The Local Housing Allowance rate and temporary accomodation reimbursement process

BisImpact is grateful to the Local Government Association for their support with this report and in particular to Jo Allchurch, Megan Kidd, Isobel Parkes, and Priya Thethi for their input during the development of the report and comments on the final draft. We would also like to thank colleagues from the Policy Group at the Poverty, Housing, and Disadvantage Directorate at the Department for Work and Pensions, and the Homelessness and Rough Sleeping Strategy Directorate at the Department for Levelling Up, Housing, and Communities who provided valuable insights and the central government’s perspective. 

With many thanks to the officials from the nine local authorities who were interviewed for the case studies. 

• Given that LHA rates are based on the bottom 30th percentile of longer-term market rents in England’s various Broad Rental Market Areas (BRMAs), they inherently underrepresent the costs of temporary accommodation, which tends to be more expensive. To prevent this discrepancy from being disproportionately punitive, BisImpact recommends that the central government consider both rebasing and increasing the reclaimable threshold.
• Between 2011 and 2024, LHA rates have risen on average by 30 per cent. The magnitude of increase underscores the critical issue - the current TA reimbursement system is failing to keep pace with the rapidly escalating costs of providing housing to the homeless. Furthermore, over the years, the reimbursement terms have become worse. Notably, post-2017, it was decided that the management cost element of reimbursement would be dropped. Prior to then, local authorities could claim back an additional £40 to £60 per household for their management costs. In lieu of this, the central government established grants for homelessness prevention, repurposing the funds that were previously designated for management cost reimbursement to these new grants. Ironically, many local authorities are now using much of that funding for TA provision. 
• The reimbursement system is not widely understood, even by many who closely work on issues of homelessness. There ought to be clearer communication and education on how the process works. This includes details on how much of the upfront payment is being reimbursed, and how LHA rates are being applied. For example, the minimum rate that is applied for TA reimbursement is that of accommodation that is sized as a one bedroom (1BR). Additionally, local authorities are in fact reimbursed based on where the properties used for temporary accommodation are located, not based on which local authority is filing for reimbursement.
• Many local authorities are calling for the methodology and framework used to set the LHA rates to be revisited. They argue that in most BRMAs, properties that are below the 30th percentile, are rarely released onto the market. This is because in the current economic conditions, if a family has been able to secure such a property, it is in their interest to renew the contract. Consequently, there is an adverse selection problem: the properties that are potentially available for rent for temporary accommodation are usually more expensive than the 30th percentile. In worse situations, local authorities are compelled to use the more expensive options of Bed & Breakfasts (B&Bs) and commercial hotels.
• When cuts have had to be made to other homelessness budget line items to retain sufficient funding for temporary accommodation provision, it has often been at the expense of homelessness prevention funding, resulting in a ‘doom-loop’. Namely, without strong prevention measures, more residents are prone to becoming homeless, further exacerbating the problem.
• Several local authorities emphasised during interview that even if the TA reimbursement process is rebased to use the latest LHA rates, the central government must look beyond to focus on increasing aggregate housing supply and to implement effective homelessness prevention measures. Additionally, BisImpact highlights that the central government must enhance its policy offerings for homebuilding, for example consider innovation solutions such as office-to-residential conversion programmes to ensure a sustainable solution to the homelessness crisis.
• Where there have been cases of local authorities negotiating aggressively with landlords, for example, in Bristol they have been fairly successful in generating positive results and securing better terms.
• Local authorities are often finding themselves in competition with one another, allowing landlords to capitalise and secure better rates. There may be value in local authorities collectively bargaining or coordinating together on the housing market, rather than artificially driving up prices. 
• Information-sharing has been tremendously helpful for some local authorities, such as those in London. Not only has it helped brainstorm solutions to the temporary accommodation subsidy gap, but it has also provided a forum for local authority staff to express their feelings and frustrations. More forums should be set-up for this type of troubleshooting.

Local Authorities in England receive reimbursement for the provision of Temporary Accommodation (TA), which is generally capped at the January 2011 Local Housing Allowance Rates (LHA). However, over the last 13 years, the number of households in temporary accommodation in England has significantly increased. This situation, combined with rising property prices and a reimbursement process that often leads to a financial shortfall between upfront payment and what is reimbursed, has led to many local authorities facing significant financial strain.

As demonstrated in Figure 1, there has been a consistent upward trend in homelessness and data from September 2023 indicates that there are approximately 109,000 households that are in temporary accommodation. Under the Housing Act of 1996, local authorities have statutory duties that govern their responsibilities with respect to homelessness. Chiefly, when an individual or family has applied to a local authority claiming homelessness, local authorities are required to provide accommodation if they have reason to believe an applicant is homeless, eligible for assistance, or in priority need.

