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No-one lives in a council property for free. Those who are on low incomes or not working will simply claim their benefits through the normal benefit application process in the UK, and they would pay their rent in the usual way. Effectively, they could be living for free because all their income is from benefits. However, the rent money would still have to exchange hands so to speak. Hence the reason why some people struggle on benefits - rent goes up but benefits aren't raised as much. This is very controversial as some people choose not to work and fleece the system for every penny - ending up much better off than those who work very hard for their money!
Finally, there's shared purchase. The councils claim that they've never got any money but the 'out sourced' companies are building properties all the time. Often, when big developers buy up land to build a housing estate, they are given the go-ahead on condition that 10% of the properties are allocated for 'social housing'. There are various shared purchase schemes at the moment. For example, you could (as long as you're on the housing list) buy a house worth �100,000 but only mortgage 50% of it. You would then have a mortgage for �50,000 and pay rent for the other half. You are often allowed to increase the percentage you own as the years roll on and you can afford more. House prices in the UK have gone through the roof in recent years so this is sometimes the only way first timers can get on the property ladder. I sold a 2 bed house 6 years ago for �80,000. It's now worth �142,000 !!!! The 3 bed I now live in was purchased for �112,000 and is now worth �190,000 !!! It's good for us already owing our own houses but not so good for our children who will want to buy someday - unless we pop our clogs early :o))))))