The incidence of housing benefit

Gideon Osborne’s plan to cut housing benefit has prompted predictions of large-scale evictions and hardship. But are these really correct?
Put yourself in the shoes of a landlord facing a tenant who, because of the cuts, cannot pay his rent. Will he really evict him when other likely tenants won’t be able to afford the rent either, because their housing benefit has been cut as well?
Perhaps not. Perhaps instead the landlord will simply cut his rent. If so, the burden of the cut will fall on landlords, not tenants.
The question, then, concerns the incidence of the cut. There’s a direct parallel here with taxes. Just as the pain of a tax rise doesn’t necessarily fall upon the direct payer of the tax, so the pain of a benefit cut doesn’t necessarily fall upon the recipient.
 There is evidence here. Stephen Gibbons and Alan Manning looked at the effects of restrictions on HB in the mid-90s. They found that - depending on how the statistics are cut - between half and all of the cut in HB fell upon landlords, who had to cut their rent.
This is consistent with research in France (pdf):

We find that one additional euro of housing benefit leads to an increase of 78 cents in rents, leaving only 22 cents for low income households to reduce their net rent and increase their consumption.
This large impact of housing benefits on rents seems to be caused by a very low housing supply elasticity.

Now, I don’t say this to defend Osborne’s move. Gibbons and Machin find that it is only tenants who are in a position to negotiate lower rents - those who move - who did pass on the cut to landlords. In this sense, HB cuts do bear heavily upon the most vulnerable - those in a weak bargaining position. And you could argue that lower rents would be a bad thing, as they’d reduce the supply of property to let.
All I’m saying is that the belief that a £1 cut in HB is a £1 loss to poor tenants might well be wrong.  And I happen to think (sometimes, I fear, uniquely) that there’s no reason why the Left should subscribe to bad economics.

Comments

[Slightly Sceptical]

Alternatively , given that the reduction comes in after a year . It encourages landlords to (ahem) encourage tenants , who have had their HB cut to move out. Replace them with fresh , newly claiming tenants who can get full HB.

... and as unemployment looks likely to go up,considerably, finding fresh tenants might not be too hard.

[Alex]

Will he really evict him when other likely tenants won’t be able to afford the rent either, because their housing benefit has been cut as well?

Do bears shit in the woods? Did they have any trouble at all last time out?

[Harry]

Lucky the previous government worked so hard to make sure that sufficient supply of affordable housing was available to meet demands and that council housing stocks were replenished. And it was so wise of them to realise that although we can all live without fancy consumer electronics, all of us need somewhere to live and to make sure the price of housing was included in all inflation measures. D'oh.

[Mark Wadsworth]

Quite right.

HB is a subsidy to landlords, and should be cut for the same reason as Land Value Tax is the least bad tax.

In any event, it is far cheaper building more social housing than it is subsidising 'private' landlords (who probably 'own' ex-councils that the previous Tory govt. flogged off cheap etc etc).

And as we well know right wingers subscribe to Bad Economics too and probably wouldn't agree with much of what I just said.

[Luis Enrique]

HB tenants will be evicted from desirable neighborhoods where they have no bargaining power, and migrate to bad neighbourhoods, where rents are likely to fall. Thereby making investing in the housing stock in those areas even less attractive.

I don't particularly like the prospect of taxation paying HB for low/no income households to live in desirable neighborhoods, which hard working folk cannot afford, but I don't like the outcome above either. I think this reform to HB only makes sense if accompanied by some activist state/NGO (whatever) construction of low-cost housing units in desirable locations, to create mixed neighborhoods prevent balkanization. This is one area with externalities all over the shop, and free-market outcomes ain't good, imho.

[Tom]

Doesn't the incidence of a tax often depend on the market at the time? A sales tax will fall more on the seller in a buyer's market, and vice versa. If there's greater demand for housing now than in the mid-1990s (which I'm not sure there is, but that certainly seems to be the impression one gets from the media), then the incidence of the cut would fall on the tenants more than the landlords, who would have more alternative people to let their property too.

[CharlieMcMenamin]

What's needed, surely, is a system - and it can be quite a flexible one - of rent control, not constant tinkering with the subsidy system. Impossible you say? Well, both housing associations and councils manage to live with the rent restructuring system in the social housing sector, so why shouldn't the private sector be able to do the same?

[Surreptitious Evil]

Hang on - the newly reduced level of housing benefit is still more than double my mortgage. It is over 4 times (at the flats' rate) more than I ever got in rent for renting out my old flat.

This looks like a sensible restriction on landlords sucking excessively at the public teat (if the claimants were in a sufficiently good job to take them out of housing benefit, they wouldn't be paying anything near those levels of rent.

As for Central London - although I haven't worked there, people who worked for me have. Most of them, in good jobs, commuted significant distances and didn't claim that somebody else should pay so they could live in a Barbican flat.

[Alex]

Most of them, in good jobs, commuted significant distances and didn't claim that somebody else should pay so they could live in a Barbican flat.

Links and cites, or it didn't happen. Kindly cease talking points distribution.

[RH]

Sorry guv,
I do not think the landlords would cut the rent because of reduction in housing benefit. It is fanciful thinking.

[michael]

How will local authorities now manage the 'created public sector market' of private sector landlords providing 'housing solutions' in a less well cash rewarded CONDEM Coalition Country

[cuffleyburgers]

Yeah but400 pounds p/w is a fuck of a lot - it's far more than I get or anybody who works with me.

Osborne is absolutely right to look to reduce it.

Damn' socialists.

[discount coach handbags]

It's not obvious that changes to how the government taxes and spend are what causes countries to move around that chart. I know you are not claiming it is, but one might read this post and think that if the government did things differently, we could move south west.

It may be, for example, that inequality in OECD countries is to do with the industrial mix in each country.

I wonder why Portugal appears to have such an unfavorable mix ... corruption?

gr