The key aspects of the reimbursement process are as follows: When a local authority places a household in temporary accommodation (for example with a private accommodation provider, in council-owned stock, etc.), it can claim back the incurred costs associated with the provision of the TA from the Department for Work and Pensions (DWP). Apart from households placed in council-owned stock outside the Housing Revenue Account (HRA), for which a local authority can reclaim up to the current Local Housing Allowance (LHA) rates, the local authority can generally reclaim up to 90 per cent of the January 2011 LHA rates, which were set based on the rental costs at that time. These rates are now outdated and do not accurately reflect current market conditions. The gap in financing between what local authorities initially pay and what is eventually reimbursed by the national government is known as the Temporary Accommodation Subsidy Gap. The current reimbursement system, which largely relies on these outdated 2011 rates, exacerbates this Subsidy Gap. 

Figure 1: Number of households in temporary accomodation across time

This report aims to:

1. Illustrate the on-the-ground implications for local authorities if the ever-increasing Temporary Accommodation Subsidy Gap is not suitably addressed. Our interviews with local authorities have enabled us to provide detailed analyses, highlight common themes, and outline unique challenges. The sample of local authorities interviewed was intentionally diverse to capture the different potential perspectives.
   
    
2. Recommend policy changes that will not only make the reimbursement process more positively impactful for all relevant stakeholders, but also help local authorities better manage financial pressures. 

Why now?

The Local Government Association’s (LGA’s) June 2024 White Paper, ahead of the General Election, highlighted that councils are facing funding gaps of £6.2 billion over the next two years.  Much of this is driven by the spiralling cost of temporary accommodation.

Over the last few years, the supply of requisite accommodation has decreased significantly (35 per cent drop in the third quarter of 2023 compared to 2019), while the demand for temporary accommodation has surged. Higher property prices have incentivised landlords to sell or convert properties to other use-cases rather than maintain them as long-term rentals. Additionally, increased regulation has further discouraged landlords from renting out properties for temporary accommodation.

Local authorities are increasingly reliant on the most expensive, least desirable forms of temporary accommodation, such as Bed and Breakfasts (B&Bs) and commercial hotels, driving up expenses (Price Effect). For example, the use of B&Bs has increased from 8 per cent in mid 2019 to 14 per cent in mid 2023. Simultaneously, the rising number of households in need of temporary accommodation (Quantity Effect) is widening the gap between local authority spending and the overall temporary accommodation reimbursement.

In this section, we provide a brief overview of how the reimbursement process works and outline how the amount to be reimbursed is determined.

Temporary Accommodation reimbursement process

• Step 1: Individuals/families who are in immediate need of temporary housing are directed to contact their local authority. It is at this point that the local authorities are legally required to assess the needs of their residents and determine whether they are eligible for temporary accommodation.
   
• Step 2: If the individuals/families meet the conditions for assistance, they are placed into available temporary accommodation. These may be hostels, temporary flats owned by private landlords, councils, or housing associations, or even B&Bs.
   
• Step 3: Generally, the local authority covers the upfront cost of the temporary accommodation and is subsequently reimbursed through direct payment from the individual’s benefits (when applicable), Discretionary Housing Payments (DHPs), and homelessness prevention grants from the central government. DWP is responsible for administering the reimbursement process. Additionally, the local authority has a duty to provide ongoing support to its residents, including helping individuals in temporary housing find permanent housing and providing resources to help resolve the root causes of homelessness.

Determining the Temporary Accommodation reimbursement rate

The amount of TA reimbursement is calculated based on Local Housing Allowance (LHA) rates specific to the Broad Rental Market Area (BRMA) where the accommodation is located. The rates are based on January 2011 LHA rates and vary by the type and size of the property. Applicable LHA rates range from the one-bedroom rate to the five-bedroom rate.

• Non-self-contained accommodation (board and lodging or licensed): The subsidy is limited to the one-bedroom self-contained LHA rate for the property’s location, and even if more than one room is occupied by the same household, no extra subsidy can be claimed. 
• Self-contained licensed and short-term lease accommodation: The maximum subsidy is 90 per cent of the LHA rate for the size of the property.

Furthermore, the subsidy cannot exceed the weekly Housing Benefit entitlement, or the upper cap limit (£500 per week for accommodation within 6 London  (Central London, Inner West London, Inner North London, Inner South West London, Inner East London, Inner South East London, Outer South West London) and £375 for all other BRMAs).

A quantified example is presented in Box 1 to showcase the process by which local authorities claim reimbursement to support households in temporary accommodation within their jurisdictions. 

Box 1: Quantified example of temporary accomodation reimbursement process

Our findings in this research piece are qualitative in nature. Our findings have been discerned from conversations with key stakeholders in the domain of temporary accommodation and homelessness.

We organise our analysis/findings into two segments:

1) Stakeholder Interview Ratings: This is an analysis of the numerical ratings provided by local authority staff during interviews on selected prompts.

2) Qualitative Takeaways via Case Studies: These are deep dives which spotlight unique insights from each of the local authorities that were interviewed.

