George Osborne’s move to impose market rents on those earning more than £30,000 outside London forecast to hit 60,000 households

Tens of thousands of hard-working families will be forced to leave their council homes and find themselves unable to afford a local alternative as a result of government plans to restrict social housing to the poorest, according to research obtained by the Observer.

The devastating figures – in a report commissioned by the Local Government Association – show that almost 60,000 households in England will be unable to afford to remain in their council properties from April next year, as a result of George Osborne’s reform, called “pay to stay”.

Under the policy, announced in last year’s budget, families or individuals earning more than £40,000 a year in London, and more than £30,000 elsewhere, will be told to pay the local market rate in the private sector, rather than the far lower social rent. The move is part of Tory plans to end what ministers say are effectively subsidies for better-off council tenants.

However, the report for the LGA by Savills estate agents finds that far higher rents in the private sector, and soaring house prices in many parts of the south, mean that many council tenants who just exceed the income cut-offs will be left in a desperate position.

The report finds that 214,000 households across England will be hit by the policy and that in London most of the 27,000 households affected will be unable to afford to rent privately or buy in the same area.

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Before scrutiny of the housing bill in the House of Lords this week, a row over pay to stay was brewing as the Tory-controlled LGA attacked the policy as unfair on hard-working families and a disincentive to work, while Labour and crossbench peers savaged it as ill-thought-out and unfair.

The crossbench peer Bob Kerslake, former head of the civil service and until last year the most senior mandarin working on housing policy, called on ministers to put the plan on hold so that pilot schemes can be carried out.

Kerslake said that he would table amendments to place the scheme at the discretion of local authorities and “provide adequate protection for tenants on the amount of rent they have to pay compared to their income”.

Kerslake told the Observer: “When this was originally discussed in the coalition government, it was intended to deal with the very small number of high earners on over £60,000. The current proposals will affect a lot more households with earnings of half that.

“Pay to stay needs to be seen alongside the forced sale of council housing to fund right to buy for housing associations, the ending of permanent tenancies and the almost total end of funding for new social housing after 2018. Together, they threaten the future of social housing as we have known it.”

The LGA said the research showed that around 50% of those tenants who would be find themselves classed as high earners in the south-east, east of England and London would not be able to afford to pay market rents or take up a right to buy offer and would need to move out of the area.

Peter Box, housing spokesman at the LGA, said: “A couple with three children earning £15,000 each a year cannot be defined as high income. Pay to stay needs to be voluntary for councils, as it will be for housing associations.

“This flexibility is essential to allow us to protect social housing tenants and avoid the unintended consequence of hard-working families being penalised, people being disincentivised to work and earn more and key workers, such as nurses, teachers or social workers, having to move out of their local area.”

Work by the Resolution Foundation found that a household with two earners in Oxford which took on one hour more of paid work a week, tipping joint earnings over £30,000, would see the rent increase by more than £4,000 a year.

Laura Gardiner, senior economic analyst at the foundation, said: “Enforcing near-market rents for council tenants earning over £30,000 risks creating strong disincentives to earn more. Families on the cusp of the £30,000 cliff edge could find that securing a pay rise or working a few extra hours leaves them thousands of pounds worse off as a result of far higher housing costs.

“Introducing a taper could mitigate the worst effects but it is questionable how it could be administered.”

A Department for Communities and Local Government spokesman said: “It’s not fair that hard-working people are subsidising the lifestyles of those on higher than average incomes, to the tune of £3,500 per year.

“We have been clear that our intention is that social rents would increase gradually as tenants’ incomes rise above this threshold. Pay to stay better reflects tenants’ ability to pay, while those who genuinely need support will continue to receive it.”