Increasing housing supply and reducing the housing benefit bill demands a radical decentralisation of housing powers and a reorientation of incentives.

During the course of this parliament, 95 per cent of government spending on housing will go through the benefit system, with just 5 per cent invested in new homes. This more than reverses the balance of spending in the late 1970s, contributing to the undersupply of homes and a rising housing benefit bill. Without a change of course, rising house prices are set to put homeownership further out of reach for millions, especially young people, and the share of households facing higher private rents will grow. Even as the economy recovers, the housing benefit caseload is set to rise, with more working people finding themselves unable to pay their rent without a subsidy. The housing benefit bill is projected to rise in real terms throughout the next five years, reaching a level around £8 billion a year higher in real terms than before the recession.

The overwhelming priority for addressing each of these issues is to dramatically increase housing supply so there are more homes to rent and buy overall. Boosting supply is a precondition for addressing the structural growth in housing benefit spending. However, shifting from 'benefits to bricks' also requires institutional reforms capable of connecting housing supply, the shape of local housing markets and the drivers of benefit spending in particular parts of the country.

The report begins by assessing the weaknesses to two fundamental features of the present housing system.

The weaknesses of a benefit-driven expenditure strategy:

  • it leaves the public finances vulnerable to an economic shock
  • it contributes to not building enough homes
  • it delivers poor value for taxpayers' money
  • it is bad for work incentives
  • it is politically vulnerable.

The limitations of a centrally driven policy strategy:

  • it is unresponsive to variations in the housing market, including:
    • the split between owners and renters
    • the gap between average housing benefit awards across tenures
    • the employment status of local housing benefit claimants
  • it means perverse incentives for local and central government.

As a response, we propose a phased plan for giving local areas powers and incentives to make the shift from 'benefits to bricks' to the extent and in the ways most appropriate given their local housing and labour markets. We propose four separate
phases, which could also serve as a menu of options for different parts of the country.

  • Phase 1: Enable earn-back deals between local councils and the Treasury to share the proceeds of local action to reduce housing benefit spending relative to forecasted costs
  • Phase 2: Allow local authorities to redraw the broad rental market area (BRMA) for their area and revert to direct payment of landlords, retaining a share of any savings locally
  • Phase 3: Devolve housing capital budgets to combined authorities along with greater control over social rent setting, to allow better value 'grants for rent' deals to be struck
  • Phase 4: Provide cities and counties with an upfront, multiyear Affordable Housing Fund, to meet local housing needs through building homes and subsidising rents

Phase four provides local areas with full control over housing spending, for both benefits and investment, and thus full responsibility for most effectively meeting housing needs in their area, against a national minimum entitlement.