2 General impact
2.1 Impact of UK Government welfare reform on the housing sector in Scotland
The Annual Report found that UK Government welfare reform has had a substantial impact on the incomes of individuals. The two previous follow up reports have focused on the impact on families and disabled people, however this report does not focus on a particular cohort of people but on the housing sector as a whole, this includes not only the impact on tenants, but also the impact on landlords. Where possible the implications for wider policy are also highlighted, but these are not explored in depth. The direct costs of welfare reform fall on individuals, however there are a variety of ways in which households respond the costs of welfare reform which can be passed or shared between individuals and landlords. Individuals affected by welfare reform, may absorb the impact through a combination of responses – housing, financial and employment. These responses will have different implications for the wider sector.
Driving behavioural change in terms of increased employment, or a move to more affordable accommodation may be the stated intention of some policies. For instance the UK Government claimed that changes to social sector housing benefit known as the bedroom tax were designed in part to support the more efficient use of social sector housing stock by encouraging those affected to downsize, freeing up larger properties for those who required them, as well as encouraging those who wished to maintain their homes to take on additional work.  It was apparent from the policy's inception however that many affected will be unable or unwilling to respond in these ways, and as a result will struggle to pay their rent, and fall into rent arrears. Where people do respond in these ways this may present a challenge to the sector, and to devolved areas of policy. For instance the bedroom tax creates an impetus for households in the social sector to seek accommodation with fewer bedrooms. In the absence of mitigation this would be expected to increase long term demand for transfers into one bedroom accommodation. However devolved supply policy has not favoured such accommodation, (with the majority of new build in the social sector being two or more bedrooms). If the policy had not been mitigated it may have been necessary to reconsider the balance of supply of new accommodation. If the policy had not been mitigated there would also have been a challenge in the meeting of devolved homelessness priorities, as many of those to whom local authorities have a duty to provide permanent accommodation would also have required one bedroom accommodation, under mitigation these households can be moved into two bedroom accommodation if that is all that is available.
Support for housing costs is fundamentally different for the private and social sector. In general support in the social sector is uncapped – in that housing benefit or the housing element of Universal Credit can be payable up to the full value of eligible rent and service changes. In the private sector there are longstanding limits in the maximum payable against rent, set in relation to household size and local market rents – these are the Local Housing Allowance ( LHA) rates, it is common to refer to those receiving housing benefit in the private sector as receiving ' LHA' to distinguish from housing benefit in the social sector.
Across both sectors where housing benefit is being claimed it is likely to meet the majority of the rent payable. In 2015 amongst households claiming housing benefit, social rented households had on average of 94% of the value of their housing costs covered by housing benefit whereas privately rented households received an average of 83%.  The differences may partially reflect the higher numbers of working households in the private rented sector – causing Housing Benefit awards to be tapered, and partially reflect the number of households whose rents are capped by the relevant LHA rate, (as unlike the bedroom tax the LHA rate can reduce the amount payable for households who are not deemed to be under-occupying accommodation). These high averages put issues around welfare reform into a useful context. On one hand it is clear that housing benefit, and we can assume UC, continues to meet a great deal of its recipients' rental costs, even after changes to welfare reform. However, it is also clear that losses at an individual level can leave households seriously exposed with few means available to meet any shortfall.
Impact on Landlords
The impact of welfare reform on tenants, and any overall reduction in support for housing costs, risks an impact on landlords in either the social or private rented sector. As noted above tenants will take a variety of responses to welfare reform, but in some cases, especially where other options are more limited, tenants may prioritise other costs (including other bills, food, clothes or repayments of other debt) over the payment of rent, especially in the short term. The opposite is also true, where tenants prioritise rent payments, at least to the extent that avoids action from landlords, but at the cost of skipped meals or missed utility payments etc. 
The impact on individual private sector landlords of one or more of their tenants falling into arrears may be substantial, especially where properties are let with a mortgage in place and as such failure of tenants to pay rent may impact the ability of a landlord to maintain their own mortgage payments. In extreme cases this may lead to private landlords withdrawing properties entirely. In general private sector landlords are likely to respond to their own experience and perception of welfare reform by taking steps to protect their income streams, including taking eviction action against tenants in rent arrears and seeking to avoid taking on tenants in receipt of benefits to meet their housing costs. 
