Tuesday, 31 May 2016

Accommodation Supplement = Landlord Subsidy

 

The govt’s Accommodation Supplement has been getting air time today because of long-term mistakes in how it’s been paid, and because it received an $80 million increase in the budget.

Did you know how much this Accommodation Supplement costs taxpayers every year? $2.2billion is the answer, paid out every year to 286,000 people who qualify for it. (That’s around $8000 each per year, in case you were wondering, the total amount being far more than even most ministries are able to spend every year, paid to more than half of the 450,000 or so rental households.)

Do you know where all that dosh ultimately ends up? Of course you know: it washes straight through tenants into the bank accounts of their landlords – subsidising higher rents, leaving landlords better off and beneficiaries as far behind the 8 ball as before.

The euphemistically titled Ministry for Social Development, who hands out this largesse, itself calculates thatlandlord capture varies from 30 per cent to 78 per cent of the increase in subsidy.”

Do you think $2.2 billion of taxpayers’ money washing around is enough to shift the market? To actually increase the rents that people pay? To help make investment properties more attractive to buyers, and more expensive to rent? to capitalise higher rents into higher prices paid for rental properties? You bet your sweet life they do. The answer is: all of the above.

Which makes the Accommodation Supplement little more than a Landlord Subsidy.

Sure, the higher rents may mean landlords are able to make the general standard of rental accommodation somewhat better than it would be otherwise. But the general rental everybody pays – and the general value of rental property based on yield – are much, much higher than they would be otherwise.

How much higher? Let’s make it simple by using the classical calculation for prices, being Price = Money Demand / Total Supply, giving us $2.2 billion / 450,000 = $4,900 more every year taken from taxpayers’ pockets and deposited into landlord’s. Capitalise that general rental increase at today’s rule-of-thumb yield of five percent, and that’s nearly a $100,000 rise in price for the general rental property as a direct result of this Landlord Subsidy.

Nice.

(You may like to ponder at this point the idiocy of those arguing for a capital-gains tax, who effectivelysupport giving tenants an accommodation supplement with one hand, while taking the cash back with a tax on their landlord.)

So as long as the supply of rental housing remains constrained (and under National’s talk-loudly-and-do-nothing housing policy), then the Landlord Subsidy will represent nothing more than a five-to-six-figure gift to rental investors, bought at the expense of taxpayers, private renters, and everyone priced out of the market by this extra $2.2 billion bidding property away from them.

As Frederic Bastiat used to say, the policy represents one profit, and at least two losses.

You’d call it another example of the Law of Unintended Consequences, except that only a moron (or a welfare weeny) would think the consequence was unexpected.

There is no part of the economy more stuffed up and regulated by government than housing – at the intersection of four the most regulated parts of our economy*. So this is just one more distortion in what is already one of the most stuffed-up-by-government parts of the local economic system.

No wonder the housing market is broken – with no general recipe to fix it.


* Land supply, money supply, construction, local government.

RELATED POSTS:

  • “Readers might also like to read Malthus's 'High Price of Provisions' with the Accommodation Supplement in mind -- he explains perfectly why and how the Accommodation Supplement raises rents, and how it represents an almost direct subsidy to landlords.
        “Once again: one profit, two losses ....”
    Malthus explains the problem with #TeamKey’s first-home buyer subsidy – NOT PC
  • “The Greens' Metiria Turei calls the supplement a "landlord subsidy" and points to it as part of the general problem of housing affordability: it pushes up the price of housing.
        “In the current state of the world, she's mostly right. Given a near-vertical supply curve for housing, because land use policy in New Zealand is a complete mess, anything that subsidizes demand mostly gets capitalized into land prices. So it is a subsidy to landlords, mostly via capital gains.”
    Accommodation incidence – Eric Crampton, OFFSETTING BEHAVIOUR
  • .

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