Mayor Jason Perry has called on the Government to reform outdated temporary accommodation funding rules which leave Croydon Council facing an annual shortfall of approximately £45 million.
In a letter to Housing Minister Matthew Pennycook, the Mayor warns that councils are procuring accommodation in today’s housing market while much of the Housing Benefit subsidy they receive remains linked to Local Housing Allowance rates set in January 2011.
The resulting gap must be met from the Council’s General Fund, diverting millions of pounds from other local priorities such as street cleaning, social care, community safety, housing enforcement and homelessness prevention.
Mayor Perry said:
“Croydon has taken difficult decisions to stabilise the Council’s finances, strengthen governance and rebuild public confidence. We remain determined to live within our means.
“However, no amount of local financial discipline can resolve a structural gap created by a national subsidy formula that requires councils to pay 2026 housing costs whilst being reimbursed at 2011 rates.”
Councils have a statutory duty to secure suitable accommodation for homeless households, even where local housing is scarce and the cost is significantly higher than the subsidy available from the Government.
The Mayor’s letter also highlights how Housing Benefit rules interact with the Government’s Rent Standard. In some circumstances, councils are restricted in the rent they can charge while being unable to recover enough subsidy to cover the cost of acquiring, leasing, financing and maintaining accommodation.
These conflicting rules can make otherwise sensible investment schemes unviable, discouraging councils from acquiring or developing their own properties and leaving them more reliant on expensive nightly-paid accommodation.
The national scale of the problem is significant. Local Government Association analysis shows that English councils spent £6 billion on temporary accommodation between 2011/12 and 2024/25, with £2.2 billion spent in the final two years alone.
Mayor Perry is asking the Government to:
- Replace the January 2011 benchmark with, at a minimum, the current applicable Local Housing Allowance rate.
- Review the restriction limiting subsidy to 90% of that rate.
- Provide transitional support while permanent reforms are developed.
- Align the Rent Standard and Housing Benefit subsidy rules.
- Create a clearer and quicker route for councils to secure flexibility for temporary accommodation.
- Support further long-term investment in council-owned and leased accommodation.
Mayor Perry added:
“The present system penalises councils for trying to find more sustainable and better-value ways of meeting their legal responsibilities.
“Reform would give us greater confidence to acquire and lease properties, develop new housing supply and move families away from costly nightly-paid accommodation. That would provide better value for taxpayers and greater security for households at an extremely difficult point in their lives.”
The Mayor has requested a meeting with the Housing Minister and relevant officials to discuss the proposals. Croydon’s four Members of Parliament have also been copied into the correspondence and asked to support the case for reform.
Mayor Perry’s full letter to Matthew Pennycook is published below.
Dear Minister,
Temporary accommodation and reform of the Housing Benefit subsidy regime
Congratulations on your re-appointment to the Ministry of Housing, Communities and Local Government.
As you know, local authorities face a range of urgent and interconnected challenges, from financial sustainability and rising demand for statutory services to homelessness, housing supply and the regeneration of our town centres. I would welcome the opportunity to meet you in the near future to discuss how Croydon Council can work constructively with you and the new Government on these issues.
I recently wrote to the new Prime Minister, setting out my willingness to work together to establish a new relationship between central and local government. I highlighted the need for longer-term funding settlements, greater local flexibility, stronger incentives for growth and reform of the funding for temporary accommodation - all of which aligns with the Prime Minister’s stated devolution aspirations.
One aspect of that letter warrants more detailed and urgent consideration by your Department: the continued use of January 2011 Local Housing Allowance rates to calculate the Housing Benefit subsidy available to Councils for many households living in temporary accommodation.
We have identified two separate but closely connected problems: the restrictions imposed by the Rent Standard on the rent that local authorities can charge for some forms of temporary accommodation, and the outdated Housing Benefit subsidy rules which determine how much of that cost Councils can recover from Government.
These issues need to be considered together. Addressing only one would leave Councils continuing to carry substantial and unavoidable financial burdens under the other.
The Housing Benefit subsidy gap
Where temporary accommodation does not fall within one of the recognised exempt categories, the Housing Benefit subsidy recoverable by a local authority is restricted to 90% of the applicable January 2011 LHA rate for the relevant Broad Rental Market Area.