The impact on social rented sector landlords will be different reflecting the differences in business models between private and social sector landlords. Social sector landlords will have large numbers of tenants, many of whom will be on low incomes. The impact of lost revenue for these landlords ultimately impinges on the services provided to other tenants, the rents charged, or their ability to invest in new supply.
Social Sector tenants landlords are more exposed to the impact of welfare reform as their tenants are more likely to be in receipt of support for housing costs. Three fifths (62%) of social rented households received housing benefit in 2015, compared to a quarter (25%) of PRS tenants  and more broadly are more likely to be on a low income.  Social Rented Sector tenants are less likely to say they "Manage well" or "Get By" financially compared to other tenures, and this will also have an impact on their landlords.
Landlord mitigation activity
Social Landlords undertake a range of activities to mitigate the impact of welfare reform, both in their tenants interests and to support their business model. This can take the form of supporting welfare advice employability support or money advice. Landlords have increasingly developed their offering to tenants who may otherwise struggle to meet their rent, this may not be limited to households in receipt of benefits but include other tenants on low incomes. The costs for this activity are often not clear, especially where they reflect a shift in practice by existing staff rather than a new service with new staff hired. There is little or no formal research into the cost of this work, however a case study has been provided from Melville Housing Association (below) to illustrate this point and the extent of this type of activity across the sector was highlighted in work commissioned by CIH  which included consideration of mitigation activity undertaken as part of an assessment of likely impact of future welfare reform (the now abandoned introduction of LHA rates into the social sector). These services have been developed over time, and although the original driver has been welfare reform many will now represent general good practice in supporting tenants and a core part of the overall offering of social sector landlords, which is why identifying the costs of these services is challenging. The work of these landlords both at corporate level and in terms of front line work to support tenants affected adversely by aspects of welfare reforms, is most welcome and this increased activity should be considered as part of the overall impact on the sector.
Case Study – Melville Housing Association
Melville Housing Association is a medium sized RSL (stock of under 2000 properties) providing general needs accommodation in relatively less deprived areas in the Lothians and South Lanarkshire. MHA employs two dedicated welfare benefits advisers from a total staff of less than 30, with the associated costs of employment and support for these officers.
In the year 2016/17 these two welfare officers helped 113 tenants access an average of nearly £6,000 each, or almost £700,000 in additional income. This was achieved through support to tenants in identifying and accessing unclaimed benefits, appealing decisions, digital skills and money-saving advice.
Melville Housing Association have provided the following example of their work:
"A single woman in her 50's contacted the Advice Service for assistance. She was receiving Employment and Support Allowance ( ESA) and Personal Independence Payment ( PIP) and had claimed Universal Credit ( UC). She was given assistance to claim Council Tax reduction and ensure her claim for a Discretionary Housing Payment had been sent to the local authority.
"Once the UC claim was processed by the DWP the Adviser showed the client how to access the information on her online account, and established that not all the correct elements had been included. Assistance was therefore given to contact the DWP and rectify the errors. Further help was then given to complete forms from DWP to ensure continuation of the correct additional element in the UC amount
"Due to restrictions in getting out and because she had disability benefits, a referral was made to "Pass IT on computers", a local charity that supplies reconditioned computers free to people with a disability. A home computer was delivered by the charity and set up for use at home. She also attended some basic computing classes at the Housing Association to improve her skills and confidence. In turn this helped her manage her on line benefits claims.
The financial gain was £7,500.
"The outcome was that this tenant received her correct benefits entitlements and was able to afford her rent to keep her tenancy secure. She improved her digital skills, and received a home computer to manage her online account."
2.2 Main Reforms
Support for housing costs in the social sector have been affected most significantly by the bedroom tax, although the burden of this, since 2014, has been met in full by the Scottish Government, rather than landlords or individuals. Without Scottish Government intervention the bedroom tax would affect around 70,000 households, who would lose an average of around £650. The Scottish Government budgeted £50m in 2018/19 to fully mitigate the impact of this welfare reform.
