Revisiting the Housing Allowance Algorithm and its Theoretical Implications on Rental Housing Demand and Rents. Evidence from New Zealand.

Abstract

The Accommodation Supplement (AS) is a means-tested direct cash allowance to assist low- and middle-income households in the private residential market in New Zealand. Generally, housing allowances are argued to be inflationary due to the programmes reliance on the market to satisfy the ‘subsidized’ demand. This argument makes it market distortionary a priori. I deconstruct the modern housing allowance algorithm (for rent) and challenge its commonly held notions in literature. My theoretical contribution posits that housing allowances are not a price variable, and neither are they a permanent income add-on to a household’s intertemporal budget constraint. I show that the AS functions similar to a negative income (and wealth) tax (NIT) where the subsidy, in general, is generated inversely to income and wealth and diminishes over time with higher savings and incomes. Theory eludes us under the housing allowance context. My academic contribution provides an augmented demand framework for rental housing at the household level. To this end, I analyse the full Household Economic Survey (HES) data for 2008, 2011, 2014, 2017 to understand housing consumption behaviour by income quintiles. Housing demand, it seems, follows the Schwabe’s law. For a microeconometric empirical analysis, I employ a ‘fixed-effects’ model. Using New Zealand Census panel data (2006 and 2013) and aggregating nearly 1,500 census Area Units (AU), my study manages to cover over 90% of households. My housing allowance data is the complete universe of subsidy recipients at the Area Unit level providing data for both, demand for or participation in the scheme and cost of or redistribution of incomes under the subsidy scheme. In a natural experiment setting I exploit these ‘plausibly exogenous’ variations in demand and expenditure on the subsidy alongside variations in rents experienced post Global Financial Crisis with additional controls for drivers of rent. I extend the empirical model to control, as well, for spatial interactions between Area Units that are not time invariant via a Geographically Weighted Regression (GWR) to complement the analysis. Contrary to what is argued in the literature, I find statistically significant results for the increase in the subsidy’s demand and cost at the submarket level to affect market rents negatively across the New Zealand rental housing markets over the study period (2006-2013). For low-income renters the subsidy, over time, did not have a statistically significant impact on their rents. As per my thesis, the presence of such monies signals more pronounced poverty or ‘systemic poverty’ of a cohort at the housing submarket level. Poor renters rent low, can have tenure discounts, and are susceptible to be part of the filtering stock. The cross-section results reinforce this. For policy, I construct an index to identify and manage the scheme’s objectives. I uncover evidence of the subsidy’s distribution across households to influence aggregate consumption demand for food. This effectively captures the incidence of the housing cash transfer suggesting welfare gains.