During stakeholder interviews, BisImpact sought to supplement qualitative information with numerical scores on key prompts to enable comparative analysis. The interviewed stakeholders (local authorities) awarded scores of between one and five on six key prompts. Apart from prompt 4, where a lower score indicates a better outcome, higher scores on all other prompts indicate better performance.

The prompts were as follows:

1. How effectively does your local authority manage the financial shortfall caused by the subsidy gap?
    
2. Rate the quality of temporary accommodation you can provide within the constraints of current subsidy levels.
    
3. Rate the level of cooperation between your local authority and private accommodation providers.
    
4. Evaluate the impact of the subsidy gap on the overall quality of services provided to individuals and families in temporary accommodation.
    
5. Assess the effectiveness of your local authority’s efforts to secure additional funding or policy changes to bridge the subsidy gap.
    
6. How receptive do you feel national policymakers have been to your communication of the impact of the subsidy gap?

Figure 6 summarises the average scores on each one of the prompts. The detailed scores as provided by each interviewed local authority are available in the Conclusion section, figure A1.

Figure 6: Average scores on key prompts across Interviewed local authorities

Local authorities unanimously feel central policymakers do not understand the gravity of the subsidy gap problem. With an average score of 1.31, and not a single score above 2 on this prompt, local authorities markedly do not think enough is being done at the central level. They feel that without policy changes, the fiscal situation will deteriorate, and ultimately, the burden may rest with the central government and taxpayers. Given that almost one out of five council leaders and chief executives have expressed concerns about the possibility of their local authority issuing a Section 114 notice due to financial pressures, addressing the temporary accommodation subsidy gap, one of the biggest challenges, now is crucial (While local authorities do not become bankrupt like businesses or individuals, they issue a Section 114 notice, which is a declaration from the council’s finance officer that the authority is expected to engage in unlawful spending as defined by the Local Government Finance Act 1988. While expenditure can be unlawful for various reasons, the primary reasons most authorities issue a Section 114 is because they expect their expenditure to exceed their income for a particular financial year.) Rebasing the reimbursement rates to 2024 LHA rates is largely seen as a small step towards truly mitigating this fiscal space challenge. 

For the most part, local authorities feel they are performing reasonably well when it comes to coping with the subsidy gap. Almost all the average scores for the various prompts hover around 3. The general sentiment among local authorities is that they are making the best of a difficult situation. There is no established standard for good performance, so scores vary widely. For example, the London Borough of Hackney viewed its own work as excellent, while Birmingham City Council felt that it was struggling to cope with its circumstances. BisImpact emphasises that self-perception does not necessarily reflect actual performance, but rather represents different perspectives. The amount of self-owned housing stock utilised by a local authority for temporary accommodation appears to influence this perception.

Overall fiscal position matters. Local authorities already in relatively poorer financial positions find it particularly challenging to cope with the current administration of the temporary accommodation reimbursement process. For instance, Medway Council explicitly stated that it was drawing from its budget reserves. While this can be a reasonable short-term fix, it is ultimately not a sustainable solution to the subsidy gap.

LHA rates were largely established with the purpose of determining the maximum amount of Housing Benefit that should be allotted to tenants who were renting from private landlords. These rates, set by the Valuation Office Agency (VOA) were previously set at the 50th percentile of rents in the respective BRMAs, prior to being reduced to the lower 30th percentile in April 2011.  Consequently, LHA rates are designed to cover the cheapest rents in an area as opposed to seeking to meet the average cost of rent. 

Although the main use case of LHA rates continues to be for Housing Benefit, they are also used for temporary accommodation reimbursement. BisImpact suggests that this is something worth considering further. There is a strong argument to be made for constructing a separate set of rates to be used solely for temporary accommodation reimbursement. Fundamentally, even from a business perspective, when letting out for shorter periods of time, it is difficult to justify pricing rates comparable to a longer-term lease, making the use of LHA rates in this way less appropriate. It is thus unsurprising that local authorities are voicing concerns that even if claimable LHA rates for temporary accommodation are rebased to 2024 standards, the change will not cover the local authorities’ ongoing loss. In part, it seems retrofitting a temporary accommodation reimbursement process onto rates designed for another use-case is in part what is driving the subsidy gaps.

It is worth noting how the various types of temporary accommodation compare to the standardised LHA rates. When a local authority owns its stock, or is utilising property of a housing authority, LHA rates tend to be in line with the charged rents. Similarly, when properties are leased by a local authority from a registered provider through longer-term leases, they tend to be only slightly higher than the LHA rates. In contrast, the types of accommodation where LHA rates really fall short include pay-by-night, privately managed accommodation, and to a lesser extent, accommodation such as hostels, emergency units, etc.

BisImpact conducted in-depth interviews with nine local authorities to understand how the current Temporary Accommodation Reimbursement policy is affecting their work, how they are coping with the fiscal stress, and what changes they would like to see for better circumstances going forward. These nine local authorities were shortlisted from a long list based on several criteria, including those with the largest funding gaps, representation from different English regions and local authority types, and political composition. 