Local Housing Allowance
In the private sector the most significant reform has been the changes to Local Housing Allowance rates. Local Housing Allowance rates are set in relation to market rents across eighteen Broad Rental Market Area's ( BRMA) in Scotland, and across five bandings reflecting accommodation size, ranging from the cost of sharing accommodation or leasing a single room to the cost of rent on a home with four or more bedrooms. These rates are used to set the maximum payable under housing benefit. The rate payable is set in relation to household size, not the property itself. The lowest rate is the Shared Accommodation Rate ( SAR) available to single adults under the age of 35 without dependents.
Previously set at the 50 th percentile of market rents the LHA rate was reduced as part of Coalition government welfare reform to the 30 th percentile. It has also been subject to limits on uprating, starting with a 1% cap, and, since 2015 a freeze. Since 2015 LHA rates have been set at the lower of the previous year's level, or the 30 th percentile of newly advertised rents. This means it is possible for LHA rates to fall, but cannot increase (other than through the provision of targeted affordability funding, small increases allocated, at the discretion of UK ministers, usually to those rates which fall furthest from the 30 th percentile). The levels are set for a financial year, and the 2018/19 rates will be the third set of rates to be frozen. The freeze on uprating was announced as a policy for four years, but it is not clear how rates will be uprated following the end of the freeze. This, alongside the unpredictability of rents, makes it impossible to accurately forecast the future impact of LHA policy.
The impact of the freeze on LHA rates are the focus of part five of this report.
Tenants in both sectors are affected by the introduction of Universal Credit ( UC). UC was the key element of the coalition governments programme of welfare reform being continued under the current UK government. It combines a number of existing benefits (now often known as legacy benefits) into a single monthly payment with a single taper rate. The introduction of UC has been complex and there are two main models of UC: the earlier form of UC (the 'Live Service') was rolled out across the entire country for new claimants who met certain gateway criteria, it continues in much of the country but no longer accepts new claimants; the newer 'Full Service' is in the process of being rolled out across the country for new claimants, or claimants with a change of circumstance. The roll out of Full Service is due to be completed in December 2019. Live Service caseload is transferred into the Full Service with the geographical caseload, and those still on legacy benefits will be migrated into UC following that point. The DWP's intention is that legacy benefits for working age claimants will be completely eliminated in 2022. Pension age households continue to claim legacy benefits, especially Housing Benefit. The main disability benefits (including DLA/ PIP) are not part of UC, although Employment Support Allowance is being replaced.
Whilst the Scottish Government remains concerned about aspects of UC that will be less generous than the legacy benefits it replaces (in particular for some transferring from tax credits and for certain disabled people) so far the problems caused by the introduction of UC have primarily been due to administrative and timescale issues. The implementation of UC has been blamed for an increase in overall levels of rent arrears. The impact on rent arrears of UK Government welfare reforms is the focus of part six of this report. Local Authorities and landlords have also reported that it is harder to support households in receipt of UC, and this causes difficulty in the processing of DHPs, Scottish Welfare fund ( SWF) applications and Council Tax Reduction, compared to households in receipt of Housing Benefit. In both cases this is largely because neither local authorities or landlords are able to access (or access as easily) information about tenants/claimants UC award, compared to those tenants on Housing Benefit. LAs are able to use information collected in the administration of Housing Benefit in the management of DHPs and CTR schemes, and landlords are able to communicate directly with LAs in their tenants interest.
The Scottish Government introduced the Scottish UC Choices in 2017  , to give individuals a choice of how frequently UC is paid (monthly or twice a month), and whether they wish to have their housing costs element paid directly to a landlord. These changes are not expected to fully mitigate the negative aspects of UC but to offer claimants some control, and freedom to manage their finances in a way which suits them. The UK Government introduced changes at the 2017 Autumn budget also aimed at increasing the level of support for those claiming UC, and to address certain concerns with this. The majority of these changes were implemented in April, it is not yet clear to what degree they are mitigating negative impacts of UC.
