Housing & Homelessness

Recent data published by the UK government reveals signs of a potential homelessness crisis in England. Sensitivity to energy price volatility may make social housing rent unaffordable.

If there is a threat of home loss, tenants are eligible for a prevention duty. These are support measures provided by local councils. According to official data on statutory homelessness in England, 1,470 social housing tenants were owed this benefit on the basis of the threat of home loss in the fourth quarter of 2021. This number more than doubled to 3,270 social housing tenants in the first quarter of 2022 before settling back to 1,810 in the next three months.

These figures may seem incremental when taking the size of the overall housing market into account. However, such a  spike in data cannot just be attributed to statistical noise. Indeed, historically, homelessness has not exhibited such fluctuations. Energy price volatility appears to be the most plausible explanation for this spike in the threat of home loss for social housing tenants. If correct, this assumption implies that a growing number of households in social housing might find themselves on the edge of homelessness as the energy crisis escalates.   

Social housing is usually seen as the last resort for financially vulnerable groups. By design, it is cheaper than private and affordable rent. While tenants are more protected in social housing, people still face the threat of eviction if the rent is not paid. If people are evicted from social housing, their only remaining options are often temporary accommodation or rough sleeping.

It is remarkable that the mentioned ‘bell shape’ spike in the threat of home loss is observed in the private sector as well. The number of people claiming benefits rises in the first quarter and falls in the second quarter of 2022. However, these changes are proportionally less significant than in the social sector. This is likely to be caused by private renters’ greater financial resilience and the availability of social housing as an alternative.

Statutory homelessness figures reveal that problems with rent payments are the primary reason for the threat of home loss. Therefore, the spike in the threat of home loss seen in the first quarter of 2022 had to be driven by factors affecting households’ finances. Such factors may include policy change, employment shifts and inflation.

There were no major, relevant government policy changes at the end of 2021 and the beginning of 2022. Unemployment was steadily declining throughout the period. There was a rise in the number of claimants of the housing component of Universal Credit in the social housing sector. However, there were no major fluctuations during that period.

The most volatile macroeconomic indicator for that period is inflation and changes in energy prices in particular. According to Ofgem, wholesale gas prices increased to a record high in the fourth quarter of 2021. The rise had been mitigated in the first quarter of 2022 before the effects of the Russian invasion of Ukraine drove the prices up again.

Because of the rise in energy prices, social landlords had to secure energy contracts under unfavourable terms. Greater energy expenditure meant higher rents and energy bills for social housing tenants. Available data indicates that market average tariffs for households rose substantially in the fourth quarter of 2021 shortly after Ofgem lifted the energy price cap.

This is consistent with the Office for National Statistics’ February publication which demonstrates that energy price increases disproportionately affect those on lower incomes. The lag in the effect arises due to time gaps between market energy price fluctuations, households’ savings drain and prevention duty claim registration. Such sensitivity would explain the decrease in prevention duty cases from April to June this year. Energy bills stabilised in the first quarter of 2022. Hence, there was less pressure on consumers’ budgets and fewer people were pushed to seek help from local councils in the second quarter of 2022. 

Overall, this provides two insights. First, households in social housing are likely to be highly sensitive to changes in energy prices. If private renters have options when rent cannot be paid, homelessness is almost the only alternative when social housing rent is unaffordable. Second, the energy crisis does not only affect individuals’ finances but also affects households with a lag. It takes time for the energy price volatility to pass on to renters’ budgets. 

As energy prices are rising way above the levels seen in the fourth quarter of 2021, local councils may now face a growing number of people on the edge of homelessness in social housing. Since the beginning of the year, Ofgem has increased the energy tariff cap twice. According to Ofgem figures, average standard variable tariffs provided by Large Legacy suppliers rose by 54% in April and most recently went up by 27% in October 2022. 

The energy price guarantee adjustments announced by the government in the Autumn Statement as well as the 7% rent increase cap for the social sector are steps towards preventing the homelessness crisis. The analysis here nonetheless suggests that social housing may require even greater attention. Since the effect of energy price increases is delayed, acting early will be the best strategy. 