Interview questions were designed to provide further insight into the results of the initial quantitative analysis. BisImpact worked with the LGA to refine questions, ensuring they captured qualitative nuances. Beyond qualitative questions, each interview included a set of prompts scored on a scale of one to five to gather sentiments in a quantitative way (detailed above). Interviews were typically conducted by two consultancy team members, who subsequently refined and synthesized the interview notes. Interviewed authorities were asked about the impacts of TA within their jurisdictions. Questions covered included the following aspects:

• cost of TA accommodation relative to LHA rates
• total amount spent on TA in the previous year
• effect of a 90 per cent reimbursement rate on overall council budgets and services forgone due to budgetary pressures
• details on housing allocation, typical accommodation size, and average length of stay.

Authorities also had the opportunity to outline policy changes they would advocate to address TA cost pressures and were asked to rate how their locality manages the financial and logistical demands of providing temporary housing.

In this section, for each of the eight local authorities interviewed, we provide the key takeaways. 

Background

Departing from the norm, Barking and Dagenham has successfully reduced the number of households in temporary accommodation. This success is largely the result of its earlier strategic capital investments and its corresponding emphasis on homelessness prevention. However, like other local authorities, Barking and Dagenham now faces comparable future challenges given several landlords are ending lease agreements and reclaiming their properties. As opposed to advocating solely for change in the temporary accommodation reimbursement process towards using the 2024 LHA rates, this local authority is stressing the importance of central government policies that address the root causes of homelessness.

Key takeaways

• Barking and Dagenham stands out as a unique local authority to interview because it has coped relatively well with the current temporary accommodation subsidy reimbursement system. Through historical decisions and forward planning, Barking and Dagenham has been able to utilise more council owned housing, leading to more favourable finances compared to other local authorities, allowing it to focus more on prevention. This has created a positive flywheel effect. While Barking and Dagenham deserves credit for its successful approach, it is important to recognise that other local authorities face different circumstances and challenges. These local authorities may need to rely more on costlier accommodation options like B&Bs or similar setups, resulting in disproportionately higher expenses.
• Barking and Dagenham has benefitted from long-term leases and retains a sizeable amount of housing stock from such lease agreements. They were negotiated when rates were more favourable, which has kept costs down for the local authority. With many lease agreements scheduled to be renegotiated, these favourable circumstances are beginning to change, and Barking and Dagenham anticipates that it, too, will start to feel considerable pressure from the subsidy gap dynamics. 
• This local authority deep dive demonstrates that having adequate fiscal resources dedicated to homelessness prevention can significantly enhance a local authority's financial standing in this policy area. In contrast, many other local authorities are struggling to carve out substantial enough fiscal space for prevention activities. For instance, any savings from a reduction in households in TA in Barking and Dagenham is being redirected to the Homelessness Prevention Fund. This fund is used to cover services such as settling residents' outstanding debts and helping them with advance rent payments.
• The irregular and inconsistent decision-making by the Home Office regarding asylum seeker applications, coupled with poor communication of these decisions to local authorities such as Barking and Dagenham, significantly impacts their ability to effectively service temporary accommodation requests. Barking and Dagenham, a local authority where asylum seekers gravitate towards, reported that the Home Office's lumpy decision making, which is often not communicated in advance, results in a sudden surge in demand for TA. More coordination between the Home Office and such local authorities would enable better and more cost effective placement.
• Barking and Dagenham wants central policymakers to address the underlying causes of houselessness as it feels its local efforts can only go so far. In discussion with BisImpact, it corroborated that the central government should explore policy such as tax abatements to boost the financial viability/attractiveness of converting vacant commercial spaces into residential use. This is one way of boosting the housing supply.

Background

In the current economic climate, marked by a cost-of-living crisis and high interest rates, many landlords have exited the residential rental market. This has resulted in a shortage of affordable and appropriately sized accommodation. Consequently, Basildon has faced increased TA demand while housing supply has been falling. To meet this demand, Basildon will have to reduce some non-statutory services and use its budgetary reserves to cover the higher costs of available accommodation.

Key takeaways

• The present real estate market conditions make it financially less viable for landlords and developers to operate in the residential rental space, resulting in approximately 40 per cent of landlords leaving the market. Properties that remain on the market are generally less desirable and tend to be more expensive. As a result, when LHA rates are set at the 30th percentile, they do not fully account for these rental market dynamics. This reduction in supply has led to increased rents and further complicates the challenge of providing adequate TA.
• Many households are being placed into shared housing or B&Bs, which are often not ideal for longer stays.  These types of accommodation lack important features such as kitchen facilities. Additionally, the limited rental housing availability has prevented some households from moving out of TA. Basildon confirmed that some households have remained in TA for as long as seven to eight years. It is worth noting that long-term TA is typically in the form of houses.
• Given the housing market dynamics within Basildon, the local authority places most new households seeking TA in hotels and B&Bs. These accommodation options are significantly pricier even compared to the 2024 LHA rates, with hotels averaging £2,000 per month - more than four times the reimbursable rate for one bedroom accommodation.
• The price discrepancy between higher cost TA options and the current reimbursement rates has contributed to significant overspend and has negatively affected the provision of other services. The inability to cover full costs has led to financial difficulties, forcing the local authority to tap into budget reserves. Basildon has forgone services such as youth schemes and leisure services. This reallocation of funds highlights the significant impact of the TA Subsidy Gap on other local authority services.
• There is a desire for more capital funding to increase housing stock and build social housing. The local authority advocates for additional funding to mitigate the need for temporary accommodation, and to expand some of its existing programmes that prevent homelessness/displacement such as assisting residents pay rental deposits. 