Since 2013 households in receipt of a number of UK Government benefits have had their total benefit income capped at a fixed level. Certain benefits, especially disability related benefits, exempt a household from the cap, as does working over 16 hours a week  A nine-month "grace period" also operates during which the Benefit Cap does not apply to certain claimants who were previously in work. Under legacy benefits this cap was applied by reducing the housing benefit award, as housing benefit is often the largest part of a households overall benefit income. In UC the reduction is applied to the whole award, and cannot be attributed to any individual element.
The cap was originally set at £26,000 a year for a couple or household with children or £18,200 for a single claimant without dependents. From November 2016 this was reduced to £20,000 or £13,400 for single claimants. The length of time for which households are capped will vary depending on whether they are able to take action to avoid it ( e.g. finding or increasing hours in work, or successfully applying for an exempting benefit).
The benefit cap interacts with the benefits it limits. The Annual Report  highlighted that the introduction of the two child limit for support in UC and tax credits will, all else equal, reduce the number of households with three or more children affected by the benefit cap. Currently around 75% of households affected by the cap have three or more children. For those not affected by the limit each child entitles a family to an additional tax credits or UC child element, and for this reason such households have a high benefit entitlement which makes these families more likely to be affected by the cap.
As the impact of the two child limit rolls out to more families with a third child born since April 2017, this is likely to increase the proportion of the overall number of households that are capped primarily because of high housing costs – although high housing costs will of course frequently be associated with larger family sizes.
Conversely it should be recognised that if reductions and cuts in other areas, especially connected to support for housing costs were reversed then the impact of the benefit cap would increase as a result.  This is because households already capped would not see any increase in their benefit income (but their nominal level of deduction for the cap would increase), and other households would be brought up to the cap limit. In other words if Housing Benefit awards, or the housing element of UC were to become more generous many households would not receive an actual increase in the benefit income.
In November 2017 (the latest data available), around 3,400 households were capped through housing benefit in Scotland and 140 households through UC  , however this latter figure only includes UC full service cases. It is not clear how many households were capped in live-service UC areas in Scotland. Of those that were subject to the cap, the range of losses varies substantially, but the average deduction is around £57 a week or the equivalent of just under £3,000 per year if the household was capped for each week across a year.
Despite average housing benefit awards being higher for private sector tenants, the majority of those affected by the benefit cap (under housing benefit  ) are social rented tenants. Around 44% (1,478) of those affected are local authority tenants, 22% (741) are registered social landlord tenants and 34% (1,158) are in the private rented sector.
Due to the fact that households with children are entitled to more in benefits, such as Child Benefit and Child Tax credits, it follows that the vast majority of the households affected by the cap have at least 1 child, with only 10% of households recorded as having no children. IPPR Scotland estimate that ending the benefit cap in Scotland could lift around 5000 children out of relative poverty, at a cost of around £20m in 2019/20. 
Support for mortgage interest
Owner occupiers with mortgage costs are eligible for Support for Mortgage Interest ( SMI). This was formally administered as a benefit, but is now available as a loan scheme. In April 2018 all existing recipients of the SMI benefit will have payments stopped, to retain support recipients must apply for the payment of the loan. The eligibility criteria for SMI is more limited than that for support with rental costs through either housing benefit or UC, especially for working age households, who need to wait 39 weeks after claiming a passporting benefit (such as UC or Job Seekers allowance ( JSA)), and will need to be entirely out of work.  The change is expected to affect between 10,000 and 20,000 households in Scotland, reducing Social Security spending by £20 million per year by 2020/21.
2.3 Mitigation and devolved powers
Scottish Government has acted to support the housing sector as a whole through mitigation, including direct financial mitigation to individuals and households. We expect to spend over £125m in 2018/19 on welfare mitigation and measures to help protect those on low incomes. Housing Benefit and Universal Credit ( UC) are reserved benefits. However, the Scotland Act 2016 devolved Discretionary Housing Payments in full from April 2017, and also gave Scottish Ministers a power, held concurrently with UK Government ministers to modify the way in which UC is paid, and the calculation of housing costs.