The problem is not that LHA has remained wholly unchanged since 2011. It is that the benchmark used specifically for much temporary accommodation subsidy remains tied to the January 2011 rate.
Councils are, therefore, procuring accommodation in today’s housing market whilst receiving subsidy calculated using rental values that are more than 15 years old. Since 2011, rents, property prices, borrowing costs, maintenance, insurance and management costs have all increased substantially. The subsidy available to local authorities has not kept pace.
The gap has to be met from Councils’ General Funds i.e. local taxpayers. In Croydon, at current levels of demand, the difference between the cost of providing temporary accommodation and the Housing Benefit subsidy recoverable is approximately £45 million per annum.
This is money that must consequently be diverted from other local services. It reduces the resources available for prevention, street cleaning, social care, community safety, housing enforcement and the other services on which residents depend. It also places additional pressure on authorities which are already working hard to balance their budgets and restore financial sustainability.
Croydon has taken difficult decisions over recent years to stabilise the Council’s finances, strengthen governance and rebuild public confidence. We remain determined to live within our means. However, no amount of local financial discipline can resolve a structural gap created by a national subsidy formula that requires Councils to pay 2026 housing costs whilst being reimbursed at 2011 rates.
This is not a problem confined to Croydon. The scale of the national pressure is stark: new Local Government Association analysis shows that English councils spent £6 billion on temporary accommodation between 2011/12 and 2024/5, with more than a third of that sum - £2.2 billion - spent in the last two years alone. It affects local authorities across the country, with particularly severe consequences in London and the South East because of the cost and scarcity of suitable accommodation.
Nor is temporary accommodation discretionary expenditure. Councils have statutory duties to homeless households under Part 7 of the Housing Act 1996. Authorities must secure suitable accommodation even where local supply is constrained and the market cost is substantially above the subsidy recoverable.
The principal causes of rising temporary accommodation demand are also not wholly within the control of individual Councils. Yet the resulting financial burden falls heavily on local General Funds. The present system, therefore, transfers the cost of pressures in the wider housing market onto individual local authorities and their residents.
The interaction with the Rent Standard
The subsidy problem is compounded by the operation of the Rent Standard.
The Rent Standard applies to registered providers, including local authorities, and generally requires rents to be set at Social Rent or Formula Rent where accommodation is not classified as Affordable Rent housing and no exemption applies. The requirement does not provide a general distinction between properties held within the Housing Revenue Account and those held through the General Fund.
Where accommodation falls outside the relevant exemptions, the rent a Council can legally charge may be substantially below the cost of acquiring, leasing, financing, managing and maintaining it.
This has become increasingly significant as Councils explore ways to reduce their dependence on expensive nightly paid accommodation by acquiring properties, entering longer-term leases or developing additional housing supply. These schemes need to be modelled against current borrowing and operating costs. In Croydon’s recent modelling, the cost of borrowing from the Public Works Loan Board over a 40-year period had risen to more than 6%.
A scheme that may appear viable when assessed against current rental costs or current LHA can become unviable where the Council is restricted to Formula Rent and can recover Housing Benefit subsidy only up to 90% of the January 2011 LHA rate.
There are exemptions within the Rent Standard, including for certain forms of temporary social housing, intermediate rent accommodation and relevant local authority accommodation. Affordable Rent can also be charged where the Secretary of State, Homes England or the Greater London Authority has agreed that this is appropriate.
However, the conditions are complicated and can depend upon the ownership structure, the type and length of a lease, whether public assistance was provided, the form of tenancy or licence and whether the accommodation is held within the HRA.
The route for a local authority to seek disapplication of the Government’s rent policy is also narrowly drawn. An authority may have to demonstrate that its HRA is at risk of falling into deficit, that compliance would jeopardise its ability to meet legal obligations, and that every possible step has already been taken to reduce costs and curtail non-essential commitments.
That process does not adequately address the broader General Fund pressure created by temporary accommodation. It is also too slow and uncertain to support authorities making investment and procurement decisions in a fast-moving housing market.
Private registered providers can, in some circumstances, access greater flexibility through the definitions of temporary social housing and intermediate rent accommodation. Councils can consider creating their own registered providers, but that is a substantial undertaking requiring a robust business case, strong governance and engagement with the Regulator of Social Housing. It should not be necessary for an authority to create a separate corporate structure simply to overcome inconsistencies between national rent and subsidy rules.