Background

Birmingham City Council is the largest local authority in Europe with 1.2 million residents. The local authority has experienced a sharp increase in the number of households it places into TA. TA spend is one its biggest budget items. 

Key takeaways

• The number of Birmingham-resident households in TA has roughly doubled over the past four years. It has increased from 2,858 households in September 2019 to 4,549 households in September 2023.
• Currently, £4.65 million of funding from the homelessness prevention grant is being redirected to pay for private sector leased properties for temporary accommodation. This diversion creates a damaging cycle where the underlying causes of homelessness remain unaddressed. This policy response geared towards the short-term and necessary for meeting statutory commitments, reduces funds available for its original purpose: prevention efforts. As a result, the demand for temporary accommodation increases, creating a negative loop.
• Birmingham as a local authority is grappling with severe financial challenges, which have led to the elimination of 38 internal jobs in the housing solutions area over the past year. Temporary accommodation is a significant contributing factor to the local authority’s overall financial challenges. Unlike other local authorities that have managed to access reserves, Birmingham does not have this option, making it even more difficult to manage its TA subsidy gap. 
• Birmingham officials expressed that the Right to Buy Policy is leading to diminished housing stock and may be worth reconsidering. All other things kept equal, this policy, while it promotes homeownership and social mobility, leads to a decrease in the number of homes available for tenants who need affordable housing. As a result, for the Right to Buy policy to be truly successful, it should be supplemented with complementary policy that is simultaneously boosting housing stock. As it stands, there is a trade off between promoting the benefits of homeownership and possessing an adequate supply of social housing. 
• The quality and affordability of temporary accommodation in Birmingham is limited, and with diminishing social housing stock, these issues are expected to grow. Most households in need of TA initially end up in B&Bs, which serve as a gateway to other TA forms. Anecdotally, B&B prices can exceed the TA reimbursement rates (90 per cent of 2011 LHA rates) by up to 500 per cent, while private sector leases exceed LHA rates by 70 to 90 per cent. Despite efforts to transition households to more affordable and permanent housing, Birmingham reports that around 29 households per week exceed the six week statutory limit for being in hotel type accommodation. More generally, households spend an average of two years in TA, indicating significant challenges in managing timely transitions.

Background

Bristol relies heavily on private sector lease agreements, with approximately two-thirds of households in Temporary Accommodation (TA) being placed with private providers. TA spending is one of the four key cost pressures on Bristol City Council’s finances, while others include adult social care. A sharp increase in the number of households in TA has significantly increased Bristol’s temporary accommodation subsidy gap. To counteract this growing problem, Bristol has taken several different actions, including reclassifying some permanent housing stock for TA use as part of 12 month pilot, taking a harder stance on negotiating prices with private sector landlords, and redirecting finances from other support services. 

Key takeaways

• Effective negotiation can potentially produce cost saving results for local authorities. Bristol implemented a new framework to drive down prices with existing providers. When one provider refused to lower prices, the local authority removed residents from that provider and relocated them to B&Bs. Despite the short-term inconvenience for families and the higher costs of using hotels, the provider eventually returned with more favourable terms. This experience suggests that other authorities might benefit from taking a firmer stance in negotiations. While there are higher interim costs with such a strategy, it can eventually lead to long-term savings.
• Due to the rising number of households in TA, Bristol ran a 12 month pilot where they reclassified some of its permanent housing stock for TA use. This reclassification reduces the availability of permanent social housing, potentially prolonging the time households spend in temporary accommodation. The pilot has now ended, and Bristol is consulting on the future of this initiative.
• A sharp increase in the number of households in TA has significantly increased Bristol’s temporary accommodation subsidy gap, which now accounts for around 65 per cent of the total value spent on TA. The local authority’s TA subsidy gap grew from approximately £7.2 million in 2021/22 to £12.77 million in 2023/24. Without action, it this gap will likely increase to £18.5 million in 2024/5 However, Bristol is actively working to reduce this gap.
• The financial strain from increased TA spending has led to having to make compromises in other related policy areas, such as floating support services and homelessness prevention programmes. To address what it perceives as lack of action from the central government, Bristol has decided to invest £0.9 million to £2 million more in prevention this year. This money is allocated towards increasing staffing resources to better handle prevention efforts as well as supporting clients to move on from TA.
• Bristol used itself as an example to suggest relevant policy changes, including: 1) Scrapping the benefit cap; but if this isn’t going to happen: a) Implementing a more nuanced setting of benefit caps, which currently have only two rates (a London rate and a non-London rate), or b) Increasing the current benefit cap rates, and 2) Adjusting the formulae used to calculate Local Housing Allowance (LHA) rates, which Bristol felt did not reflect market rents. The first suggestion comes from the fact that Bristol’s cost of living is high, and the current system does not consider regional/area differences in non-London local authorities. On the second point, Bristol’s own experience in sourcing accommodation made it question whether the LHA rates were actually 30th percentile of market rents.

