Mary Dejevsky: Only a 'big bang' will excise corruption in council housing

Whether it is high personal debt, resentment against immigrants, or children with nowhere quiet to do their homework, many of Britain's social ills can be traced back to a shortage of housing. Which is why almost nothing raises passions so much as the allocation of council housing. In many cities, as well as in some rural areas, securing a council tenancy is little short of a long-term win on the lottery.

You pay a rent which, in areas of high-priced housing, is far below what you would have to pay for equivalent accommodation in the private sector. Your repairs and maintenance are looked after and, however your personal fortunes develop, you have tenure for life – maybe even into the next generation. That you have something whose market value far exceeds its cost on paper has become increasingly apparent; witness the incentives some councils are prepared to pay older tenants to move to somewhere smaller when their family has grown up.

It is in a fresh effort to address London's acute shortage of public housing, that Westminster Council – which has authority over some of the most expensive postcodes in the country – is asking the Government for more flexibility to set rents. It has produced figures showing that more than 2,000 of its tenants earn more than £50,000 a year (around double the average UK wage), and wants to charge higher rents to those earning more. The rent range is currently set by central government.

The Labour opposition on Westminster council immediately objected that this would penalise higher earners and reduce the social mix in council housing. What it naturally refrained from saying was that any such measures would encourage fraud. Who would willingly admit to earning £50,000 if it meant a sharp rise in the rent? I would forecast a sharp dip in the stated income of tenants in the year that any such provision enters into force – but no great change in the names on the doorbells.

For council housing, as the BBC reporter, Richard Bilton, showed in a Panorama special last week, is a sector where quite a few people are turning a pretty penny – just not the councils who own and manage it. Westminster's proposal is just the latest effort by an authority with artificially low-rent housing stock to increase its returns. Effectively means-testing rents, so the "rich" pay considerably more for the same flat than the "poor", however, seems a peculiarly un-market orientated course for a Conservative council to choose.

It reflects, though, a contradiction at the heart of council housing today. Until 1977 – as The Great Estate, another, more elegiac, BBC Four documentary illustrated – councils allocated housing according to waiting lists, and local connections counted for a great deal. Some of those tenants remain, and some may now be in Westminster's £50,000 class. But the post-1977 tenants have been allocated their tenancies according to need, as calculated according to a rigid system of points. The result has been a sharp narrowing of the social mix, but also burgeoning "business" opportunities for anyone tempted to exploit the gap between their rent and the local market rate.

Bilton exposed a variety of scams – from shysters advertising for tenants prepared to be bought expensively out, to individuals who played the system to secure multiple tenancies, to legitimate tenants who simply sublet the flat themselves and pocketed the difference. If you are looking for a cheap rental in London, the odds are good that you will unwittingly encounter a council flat scam. You have only to overhear conversations on any bus to realise how prevalent such practices are.

In Bilton's programme, efforts by councils to detect and clamp down on such fraud seemed dismally small-scale and ineffectual. Their investigations were helped by the fact of council and private tenants living cheek by jowl in former council blocks, so that neighbours no longer necessarily knew who was an owner and who a council tenant.

This is the point at which you probably expect the ritual rant against Margaret Thatcher's council house sales, which "creamed off" all the "best" housing, left only the worst in public ownership and "catastrophically reduced the housing stock". Well yes, and no. I have no problem with the "right to buy", as it was first implemented. I do think that the tenure required to qualify for subsequent sales was far too short, that the discounts were far too high – inviting speculation – and that all the receipts should have been reinvested in new social housing.

However it came about, though – and Labour's 1977 homelessness legislation and the credit bubble of the 2000s had at least as much to do with it as Thatcher – the huge public-private rent disparity in many areas makes for a profoundly distorted market infested with fraud. Nor will charging the relatively few better-off council tenants do much to help. Nothing short of a "big bang", which stops the old system in its tracks and starts again on new principles, will do more than nibble away at the edges.

Timed to dovetail with the changes in housing benefit from April 2013, all council tenancies should be declared void and all rents raised to a competitive market level. Every local authority should be required to conduct a complete inventory of its housing stock, and all existing tenants would have to reapply, with the assurance that those occupying their houses and flats legitimately – including those with higher incomes or more space than they were deemed to need – would have their tenancies automatically renewed. Housing benefit would make up the difference for those unable to afford the new rents.

There would be much weeping and wailing on the part of many councillors, charities and anti-poverty campaigners, not to speak of doom-laden predictions about "little old ladies" panicked about losing their homes. Priority should be given to reassuring them first of all. But if incapacity benefit can be overhauled, as is currently being done – with less of an outcry, incidentally, than was forecast – then similar medicine can, and should, be applied to the corruption that bedevils Britain's social housing.

m.dejevsky@independent.co.uk