By Claire West

A key plank of the Government's drive to build a 'New Welfare State', which would substantially reduce housing benefit allowances, could leave 160,000 claimants in London trying to squeeze into just 46,000 homes, according to new figures.

Research by the National Housing Federation shows that when housing benefit allowances are brought into line with the bottom third of private sector rents instead of the bottom half as few as 46,000 of the 160,000 the capital's private sector homes currently occupied by benefit claimants would sit within the new band.

That would mean the rent charged on 114,000 homes occupied by claimants would suddenly be too pricy for the occupying claimants, leaving them at risk of losing their homes.

While some landlords may reduce rents in line with the new upper limit, there is a fear that the housing market in London is so strong that most would simply decide to keep their charges at the same level and let out their homes to non-claimants.

This would mean that many of the 114,000 households in the homes that would become too expensive would either have to crowd into the drastically reduced pool of affordable homes or leave the capital entirely.

The issue of families being 'squeezed' out of their existing properties is set to hit families across the capital, not only in expensive boroughs, such as Kensington and Chelsea, and Westminster, but also in areas such as Islington, Southwark and Lambeth.

The new research, based on official government figures, adds weight to growing concerns that the changes being proposed by the Government could force huge numbers of poor and vulnerable people to leave the capital, and move away from areas of employment opportunities, while pushing others into overcrowded conditions.

Official government statistics already show that the introduction of housing benefit caps will hit a range of vulnerable groups, such as low paid workers, single parents, people with disabilities and black and Asian households.

The proposed reduction of housing benefit allowances - called local housing allowances - is due to come into effect from October 2011.

Federation chief executive David Orr said: "London is one of the most vibrant and socially mixed cities in the world - and yet the diversity, for which it is so famous, is under threat from the Government's proposal to bring all housing benefit allowances into line with the bottom third of rents.

"The fact that the changes could push 160,000 vulnerable households into competing for just 46,000 homes is extremely worrying and morally wrong.

"The situation could easily lead to housing benefit claimants being pushed out of huge swathes of the capital - including places such as Islington, Southwark and Lambeth."

He added: "The Government has said all along that protecting the vulnerable is its priority - and yet the reduction of housing benefit allowances in line with the bottom third will hit the poorest Londoners the hardest."