There will be "casualties" from the coalition Government's decision to cap the level of housing benefit and local housing allowance, a Tory minister has acknowledged.

Baroness Hanham, a junior Communities and Local Government minister, told peers: "Yes, there will be casualties. I don't have any doubt that there will be casualties from that."

Lady Hanham, a former leader of Kensington and Chelsea Council, added: "It will be up to local authorities to deal with that as sensitively and carefully as they can, if people have to leave where they are."

The minister, who was replying to a Lords debate on affordable housing, said the review of housing benefit had, like cuts to the budget of the Homes and Communities Agency, been "based on the economic situation".

"The fact of the matter is that the costs (of housing benefit) have gone up from £14 billion two or three years ago to £21 billion and that's an enormous sum of money."

There had also been "rare examples of people receiving housing benefit at an enormous rate", up to £2,000 a week in some cases, Lady Hanham told peers.

Labour's shadow minister Lord McKenzie of Luton protested: "I find it difficult to find words strong enough to say how much we deplore the changes to housing benefit."

Lord McKenzie said it would mean a cut of £1.7 billion per annum by 2014/5. "These cuts will mean a majority of tenants will get less in support than they pay in rent, forcing many to move or even end up homeless. It will create ghettos of the poor."

And he demanded: "Why on earth should anyone lose 10% of their benefit just because they are unemployed for a year?"

Earlier, at question time, Lord McKenzie had condemned the cuts as "Draconian, indeed wicked". Lady Hanham said the rise in costs was "completely unsustainable".

The minister said the changes would "refocus the welfare system on supporting those who should be working, while continuing to provide for those most in need". They would also make better use of housing by "freeing up larger homes for overcrowded families".