Accommodation incidence

Poor people in New Zealand are eligible for a subsidy towards accommodation expenses: the Accommodation Supplement.

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. 

If developers were allowed to build new housing in response to demand, either by increasing density or by building out, the incidence of the subsidy would be entirely different. 

In the graphs above, we map out supply and demand for rental accommodation among low-income cohorts. 

D represents their demand curve. It slopes down for the usual reasons: when housing is expensive, people demand less of it. Think less of the grosser forms of substitution, like homelessness, but rather of the intensity of rental use: families doubling up in accommodation units and many kids sharing bedrooms. When housing is expensive, people double up; when it's cheap, we have more space per renter. D+A gives demand when low-income renters have access to the accommodation supplement: the vertical distance between D and D+A is the level of the subsidy.

S is the supply curve: the price at which developers bring new low-income units onto the market. It slopes up as well. But, the slope differs between the graph at left and the one at right. On the left, supply is relatively inelastic. And that's the current state of the world in New Zealand. It is illegal to provide low income housing, or any kind of housing, cheaply. Councils restrict the supply of land such that its price is bid up. And, they make it illegal to put self-contained flats into existing homes: one of the quickest and least expensive ways of expanding the supply of more affordable units. And in that state of the world, the accommodation supplement does little to expand access to accommodation; rather, it mostly confers rents upon existing landlords. The quantity of housing shifts outwards from Q to Q', but most of the supplement is taken by landlords. It's then capitalised into land prices, helping to further push up the price of land that's made scarce by regulation.

In the happier state of the world, that pictured in the graph on the right, developers are able to bring new supply onto the market when demand for it exceeds the cost of providing it. The regulatory barriers are eased and the supply curve is consequently more elastic. In that state of the world, the accommodation supplement results in a greater supply of housing for lower-income tenants, with less of it turned into a transfer to landlords. The government is spending more in total on the accommodation supplement, but is also getting a lot more housing for its spending; it could achieve better accommodation outcomes under this regime even with moderate reductions in the supplement paid. That's because the spending mostly turns into new housing instead of into transfers to rentiers.

To keep the graphs simpler, I only rotated the supply curve. More realistically, the supply curve would have been pushed out, resulting in lower ex ante prices and higher ex ante quantities; there's less need for an accommodation supplement where regulatory inflation of land costs effectively bans developers from building low cost housing.

Stephen Franks illustrates the current political equilibrium:

For most of New Zealand's wonderful years of egalitarianism you could buy land for your house for around one year's average earnings, and build your house for about two and a half year's earnings. After taxes and living expenses you could expect to get rid of most of your mortgage over the next 10 to 15 years.

Then the baby boomers inherited political power. Already set for housing they don't need to be grateful to developers. They can despise subdividers. They'll rally to block densification, and 'sprawl' and highrises and infill units and anything that might offend their 1970s aesthetic sensitivities or glorious views. They feel the virtue in sending others to commute in trains from apartments on 'hubs' irrespective of the surveys that show fewer than 5% want to live like that.

The more scarce is housing the better off the boomers are. If you are already on the property escalator of course you will demand 'protection' of 'heritage' building and suburbs. It guarantees your overinvestment in housing. Artificial scarcity will not be exposed for the selfishness it is. Bankers of course agree. Otherwise they might find they've lent more than houses are worth, as they have in the rest of the world.

Zone more land to allow higher density use, allow more subdivision on the edges of town, and implement congestion charging so negative sprawl externalities are handled adequately. Current sets of land use restrictions build massive fragility into our systems so that private owners simply cannot respond to sudden changes in housing supply.