Why the accommodation supplement does little to help low-income tenants

In an article in The Conversation earlier this year, Edward Yiu and William Cheung (both University of Auckland) discuss New Zealand's accommodation supplement for low-income renters:

New Zealand’s unaffordable housing market has left many low and middle-income families reliant on the accommodation supplement to cover rent and mortgage payments.

But our new research has found the scheme, which costs the government almost NZ$2 billion a year, might not be an effective tool in addressing the country’s housing affordability crisis.

Introduced in 1993, the accommodation supplement is a weekly, means-tested payment designed to subsidise part of a household’s rent or mortgage. The supplement is calculated using the actual rent or mortgage payments a client is paying.

But our study looking at data from Auckland between 2019 and 2023 found accommodation supplement rental subsidies were not delivering meaningful improvements in affordability for renters.

That the accommodation supplement doesn't deliver improvements in affordability for renters is consistent with a simple model of the market for rental housing, as shown in the diagram below. This is the stylised version of this market that I use in my ECONS102 class, and is based on the rental market for land. In this market, the supply curve is very inelastic (very steep), and starts at a positive quantity (meaning that if rent falls to zero, there is still a positive quantity of land that is made available to rent). That's because of two reasons. First, this market includes owner-occupiers. They would rent land to themselves, even if the rent falls to zero (that explains the positive quantity when the rent is zero). Second, the quantity of land supplied doesn't respond very much to the rent - landlords can't suddenly make more land available - as Mark Twain once noted: "The thing about land is, they aren't making it anymore". Twain isn't quite correct, as land can be reclaimed from the ocean. However, landlords are unlikely to be very responsive to changes in rent, making the supply curve very inelastic.

Now, consider this market operating at equilibrium (with no accommodation supplement). The market operates at the point where supply meets demand, at a rent of R0, with Q0 housing (technically, land) rented. The accommodation supplement acts as a subsidy, paid to the tenants. We show this on the diagram with a new curve, D+subsidy, which lies above the demand curve D. It acts like an increase in the demand for rental accommodation. The price that landlords receive for housing increases to RL. That is the rent that tenants pay to the landlords. However, once the accommodation supplement is subtracted, the effective rent paid by the tenants decreases to RT (the difference between RL and RT is the amount of the accommodation supplement).

But notice the difference in the rents with the accommodation supplement to the equilibrium rent. The rent that landlords receive increases by a lot (from R0 to RL). The effective rent paid by tenants is barely affected (decreasing from R0 to RT). Landlords benefit the most from the accommodation supplement, with tenants barely benefiting at all. That is because the side of the market (supply or demand) that is more inelastic will always capture most of the gains from a subsidy. In this case, the supply is very inelastic (and certainly more inelastic than demand), so landlords stand to gain most from the subsidy.

It gets worse though. The increase in rents that landlords receive also affects rents paid by tenants who don't receive the accommodation supplement at all. These higher-income tenants pay higher rents as well, because they have to compete with the subsidised tenants for housing. However, the government doesn't provide them with any subsidy, making them clearly worse off as a result.

So, it should be no surprise that the accommodation supplement does not deliver meaningful improvements in affordability for renters. It barely has any effect on the effective rent paid by tenants who receive the accommodation supplement, and raises the rents paid by tenants who don't receive the accommodation supplement.

Are there better options? Yiu and Cheung suggest that:

...mortgage support seems to level the playing field more effectively than rental assistance.

Possibly. If a mortgage subsidy allows some low-income tenants to become owner-occupiers instead, then they will benefit greatly (from capital gains, as well as many other benefits associated with home ownership). If the mortgage subsidy is given to landlords as well, it might help to lower rents. Overall, it could well be more effective than the current accommodation supplement paid to tenants. It is certainly something worth further exploration.