Misalignment between the two systems
There is a further discrepancy between the Rent Standard and the Housing Benefit subsidy regime.
Accommodation may qualify for an exemption from the Rent Standard under a lease arrangement lasting more than two years, whilst the Housing Benefit subsidy rules may require a significantly longer lease, sometimes exceeding ten years, before more favourable subsidy treatment becomes available.
A Council can consequently be permitted to charge rent at one level but remain unable to recover subsidy at a corresponding level. This undermines the viability of schemes and can force Councils into longer lease arrangements than would otherwise be commercially prudent.
The system therefore risks distorting local investment decisions. Instead of selecting the ownership and leasing model that offers the best value and flexibility, Councils are encouraged to structure schemes around different and sometimes conflicting regulatory tests.
It also discourages investment in additional temporary and affordable housing. This leaves Councils more dependent on nightly paid accommodation, which is generally more expensive and offers less certainty for both the authority and the families placed there. Local authorities should not be at a disadvantage for trying to build Council homes to tackle growing demand.
Local Authority Housing Fund
The LAHF has been a welcome intervention and has provided valuable support to local authorities in acquiring much-needed homes to reduce reliance on expensive temporary accommodation. The programme has also been particularly beneficial in enabling acquisitions outside the usual Rent Standard constraints.
However, while the funding has made a positive contribution, it only begins to address the scale of the challenge. Demand for temporary accommodation continues to rise significantly, with increasing numbers of households requiring assistance, escalating placement costs, and a severe shortage of affordable housing supply.
As such, LAHF represents part of the solution, but further long-term investment and greater flexibility will be required if councils are to make a meaningful and sustained reduction in temporary accommodation dependence.
Proposed reforms
I would, therefore, ask the Government to consider the following measures:
Reset the temporary accommodation subsidy benchmark. The January 2011 LHA benchmark should be replaced, at a minimum, with the current applicable LHA rate. The revised benchmark should then be reviewed or uprated regularly so that the same gap is not allowed to emerge again.
Review the 90% restriction. The Government should consider whether limiting subsidy to 90% of the applicable rate remains justified when Councils are carrying statutory duties and procuring accommodation in a highly constrained market.
Provide transitional support. Whilst permanent reform is developed, additional funding should be made available to help Councils meet the existing subsidy gap and prevent further reductions in other frontline services.
Align the Rent Standard and Housing Benefit subsidy rules. Accommodation recognised as exempt for rent-setting purposes should receive consistent treatment under the subsidy regime. Lease-term requirements and other eligibility criteria should be aligned wherever possible.
Create a clearer route for temporary accommodation flexibility. The Government should consider a specific exemption or streamlined approval process for accommodation acquired, leased or developed by Councils to discharge their statutory homelessness duties.
Review the Affordable Rent approval process. Where a Council can demonstrate that a scheme is necessary, offers good value and will reduce reliance on more expensive temporary accommodation, there should be a quicker route to securing permission to charge an Affordable Rent.
Work with local government on longer-term reform. MHCLG should establish a focused programme of work with Councils, London Councils and the Local Government Association to ensure that rent regulation, Housing Benefit subsidy and the Government’s wider housing objectives operate coherently.
These changes would not remove the need for Councils to manage temporary accommodation carefully or to pursue homelessness prevention. They would, however, remove a significant financial penalty created by outdated national rules.
They would also give Councils greater confidence to acquire and lease properties, develop new supply and move families away from costly nightly paid accommodation. That would offer better value for the taxpayer and greater security for households at an extremely difficult point in their lives.
A meaningful devolution settlement must be supported by a sustainable financial framework. Greater local freedom will achieve little if Councils remain required to absorb millions of pounds of nationally generated housing costs through an outdated reimbursement system.
I would welcome the opportunity to meet you, together with relevant officials from Croydon Council and your Department, to discuss these proposals and the other pressing issues facing local government. Croydon stands ready to work constructively with you to develop a fairer, simpler and more sustainable approach. To that end, I have copied our four local Members of Parliament for their assistance in this endeavour.
I look forward to hearing from you.
Yours sincerely,
Mayor Jason Perry
Executive Mayor of Croydon