Mikhail Korneev is a Research Assistant at Bright Blue. Views expressed in this article are those of the author, not necessarily those of Bright Blue. [Image: Nick Fewings]

Fourteen years since the collapse of Lehman Brothers and the implementation of austerity, the memory of the 2007-2008 global financial crisis remains vivid. The spike in mortgage rates after the announcement of Liz Truss’ mini-Budget this September would not normally constitute a major concern. However, it came at a time when house prices were already in decline and inflation was steadily rising.

As the availability of mortgages falls and mortgage rates are expected to exceed 6%, this raises some concerns over the government’s control of the situation. So far, the Bank of England remains confident in its focus on inflation targeting and rules out a repeat of the 2008 scenario as improbable. Taking the current government’s commitment to expenditure cuts into consideration, the “wait and see” approach appears a coherent option.

While a significant part of the UK economy suffered severe losses during the COVID-19 pandemic, the housing market was on the rise. Since the beginning of the pandemic, prices increased by 25% across the country. Part of this growth came from the temporary Stamp Duty cut. This trend has since reversed, with prices this June declining to May levels.

This shift can be plausibly attributed to the cost-of-living crisis and rising energy prices, both of which have put pressure on the demand for houses. As everyday spending increases, mortgage repayments have become increasingly unaffordable. Therefore, customers are less keen to purchase houses, contributing to a slowdown in demand. 

Indeed, some estimates suggest that we can expect a 10% fall in house prices over the next two years. Similar concerns are expressed by other market stakeholders and analysts, with Oxford Economics projecting a 30% collapse in house prices. A fall within the 10-30% range will not only constitute the biggest drop in house prices in fifteen years but will also come worryingly close to the 18% decline during the global financial crisis of 2007-2008. 

The government has several established fiscal policies to shore up demand in the housing market. It is worth considering the two that the Chancellor updated in his recent budget. First, house demand can be incentivised with the Stamp Duty easing. Second, the Support for Mortgage Interest scheme may help the most vulnerable to meet their mortgage repayments obligations.

The former has proven to be effective during the pandemic. The current policy that got prolonged in the Autumn Statement exempts buyers from Stamp Duty for deals under £250,000. This allows more people to afford house purchases. However, increasing the threshold further does not seem like a coherent solution to the current decline. Giving up this source of the tax revenue goes against the fiscal responsibility endorsed by the new Government.  

Under the Support for Mortgage Interest scheme (SMI), the government provides financial assistance towards interest rate payments on mortgages and house-related loans. The scheme has, however, limited capacity to influence broader economic trends. Although the Autumn Statement has relaxed eligibility restrictions, SMI is only available to those already claiming social benefits. Therefore, the scheme appears more as a measure to protect the most vulnerable during a crisis than restoring the house demand per se. 

A monetary response to the rise in house prices would be to indirectly lower mortgage rates, which are tied to the Bank of England (BoE) interest rate. Currently, as the BoE sets the interest rate higher to fight inflation, this puts upward pressure on mortgage rates. The BoE could reduce or at least freeze the interest rate. As inflation climbs higher, however, this policy is highly unlikely to materialise. 

In its report on the Financial Policy Committee meeting this October, the BoE has clearly prioritised inflation targeting over housing market stability. Although the BoE recognises the vulnerabilities of UK households’ debt, it believes that establishing control over inflation is the most comprehensive long-term solution to the current crisis. When inflation is under control, the interest rate can be decreased, pushing mortgage rates down. 

This seems justified. In comparison with the years before the global financial crisis, lenders are better capitalised and are restricted in the use of repossessions. Therefore, a sharp fall in house prices should not trigger a broader crisis. It is noteworthy that the BoE does nonetheless take the danger of a market collapse seriously. The BoE is ready to increase the countercyclical capital buffer rate for banks if the situation escalates. 

What this tells us is that the government and the BoE are constrained in their response. Both fiscal and monetary solutions conflict with broader economic objectives. The government will, therefore, likely allow house prices to decrease. The expectation is that the housing market will follow the national economy’s path and stabilise when inflation and growth are back to normal. If the government follows the situation closely and acts promptly when needed, this seems like the least worst option.

Mikhail Korneev is a Research Assistant at Bright Blue. Views expressed in this article are those of the author, not necessarily those of Bright Blue. [Image: Jac Alexandru]