The poverty premium
By Lucie Russell and Carl Packman, Fair By Design Campaign
Say the term “poverty premium” to people and many won’t know what it is. But when you use the “Boots Theory” to describe it, then it makes complete sense.
The Boots Theory can be found in Terry Pratchett’s 1993 book Men At Arms. In the book, Captain Samuel Vimes reasons that the difference between those people with a very high status and those with a very low status is their spending habits, although not in the way you might expect. “The reason that the rich were so rich,” he says, “was because they managed to spend less money.”
The narrator expounds by focusing on Vimes’s boot buying habits:
“[Vimes] earned 38 dollars a month plus allowances. A really good pair of leather boots cost 50 dollars. But an affordable pair of boots, which were OK for a season or two and then leaked like hell when the cardboard gave out, cost about 10 dollars… A man who could afford 50 dollars had a pair of boots that’d still be keeping his feet dry in 10 years’ time, while the poor man who could only afford cheap boots would have spent 100 dollars on boots in the same time and would still have wet feet.”
Of course, this extra cost is not just limited to footwear. The poverty premium describes the extra costs of our most essential items including financial services, insurance, and energy. These costs affect how much someone on a low income will pay to borrow money to see them through to the end of the month, how much they have to pay for home contents insurance, and the cost of their gas and electricity bills.
So whose problem is this? Government has a role to play in reducing the poverty premium, as do market regulators and corporate firms. But they are not the only agencies that need to play a part. Housing providers also have a big role to play by being the change they want to see in helping tenants access affordable services and avoid the trappings of high cost credit like payday lenders or rent-to-own shops.
Here are some practical solutions that housing associations can take.
Become an energy broker
Housing providers are well aware of the high costs many of their tenants pay for their gas and electricity. That’s why some are becoming energy brokers for their tenants, for example Grampion Housing Association, who devote staff time to ensuring tenants aren’t forever searching for better deals or being outmanoeuvred by pages of customer service information. By acting as an energy broker, the housing provider takes back control and can ensure tenants get the most value for money.
Restore and reuse carpets and curtains
The hardest time for a tenant is often when they move into a new home. The costs of moving, combined with struggling to put together the money to buy new essential items so the place isn’t bare. Many people resort to rent-to-own schemes like BrightHouse and PerfectHome, which have been criticised for charging exorbitant rates of interest. Orbit is one of a number of housing associations who have tried to tackle this problem. In January, 2017, Orbit ran a pilot in Stratford-upon-Avon that restored and reused the carpets and curtains of previous tenants. Instead of ripping out the old, the curtains and carpets are deep-cleaned by the housing provider and gifted to any tenants who want them for free. Orbit found that this practice not only reduces costs for tenants but increased timely rent payments.
Pro-active income maximisation
Life on a low income can often be very difficult. Research has found that one in five people would find it ‘impossible’ to pay an unexpected bill as low as £20, while more than 16 million people in the UK have savings of less than £100. If tenants struggle to pay their rent on time as a result of this situation, then this impacts on housing providers, with reduced cashflow, lost income, and extra staff resource costs. Consequently, it makes good financial sense for housing providers to invest in financial literacy and welfare advice services.
Consider trialling a rent-flex scheme
A recent pilot of the Supported Rent Flexibility project undertaken by the Centre for Responsible Credit and Optivo Housing Association aimed to help tenants pay rent on time by giving them the opportunity to set up a personalised rent payments schedules. These would allow them to overpay and underpay at different times of the year, making it easier to pay rent without resorting to the use of high-cost credit or making detrimental changes to their living standards (e.g. not eating, or heating their home).
Not only did this improve the financial lives of the tenants involved in the pilot, but it also fostered a new sense of trust between the tenant and their housing provider.
Be proactive in referring to affordable credit
In October 2018 the Chancellor of the Exchequer announced plans to simplify regulation allowing Regulated Social Landlords (RSLs) to refer to sources of affordable credit, where previously they were not allowed. This presents an opportunity for all housing providers to assess how they help their tenants to access affordable forms of borrowing, whether through a local credit union or a scheme at their workplace. It also allows housing providers to work with tenants to find out if borrowing is actually the right solution for them, since most payday loan usage is to access money for fuel or food.
A report by the University of Bristol in 2016 revealed that the poverty premium paid by low-income families is, on average, £490 per year – enough for a family holiday, children’s clothes and shoes, or keeping a house warm in winter.
For many tenants, though, the poverty premium is an access and a bandwidth problem: there are too few options for affordable services and not enough time to find them. Housing providers have a huge part to play in resolving the poverty premium, and it makes perfect business sense for them to do so.