Background

Epsom and Ewell are generally affluent areas, but their proximity to London and their expensive property market have led to high levels of homelessness. The local authority does not own any housing stock, making it particularly vulnerable to rising rents, LHA subsidy gaps, and limited availability of accommodation. As a result, spending on TA has grown significantly over the past five to six years.

Key takeaways

• Epsom and Ewell exited being a player in the housing market approximately 30 years ago and does not own any stock. Therefore, it relies on three main forms of accommodation for its TA. These are: 1) Private sector lease properties: Epsom and Ewell operates a private sector leasing (PSL) scheme through which it successfully leases and manages private properties. 2) Collaborating with housing associations. 3) Nightly paid accommodation: These are typically the default form used for incoming households seeking TA. The main contributors of the TA subsidy gap are the costs of nightly paid accommodation and rent top-ups for Registered Social Landlords (RSLs). Rent top-ups for RSLs are the extra funds needed to cover the full rent for social housing when government subsidies fall short. 
• Epsom and Ewell face significant financial challenges in managing its housing stock. Although Epsom and Ewell use LHA rates to set the rents on the housing units it manages, these rates do not meet its expenditure. For units in housing association stock, Epsom and Ewell must top up the rent and pay the difference. Additionally, nightly paid accommodations are far more expensive than LHA rates.
• The increased TA spending poses a financial risk to the local authority, leading to the use of reserves and reallocation from existing budgets. For example, almost all the homelessness prevention grant was used to cover rent top ups to RSLs. While the council did not have to cut back on jobs, the budget for staffing is limited, resulting in an increase in caseloads for officers working with households in TA. Previously, officers managed around 30 cases each at the higher end, but now they are handling 45 cases each.
• Epsom and Ewell’s staff suggested several policy changes to better support those in temporary accommodation. They recommend administering the rent subsidy as part of the existing housing benefit system, which would streamline the process and reduce administrative costs. Additionally, they propose designing policies that allow for reasonable rent increases to keep up with rising housing costs, ensuring that subsidies match actual rental prices. These changes would give local authorities more control and ensure financial support keeps pace with rising costs.

Background

Consistent with many other local authorities, Hackney has experienced an increase in households seeking TA. Over time, the profile of residents seeking TA has shifted from young people leaving their family homes for the first time towards more varied circumstances, including pensioners, victims of domestic abuse, and those with physical disabilities or mental health needs. 

Key takeaways

• Staff noted that a lack of a cross-government strategy on homelessness has worsened the situation, with contradictory policies limiting the efficacy of the government response. For example, DWP is seeking to limit the TA subsidy, while the Home Office is approving more people for indefinite leave to remain, increasing TA demand. Additionally, the Department for Levelling Up, Housing and Communities is not effectively increasing housing supply. The Home Office, not subject to the same subsidy or budget limitations as local authorities, contracts private companies to secure accommodation for refugees. These companies often secure hotels and self-contained accommodation from smaller owners and landlords who might have otherwise partnered with local authorities. The twofold effect is that there is less TA available for local authorities, and landlords and owners now expect higher rates. These conflicting policies hinder local authorities' efforts.
• To address the limited availability of housing for TA, Hackney has implemented and continues to plan unconventional solutions, such as repurposing social housing set for demolition and converting closed schools into TA housing stock. Hackney has already repurposed 638 social housing properties, many of which had structural issues like damp and mould that needed to be addressed before use as TA. Additionally, Hackney is considering converting closed schools, which were shut down due to falling pupil numbers, into TA housing. While these measures provide interim relief, they offer limited long-term sustainability.
• Approximately 200 individuals are currently in temporary accommodation that landlords are looking to reclaim. Being placed in such accommodation, which landlords no longer wish to maintain as rental properties, puts individuals at the risk of being 'double homeless'. They may have been evicted from their original housing, and now face the prospect of having to prematurely leave the temporary accommodation in which they reside. 
• Hackney has used agreements with other local authorities to prevent artificial competition and avoid increasing demand. When Hackney places households outside its borough, it complies with agreements ensuring it does not pay more than the local authority it places households into, preserving local housing market price dynamics. More local authorities, particularly those outside of London, should seek to collaborate in this way. It is well-known that many London authorities have such agreements between themselves.
• The main drivers of TA in Hackney are: 1) homelessness, 2) loss of short-hold tenancy, 3) domestic abuse, and 4) eviction from supported accommodation. Supported accommodation provides housing with additional support for individuals with mental health issues, physical disabilities, or substance abuse problems, who may need extra resources in TA. Among those entering TA, 40 per cent have support needs, and 20 per cent have multiple or complex needs. Finding suitable accommodation for these individuals is challenging due to supply limitations and the unsuitability of some existing housing. 

