Do housing allowances increase rents? 

Do housing allowances help renters? Microeconomic theory suggests that it depends.  Among other things, it depends on the supply curve: if supply is very rigid, then housing allowances push the demand curve outward and are almost entirely reflected in higher rents, which implies that, all things considered, renters are not made better off.

In 1993, the New Zealand government initiated a new housing program, the Accommodation Supplement (AS) program. This is a non-taxable cash income supplement to low-income individuals or families with high housing costs relative to their income. AS  payments can subsidize accommodation costs from rent, board, and also home ownership. AS payment amounts vary by the size and benefit status of the family, their location of residence and actual accommodation costs, and are subject to income and cash asset tests.

A 2019 study examines the effect of the AS program. Since the policy had a specific area where it was in effect, the authors perform a difference-in-differences analysis using as treatment and control groups the rental markets on either side of the boundary of AS scope.

The figure below summarizes some of the main findings. Time is measured on the horizontal axis, with a vertical line representing the time of AS implementation. The vertical axis measures average support (top panel) and average rent (bottom panel), both in New Zealand dollars per week. In each panel, two lines are drawn, a solid line corresponding to the treatment group (inside the area) and a dashed line corresponding to the control group (outside the area).

As can be seen from the top panel, accommodation support increased sharply, bringing the targeted area to levels comparable to the control-group area. In terms of rents, however, we do not observe a very significant change in the difference between treatment and control groups during the first year, and a small decrease thereafter. In the authors’ own words, 

We find no significant effect on rents in the year following the policy change, perhaps reflecting time lags for tenancy rents to adjust. Focussing on the second year after the policy change, we estimate that accom- modation related support payments increased by $6.81 more, on average, for those on the inside than the outside, and that rental payments increased by $2.44 per week more. 

The authors also find that “most of the impact on rent was associated with tenancy changes, perhaps because that is when rent changes mostly occur.”

Dean R. Hyslopa and David Rea

Do housing allowances increase rents? Evidence from a discrete policy change

Journal of Housing Economics 46 (2019) 101657