, Chelsea, Fulham and Islington.

"For more than 400 years, central London has been socially mixed and this Government now wants to radically end that," she said. "This would lead to social cleansing on an unprecedented scale, with poorer people shipped out in large numbers to the outskirts. It is as if Dame Shirley Porter had been put in charge of housing policy, but this time on a national level. The massive increase in rough sleeping in the early 1990s was directly linked to changes in entitlement and the inability to get deposits and rent in advance paid through benefits".

And Colin Glover, the chief executive of The Connection at St Martin's, said: "In central London, there is the real possibility of people having to leave existing accommodation, some may be moved into more expensive bed and breakfast.

"For single people some may, particularly as a result of the changes to invalidity benefits, be spurred to look for work," he added. "For others, the additional problems may lead to a return to the streets. Like many changes of this sort, the models may work for the majority, but it is the vulnerable minority who can end up suffering most."

Research by Lily Thomas

Terry Lane: 'It would be easier to get housing if I didn't work'

The 49-year-old and his wife, Teresa, are two "ordinary working people" who will lose out under proposed cuts to housing benefit and allowances.

The Government's promise to cap housing payments at £250 for a one-bedroom property, £290 for two, £340 for three, and £400 for a four-bedroom property could make many properties unaffordable, especially for people in areas such as Inner London.

Rates will also be based on the 30th percentile of rents of the local area, rather than the 50th at present. Campaigners say that this will affect people across the country and result in more families living in sub-standard and overcrowded accommodation.

But Terry and Teresa Lane have already lost their home in Westminster after running up nearly £20,000 in rent arrears because their housing benefit did not cover the full cost of their rent.

The family had waited for seven years for a council house but there were none available. Instead Terry, Teresa, their son Joshua, now 22, and daughter Graciela, now 23, were temporarily housed and spent the last four years in a three-bedroom, ex-council flat owned by a private landlord. They were charged £1,580 a month and received around £900 in housing benefit but struggled to find the rest of the rent from their wages.

Mr Lane earns around £18,500 as a document controller for an architects' firm, his wife earns around £5,000 as a teaching assistant. Joshua is an undergraduate at a London university while Graciela left home because of the stress.

He said: "That is why we ended up in arrears. We just couldn't afford to find that kind of rent from our wages. I have been waiting seven years to get permanently rehoused by Westminster. An estate agent would have said our flat was in St John's Wood, which sounds posh, but it was actually in Lisson Grove in one of the most deprived wards. But private landlords are still charging ludicrous rents.

"There is going to be a new breed of poverty. It will be people who are working who get caught by the system. If the new limits on housing benefit are not adequate for living in central London, then more people like us are going to be left to struggle to try and make up the difference from their wages.

"These changes will make things more difficult for people who work – if we didn't work I'm sure benefits would cover the lot. There is not enough public housing stock so people are forced into the private sector. The Government needs to invest in public housing before they review housing benefit.

"This has had a terrible effect on my family. My son has been badly affected by the worry of it all. He has lost weight and has dark circles under his eyes. My daughter left home because of it.

"Because we are in rent arrears we have now lost all our rights to be rehoused by the council so will now have to look through the private sector. We'd be looking for a two-bedroom property now my daughter's left home so we'd be affected by the new cap of £290 a week. I think we will struggle to find somewhere at that price. We have looked further out of London but it's a difficult balance – we both work in central Westminster so you have to balance the cost of the fares."

Campbell Robb, the chief executive of Shelter, said: "These cuts are a devastating blow for the most vulnerable people in our society, and will push many over the edge into a spiral of debt, rent arrears, eviction and homelessness.

"The underlying issue which this Budget has failed to address is the critical shortage of affordable housing, which means more and more people are being housed in the private rented sector where rents are almost double those in social housing. If we are to reduce the housing benefit bill in the long term we must continue to build more affordable housing."

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