The Scottish Government has been responsible for Scottish Welfare Fund ( SWF) since April 2013, when its predecessor the Social Fund was abolished by the UK Government. The responsibility for this provision was transferred to the devolved administrations and local authorities in England. The SWF is delivered on behalf of the Scottish Government by all 32 local authorities. Since April 2013 nearly 276,000 unique households have received at least one award from the fund, these payments can be made to support someone on a low income who are in crisis or to help people establish themselves or remain in the community (for instance following a period in institutional care, in prison etc) or support those under exceptional financial pressure with large one off costs (such as for white goods). Many SWF payments will have been made to those in receipt of UK Government benefits including housing benefit or UC. In some cases the reason for the crisis or period of exceptional financial pressure may be related to a loss or delay of benefit income. As such SWF may mitigate the impact of welfare reform for those households who receive a payment but they are unlikely to be made in direct relationship to a reduction in support for housing costs, or be a direct means of addressing a rent shortfall.
DHPs more directly mitigate the impact of welfare reform on the sector. Most high profile has been the direct and full mitigation of the bedroom tax. This funding has supported individuals directly, and allowed them to meet their rent payments, preventing a build-up of rent arrears which would have had a negative impact on landlords as well as the households affected. As set out above since April 2017 the Scottish Government has been responsible for all DHPs. Scottish Government funding to mitigate the bedroom tax began in 2013, and was provided to LAs alongside UK Government funding.
The full mitigation of the bedroom tax has been the highest profile element of Scottish Government mitigation. In addition to the substantial financial investment in the sector, the certainty of full mitigation has reduced the need for tenant behavioural change, or activity from landlords and LAs to support those affected. This has had positive impacts across the sector, for example local authorities have been able to continue to make reasonable offers of settled accommodation to homeless households in stock which they will, in terms of the bedroom tax policy, underoccupy, without a risk that this will be unaffordable for the household. Furthermore, landlords, local authorities and advice agencies have been able to focus their support on those affected by other aspects of UKG welfare reform. The Scottish Government's intention to abolish the bedroom tax at source will further reduce the requirement for advice and support to make a DHP application.
DHPs are also available to support those affected by other aspects of welfare reform, largely the benefit cap and LHA rates in the private rented sector. The budget for Other DHPs in 2018/19 is £10.9m.
The other element of housing related mitigation is the support available to 18-21 year olds. The UK Government policy introduced in April 2017 was to remove automatic entitlement to housing costs in UC, for single adults aged 18-21, in full service UC areas. As with bedroom tax the Scottish Government made a commitment to provide support to all young people unable to secure an award of UC that includes housing costs. There are a number of exemptions to the UK Government policy, however the Scottish Government acted with local authorities to put in place a mitigation scheme for those unable to claim an exemption. The UK Government has subsequently indicated that they will reverse the policy introduced in 2017, and that support will be available through UC for young people's housing costs in the same way as older claimants. The overall cost of mitigating the policy is low, and was likely to remain so, even before the announcement.
The Scottish Government is using its powers over UC payment arrangements to give people in Scotland more choice about how they manage their household budget by making UC more flexible. This is known as the " UC Scottish choices" and provides people with the option to receive their UC award twice monthly and have the housing costs in their award paid direct to their landlord in both the private and social rented sector. The UC Scottish choices were made available from 4 October 2017 to people making a new claim in full service areas and this was extended to everyone receiving UC in full service areas from 31 January 2018.
Direct payment of housing costs to landlords and more frequent payments may both support households in managing their budgets in a way that suits their circumstances, and this, plus the security of a direct payment may help prevent the build-up of rent arrears. However these changes do not increase the level of award or address all of the concerns with UC, which would be outwith the Scottish Government's current powers. The take-up rate of the UC Scottish choices has been high with over 2,500 people choosing one or both of the choices between 11 November and 31 December 2017. Of those 2,100 requested to be paid twice monthly, 1,000 elected to have the housing element of UC paid directly to their landlords, and of that around 500 chose both. 
The Scottish Government is also committed to introducing Split Payments for UC claimants, where the award is split between two members of a couple, rather than all being received by one member, and work is underway to recommend the form that these will take.