Background

Medway has experienced a steep increase in the number of households in TA over the past few years, and many of its households are being placed outside of its jurisdiction. The local authority believes that it is in competition for limited housing resources with vicinal London local authorities. The local authority calls for a revised framework for LHA rates, which is thought to be out-of-line with ground realities.

Key takeaways

• Medway proposed the introduction of a compensatory mechanism to financially reward local authorities that take on residents from other local authorities. This initiative aims to provide an incentive for local authorities to support the relocation of residents from different jurisdictions. It was highlighted that while temporary accommodation subsidy reimbursement is administered based on who is placing, related services such as care can only be provided by receiving authorities (and are not reimbursed). As such, receiving local authorities are often absorbing additional costs, for example  dealing with residents with complex mental health conditions.
• As other local authorities with proximity to Medway consistently place into it, its ability to procure suitable temporary accommodation housing in its own jurisdiction was felt to have been made more difficult. Competition is commonly from nearby London local authorities whose independent actions/searches are enabling some local private landlords to set and maintain unfavourable rent terms.
• Medway is increasingly finding itself in a situation where it must place residents in need of temporary accommodation outside its own boundaries. This is inherently creating difficulty in quality assurance. The team that checks housing conditions is internal to Medway’s boundaries; it is not feasible nor possible to do this effectively for housing that is further afield. Additionally, in response to rising costs for temporary accommodation, the budget is being adjusted to include savings. As part of this effort, the monitoring team is being streamlined, which complicates the situation from the start.
• Medway reported dealing with landlords rapidly exiting the rental market. An example was given where a bigger partner decided that it was no longer cost effective to keep a building that was scheduled to provide 20 to 30 temporary accommodation units. The current market conditions with higher interest rates and rising material costs are further fuelling this supply problem.
• Medway officials have expressed concerns about potential inequities in the reimbursement system. They observed that some London authorities might benefit from relocating households to areas outside of London, where rents are generally lower, yet still receive higher reimbursement rates. However, it is important to clarify that the reimbursement model bases rates on the property's location, not the origin of the household. This highlights a common misunderstanding among many interviewed local authorities, indicating that the reimbursement process could be more transparent. Improved and more comprehensive documentation may help stakeholders better understand the system and address any concerns.

Background

Temporary Accommodation Subsidy Gap pressures are significantly impacting budgets and affecting the local authority’s ability to balance cost and quality of TA placements. Decisions are now driven purely by availability, leading to the use of commercial hotels for emergency placements. To address the growing cost of TA, Tower Hamlets is focusing on prevention by introducing two grants to help households either remain in their current homes or find alternative private rented sector (PRS) accommodation themselves.

Key takeaways

• Tower Hamlets now places 43 per cent of its households that are seeking TA within its boundaries and 57 per cent outside, a shift from the previous 50:50 distribution. This trend is driven by the greater availability of affordable, suitable TA outside the borough. Recently, the council reviewed its Placement Policy to widen the geographical area where TA can be sourced.
• Given the increased cost pressures from the current TA reimbursement process, Tower Hamlets has recently intensified its focus on prevention by trialling two new prevention grants. Firstly, the Cost-of-Living Grant provides financial support directly to host families, aiming to make it more sustainable for them to continue hosting individuals or relatives in need of housing. The idea is that by giving host families financial support, they can better afford to support the individuals they are hosting. Secondly, the Private Rented Sector DIY Grant offers financial assistance of approximately £1,700 to families or individuals who have been asked to leave their private rented accommodation, helping them find alternative privately rented housing. These initiatives are designed to alleviate housing pressures and provide practical support to those at risk of homelessness. 
• To address the financial losses resulting from the current TA system, beyond increasing the TA subsidy value, officials at Tower Hamlets have proposed two policy suggestions: 1) Enhanced inter-government coordination and, 2) Central government purchase and management of vacant rental units for TA use. Enhanced inter-government coordination would improve housing procurement efficiency by shifting from competition between different agencies to a more cooperative approach, thereby reducing costs and streamlining the process. Additionally, the purchase of unsold rental units by the central government would utilise existing housing stock, providing immediate housing solutions instead of waiting for new developments to be built.
• As financial pressures on the local authority increase, there is growing concern that the quality of housing will diminish. This is particularly troubling because some families already remain in TA for up to 10 years, with the average stay being four to five years. Currently, out-of-borough housing placements are in locations such as Essex and Kent, which some residents contest through statutory reviews, arguing that the distance is too far.

