George Osborne’s announcement that families living in social housing and earning more than 30,000 (or 40,000 in London) will have to pay higher rents is the latest in a series of policy announcements framing the role of council housing during austerity. By tackling the question of who deserves social housing, the chancellor’s policy reveals the tensions between principles and pragmatism in addressing London’s housing crisis.

The announcement responds to the notion that is unfair for those earning above-average salaries to live in subsidised housing while others earning the same amount (and in many cases significantly less) must pay market rates to private landlords.

As low to middle-earners are priced out of London, boroughs are becoming increasingly polarised

But aren’t rent rises for higher earners an attack on aspiration? This government has lamented a culture of worklessness that pervades council estates and has cut benefits with the aim of encouraging people into work. Yet Osborne’s proposals risk discouraging tenants from working in case they end up paying more for their home.

Employment among working-age adults housed by local authorities and housing associations is lower than those paying private rent. Research from 2012 found just 44% of working-age adults in these homes are in employment, compared with 69% of those who rent privately. But there is little evidence that this difference emerges from welfare dependency. Instead, higher rates of unemployment are down to the sharp decrease in council housing stock caused by the right to buy and restrictions on councils’ ability to build their own homes. Quite simply, the fewer social homes there are, the harder they are to allocate.

Many want councils to house a broad cross-section of working people but without enough homes this could leave many of the neediest people homeless. The reality is that who gets housed is prioritised by need, with the most desperate cases jumping to the top of the queue. Mixed communities have long been a thing of the past.

In London and other areas that have experienced a huge increase in house prices, this is threatening mixed communities at a broader level. As low to middle-earners are priced out of London, boroughs are becoming increasingly polarised.

Whether social tenants on above-average incomes should be allowed to live in council housing cuts to the heart of the debate as how housing resources should be allocated when supply remains in the doldrums. Putting aside the policy challenge of how the supply of housing is increased, policymakers must juggle the multiple aims of housing those most in need, maintaining mixed communities and ensuring vast swaths of the workforce are not priced out of expensive cities.

To start with, the income generated from increased social rents should primarily be used to help to bridge the gap between social housing supply and demand. But as well as worrying about dividing an ever smaller pot, we need new ideas for the housing sector.

One solution may lie in increasing the provision of intermediate housing – homes affordable to those who cannot pay full market rent and yet whose relative wealth means they are not eligible for social housing. The big gap between these tenures means there is little scope for higher-earning social tenants to move on; easing this transition by providing more intermediate options would open up more social housing for the most needy.

Kat Hanna is research manager at the Centre for London thinktank. T he Centre’s project on London’s affordability crisis reports in the autumn.