Public Services: A big benefit of smaller rents: Paul Gosling on radical proposals from the Chartered Institute of Housing in National Housing Week

The housing market is not operating as a free market because of the use of housing benefit to pay excessive rents in the private sector, says the Chartered Institute of Housing. As a result, the increase in rent has accelerated, and the housing benefit bill has gone through the roof.

The Institute, which represents professional housing workers, has presented proposals this week to the Government's Social Security Advisory Committee that would bring down rent levels and cut the cost of housing benefit - which was pounds 5bn five years ago, but is nearly pounds 10bn today.

Michael Portillo, Chief Secretary to the Treasury, recently proposed to the Cabinet that only a percentage of claimants' rents be paid, giving tenants an incentive to find cheaper accommodation. But the Institute says this is unacceptable because it would shift some of the burden of high rents on to the poorest people in society.

Establishing ceilings on the amount of housing benefit, variable for each region, would be more effective in pushing costs and rents down. It is common in London for housing benefit to pay rents of more than pounds 200 a week, and in the highest recorded instance, a weekly rent of pounds 431. The result of such high housing benefit payments is to trap claimants into what Mr Portillo refers to as 'a dependency culture'.

It has been government policy to raise rents in each sector. Local authorities have lost government subsidy, and are able to fund capital spending only out of surpluses from increased rents. Housing associations increased rents by 67 per cent in three years, to meet the higher cost of servicing private lending, which is gradually replacing government grant. In the private sector, fair rents have been phased out, and rents have increased by 44 per cent in three years.

'Private landlords have been raking it in,' says John Perry, the Institute's policy director. 'Government thinking has been fallacious on several grounds. Pushing rents up to market levels and then letting benefit take the strain won't work.'

Mr Perry says that the Government is ignoring the impact of rent rises on the broader economy. 'Rent forms a significant part of the Retail Price Indicator calculation, and a rent increase of 10 per cent costs the Treasury pounds 100m a year, because of the way it seeps across the system into non-housing related benefits.

'The only way out of the situation is to aim for at least stability, and preferably lower rents and more capital investment. One of the reasons that rents are so high is the shortage of affordable housing.

'In Westminster, where rent is pounds 200 to pounds 300, the landlords have no intention of taking on employed tenants. Nobody, unless they were renting a luxury flat, would take on that level of rent. In inner city areas, housing benefit is leading the market. One strategy would be to bring in regional capping of levels of housing benefit eligible for rent, set at levels that were above social sector rents in those regions. That would attack high rents in the private sector.'

Another big problem, says Mr Perry, is the loss of grant to housing associations. As a priority the Government must commit itself to maintaining grant support at 62 per cent, and not decrease it as planned to 55 per cent.

'The Housing Corporation (which provides grant to housing associations) doesn't take into account rent levels when assessing scheme viability. It looks at the proportion of private finance, Total Cost Indicator (TCI), and whether the local authority wants the scheme. Tai Cymru (the Welsh housing corporation) does take into account rent levels, and I would argue the Housing Corporation should as well.'

Government policy is partially directed at strengthening the private rented sector, but is achieving this at the expense of further distortions of the housing market, Mr Perry believes. This is exacerbated by its homelessness policy, which assists better-off people on waiting lists for council and housing association properties over those who are roofless, and being pushed into the private sector.

'Tenants who can pay their own way are getting the cheapest properties; tenants more dependent on benefit are going into the more expensive properties in the privately rented sector. Tenants as customers have no bargaining power. They are not paying the rents themselves, and the landlord can say 'get stuffed' if they complain about the quality of the housing.'

(Photograph omitted)