Our principal recommendations are that the temporary accommodation reimbursement process is rebased to utilising 2024 LHA rates, and that the reimbursement threshold is also increased from 90 per cent to 100 per cent. 

Overall summary

The current reimbursement process for residents in temporary accommodation using 2011 LHA rates is inadequate and fails to fittingly support local authorities in fulfilling their statutory duty of care to the homeless. This outdated reimbursement system, one that has not kept pace with rising rental prices nor the increased demand for temporary accommodation, is resulting in negative policy outcomes that will lead to more severe challenges in the long term. It must be revisited and amended immediately.

Local authorities are coping with this issue by drawing on their reserves, cutting back on prevention services, and facing escalating financial commitments. This situation is becoming unsustainable. If the central government does not intervene soon, it will end up spending significantly more in the future as more local authorities face bankruptcy. At that point, the central government will likely have to bail them out on worse terms. This situation is akin to the difference between preventing a medical condition and treating it at an advanced stage.

What is the path forward? What are the actions that central government departments should take?

Rebasing TA subsidy rates alone will not fully resolve the financial issues facing councils. However, it will allow more of the local authority budgets to be used for their intended purposes: prevention. Currently, a significant portion of these budgets is being diverted away to service temporary accommodation duties.

The 90 per cent reimbursement terms set by DWP in 2011 were originally intended to incentivise moving residents from TA into more permanent housing. However, this structure has proven progressively ineffective for most local authorities, particularly as we approach the end of 2024. One significant problem is that this system relies on sufficient housing availability and assumes local authorities can influence local housing market dynamics as price-makers. In reality, most local authorities are price takers with limited negotiating power with housing providers.

Our interview with DWP confirmed that the primary use-case of LHA rates is for calculating housing benefit payments to households renting from the private sector. Using LHA rates for reimbursing temporary accommodation provision appears to be a retrofitted solution. It may be more appropriate for the VOA and DWP to consider calculating a separate set of rates specifically for temporary accommodation reimbursement purposes.

In fact, our findings indicate that the local authorities that have remained relatively financially unscathed had extensive capital investments in housing prior to 2011. Factors affecting residential property development, such as economic fundamentals and interest rates, lie outside the control of local authorities. For the 90 per cent reimbursement threshold to continue incentivising the movement of households from TA to permanent housing, the central government must enhance its policy offerings in homebuilding. This support is crucial because, without the right overall conditions, the 90 per cent reimbursement rate is ineffective in achieving its intended purpose.

Given that building houses and apartments takes years and is a longer-term endeavour, the temporary accommodation reimbursement rates should be adjusted to the 100 per cent threshold to return more income to households in the shorter-term.

Additionally, as house prices inevitably rise over time, the reimbursement rates should be revisited and updated annually. A 13 year gap for rebasing rates is clearly sub-optimal moving forward.

By implementing these measures, central government departments can help alleviate the financial burden on local authorities and create a more effective system for managing temporary accommodation.

What should local authorities do to manage the situation as things currently stand?

We outline three key action points.

Firmer negotiation

Firstly, to cope with mounting financial pressures, local authorities need to find innovative ways to save money and negotiate better rates with temporary accommodation providers. Bristol’s approach demonstrates that when local authorities are willing to endure some short-term pain, they can achieve better long-term outcomes. Bristol’s decision to withdraw all its residents from an accommodation provider set a positive precedent. It signalled to other providers that the local authority would not accept unfavourable rates or be held to ransom. Temporary accommodation providers rely on local authority demand as much as local authorities depend on their services. Therefore, negotiating more firmly for long-term financial sustainability is prudent. BisImpact recommends that local authorities should adopt a strategic approach, considering their overall portfolio and choosing their battles wisely. This approach is likely the best path forward for ensuring financial stability.

Collective bargaining and coordination

In many cases, local authorities are currently acting as competitors with one another, and are treating fiscal gaps resulting from temporary accommodation provision as a zero sum game. In doing so, they are artificially bolstering rents. Hackney’s approach of never paying more than what its counterparts (the local authorities into which it is placing) pay is one that should be considered by others. Similarly, by sharing information and working together, local authorities can strengthen their negotiating position. We suggest more fora are created for meaningful discussions and we wish to spotlight that the London authorities have been particularly effective at doing this amongst themselves. This collaborative approach can allow for joint strategy that will prevent artificial inflation in the temporary accommodation market and make it a more balanced market overall.

Importance of carving out fiscal space for prevention

A few local authorities, such as Tower Hamlets, acknowledged that solely prioritising their response to the fiscal gap in a manner that is like taking an aspirin tablet rather than a vitamin, will only worsen the situation unless there is a significant adjustment in the terms of the temporary accommodation reimbursement process. BisImpact emphasises that no matter how dire the situation is, without sufficient investment into prevention activities, which are likely to be more cost-effective.

Table A1: Quantitative ratings given across different prompts by local authority staff working on homelessness