Among the least welcome announcements for landlords to come from David Cameron’s coalition Government has been its plans for cutting back on housing benefits.

Landlords have long had problems with housing benefits, what with long waits for payment and disputes over repayments when tenants have failed to disclose changes in their circumstances and entitlements. Over the last few years the change to local housing allowance has meant housing benefit could generally no longer be paid directly to landlords (as previously) - meaning greater exposure to arrears for landlords with HB tenants.

Local housing allowance was supposed to encourage tenants to shop around for the best rents by allowing them to pocket up to £15 per week of any difference between the allowance received and the rent paid. But, says the new Government, this has not worked. So the idea is being scrapped.

But more to the point, the amount of ‘out of control’ housing benefit that will be paid is to be substantially squeezed – within five years almost £2bn (or 9 per cent) will be knocked off the predicted annual cost of housing benefit.

Currently housing allowance rates are set locally according to family needs – which can be for up to five bedrooms – based on average rents in each ‘Broad Rental Market Area’ (the median in fact). But from April 2011 the rates will be based not on the average rent but effectively on 60 per cent of the average (the 30th percentile of rents, as the Government puts it).

What is more, housing benefit is to be capped. There will no longer be a five bedroom category, and the allowance for a four bedroom property will not be allowed to top £400 a week. The top rate for a one bedroom property will be £250, two bedroom £290, and three bedroom, £340.

So there will be an end to the £2,000 a week that the Government says is paid to some claimants in some parts of London.

There is more. The £15 weekly excess that some customers can receive will stop. Also, from 2013, out of work tenants who have claimed Job Seeker’s Allowance for more than 12 months will have their housing benefits cut by 10 per cent – as an incentive to do more to get back into work.

Recognising that the transition is likely to cause hardship, the Government said it will triple its contribution to local authority funding for discretionary housing payments. This is currently £20m a year, and will increase to £30m in 2011/12 and then to £60m a year from 2012/13. This is comparatively small beer in comparison to the current £20bn annual cost of housing benefit (£14bn paid to people of working age), not to mention the £25bn that the Government says housing benefit would have cost in 2015/16 had changes not been made.

‘In discussion with local authorities, we intend to target these resources to give extra support to areas where the impacts are greatest. It will give authorities more flexibility to provide additional support where it is most needed. For example, this could provide either a transitional safety net for customers who need to find alternative accommodation or longer term support for customers who are less able to move’.

The Government also announced increased provision within the housing allowance for disabled people or tenants with long term health conditions that have a ‘proven need for overnight care’ (by way of inclusion of an additional bedroom within the size criteria used to assess claims in such circumstances).

Taken overall, the Government says the changes ‘will provide a fairer and more sustainable Housing Benefit scheme by taking steps to ensure that people on benefit are not living in accommodation that would be out of the reach of most people in work, creating a fairer system for low income working families and for the taxpayer. It will avoid the present situation where Housing Benefit recipients are able to live in very expensive properties in areas that most working people supporting themselves would have no prospect of being able to afford’.

Under the new regime local housing allowance claimants can expect to see the amounts they receive go down by an average £12 per week. Some, of course, will see the amount go down by very much more.

The changes will apply to new claimants from the date they come into effect and to existing claimants from the anniversary of their claim - unless in the meantime they have a change of circumstances which requires their local authority to re-determine their claim sooner.

‘What these reforms mean is that people receiving Housing Benefit may not be able to live in expensive city centres, but the same applies to most working families who do not receive benefit’.

Organisations with interests in the area have not been impressed. For example, Citizens Advice housing policy officer Liz Phelps said: ‘the Government’s own assessment confirms many of our worst fears about the impact these cuts to housing benefit will have, and the dangers of rushing through fundamental changes on this scale without consultation or any pilot schemes to test the effects.

‘There can be no doubt that the combined effect of these cuts will lead to a sharp increase in rent arrears and homelessness, with the potential to spark a housing crisis in places such as London where the cuts will have the biggest impact’.

Landlords, of course, will be very much affected – both those who specifically target the HB market, and those whose tenants have a change in circumstance that means they are obliged to begin claiming housing benefit. Either way, an awful lot of tenants will be affected.

Official figures suggest one in five private renters rely on housing benefit – although the trend has been downwards. Lone parent tenants are the group most likely to be receiving housing benefit - seven in ten of rely on this support.

Meanwhile the Department of Work and Pensions estimates that currently there are approximately 5,170 families in the UK who receive more than £400 a week in Housing Benefit to cover costs of rent paid to private landlords.

Clearly landlords will have to reassess the potential market for their properties. If there is going to be less support for the rental of larger and more expensive city centre accommodation, demand is likely to reflect this – meaning rental interest and property prices for not so large properties in outlying residential areas are likely to come off less worse. Landlords targeting the HB market might have to look again at their property portfolios.

And the changes are a reminder that HB tenants should be treated in the same way as any other tenants when in comes to taking references and making credit checks, taking the same precautions as with other tenants and making rental decisions on business principles.

Certainly landlords seeking or accepting HB tenants should make sure their insurance policies cover tenants and that they are not excluded from some or all of the cover provided.

Last year the research company BDRC reported that when asked what would make them more inclined to let to housing benefit tenants, 31 per cent of landlords said it would be ‘abandoning the policy of paying benefits directly to tenants’. Whether this happens remains to be seen.

However, 17 per cent – one in six – said nothing would encourage them to take housing benefit tenants. 

Even so, the firm said more landlords had in fact taken on tenants claiming housing benefit. One reason was that more tenants were under increased financial pressure and unable to pay their rents, so there were simply fewer potential tenants not claiming the allowance.

This meant the number of private landlords who accommodated benefit claimants had more than doubled, from 9 per cent in the fourth quarter of 2008 to 20 per cent in the first quarter of 2009.

This was despite ‘a number of factors deterring more private landlords from considering benefit claimants as viable tenants’. The top three reasons given were: not trusting them to look after the property (24 per cent), a previous bad experience (15 per cent), and not trusting them to pay the rent (10 per cent).

One landlord told BDRC: ‘New DSS tenants get their rental money paid directly to them - not the landlords - and as a landlord you do not see it. It was a very bad move by the Government to change this policy’.

The squeeze on housing benefits could well see HB tenants become even less popular with landlords.