Ministers have been urged to avoid a looming housing benefit crisis after new research revealed that welfare cuts may spark an exodus of better landlords from the housing benefit sector.

Data launched at the British Property Federation's (BPF) Residential Conference this morning showed that almost nine in ten landlords (88.3%) would not reduce their rents to claimants, despite the raft of cuts to the housing benefit received by tenants announced by the government.

This flies in the face of government's key argument in favour of the changes – that landlords would reduce their rents in line with housing benefit cuts – and suggests that the high demand for homes in many areas will simply prompt landlords to instead let their properties to paying tenants.

The survey found that more than 85% (85.6%) of landlords would not reduce rents to retain existing housing benefit tenants and that almost half (43.4%) planned to reduce the number of properties let to claimants against just 8.3% who planned an increase.

The BPF said that one measure that could keep landlords in the housing benefit market is a return to direct payment, where a tenant could request their housing benefit is paid directly to the landlord.

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Since the removal of direct payment in 2008 tenants have failed to pass on millions of pounds in rent, prompting more and more landlords to consider leaving the sector, and contributing to 11.7% (£276m) of all UK rent going unpaid in December. The BPF argues that if social landlords faced the same income shortfall they would face significant difficulties.

The figures underline fears articulated by politicians including London mayor Boris Johnson that the cuts would force many households claiming housing benefit to move from their homes – and possibly their jobs – into small pockets of poor-quality housing.

Landlord groups and homeless charities have asked government to reconsider the damaging cuts, and in particular, to stop housing benefit money that should be spent on rent from leaking out of the system. The BPF supports reform of the housing benefit system, but believes current proposals will increase tenant indebtedness – and the resultant burden on landlords and taxpayers.

Ian Fletcher, Director of Policy for the BPF, said: "Most landlords want to ensure that tenants on benefits remain housed, but with housing benefit rates being cut and little restoration of rents being paid direct to landlords, our figures bear out that many respectable landlords look set to exit the benefit market. Such an exodus would be a tragedy, with more and more claimants forced into a few concentrated areas of sub-standard accommodation. Government should be seeking to work with the private rented sector to stop this happening.

"Paying your way in the world is one of the values that goes to the heart of this coalition Government, yet when it comes to landlords the Government seems prepared to let people on housing benefit get away with living in accommodation rent-free and landlords suffering huge debts. Landlords and taxpayers deserve better than hundreds of millions of lost money each year, which should be being paid out on housing."

(CD)