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Housing Affordability and the Accommodation Supplement

This is another guest post by Lucy JH

In this blog post, I want to focus on the accommodation supplement which I think is probably a small but significant contributor to housing unaffordability in Auckland. I also think it’s a bad benefit for a few reasons. To explain why I wanted to begin by giving a quick example.

You are a landlord and for some time you have been renting your two bedroom unit in Auckland Central to your tenant at a rate of $310/week. You decide to make your rental more profitable you will raise rents by $50/week. This is within market rents for the area so a fair and legal thing to do.

You go to your tenant who is working full-time but only earns $800/week and they tell you that they cannot afford the higher rent and will soon move out. Eager not to lose them, you say, “Well, why don’t you apply for the accommodation supplement? It will mean you get an extra $60/week in subsidies so you actually pay less rent, while I collect more.” Your tenant applies and is granted a subsidy. Everybody is happy.

For some reason, when I first heard about the Accomodation Supplement this is literally the first scenario that popped into my head. While obviously, nobody in this scenario has done anything wrong (the landlord is helping out a tenant, the tenant is applying for a benefit they’re entitled to) the overall effect on NZ society might not be so good.

I think this scenario also demonstrates that the Accomodation Supplement is quite open to being exploited in some cases.

Now maybe nobody else in the whole of New Zealand has had these thoughts but, even if they haven’t, I still don’t think the Accommodation Supplement is a good benefit, especially from a perspective of improving housing affordability. In this blog post, I want to explain why.

For those of you who have never heard of the Accommodation Supplement, you can read more about it here. Basically, it’s an allowance that the government pays out to people who earn below a certain amount to help them with their living costs.

You can get the Accommodation Supplement anywhere in New Zealand but it is highest in areas where housing costs are more expensive (you can see a breakdown of the areas it covers here). Many of the top areas (where you are eligible for most support) are in central Auckland or the North Shore.

It is not available to people who live in state houses who get a different kind of housing support.

The amount of money our government spends on the accommodation supplement is really quite high - $1.2 billion in 2011. This is also predicted to increase quite rapidly to $2 billion by 2016.

Government expenditure figures are typically pretty meaningless to most New Zealanders. So just to put that sum in context, that is more than twice the amount of money – $441 million – our government spent on Conservation in 2011. It is also still fairly hefty compared to the whopping $8.8 billion we spent on the pension, which is our most expensive benefit by a country mile.

So we’re spending quite a bit on the accommodation supplement and it would be nice to think we were getting a good return. But I think it is actually a deeply problematic benefit for a few key reasons.

First, the accommodation supplement distorts markets because it is a direct subsidy to help people pay for just one cost (housing). It seems quite likely that an unintended consequence of such a subsidy would be to drive up house prices and rents, particularly in the areas where the accommodation supplement is most generous. How much of an impact the Accommodation Supplement has actually had on rents I don’t know – has anybody seen any research on this topic?

Second, the accommodation supplement is not tightly targeted enough to those in genuine need. You can see the various cut out points and thresholds online but here is one table as an example.

Accomodiation Suppliment

For example, if you’re a single person and you earn less than $953/week (before tax), you live in Auckland Central and you pay more than $51/week (I think although I feel I must have misread this) in rent you’re eligible for the accommodation supplement. True, you probably don’t get a huge amount per week – maybe say $50 – but you still get a state subsidy to cover your living costs.

I know that life is hard for a lot of New Zealanders, costs are rising and wages are stagnant. I absolutely agree that those who are earning lower incomes probably desperately need this benefit to get by. I don’t want to comment on single parents or couples with children because, not having any kids myself, I don’t think I can say much about their situation.

But I have spent most of the last five years living in central Auckland on salaries of less than $950/ week and I’m pretty confident you can live quite comfortably in that situation and even save some money.

To me it seems odd that this benefit is available to even those at the top end of the scale (e.g., over $800/week as a single person or $1000/week as a couple).

What do you think – do you reckon the Accommodation Supplement is distorting house prices or rents?
Do you think it is too loosely targeted? Is it acting as a “subsidy to landlords” as some critics claim?
Are there ways the government could either make this benefit more effective or eliminate the need forit and, if so, how?

24 comments to Housing Affordability and the Accommodation Supplement

  • I know a lot of students who take it up, simply so they can focus on their studies and not have to worry about a part time job. It really does need to be better targeted for those in the most need. There should be better co-operation between local and government agencies about how this money could be better spent, I am not sure if landlords are trying coax people into applying for it to fill their pockets but I would not be surprised if some are, just as there are benefit fraudsters, and that there are tax evader multinationals either. We can only hope it remains a minority over the entire private renting area.

    I’ve been offered this as well. While for myself it was only an extra $10 I refused it because I could live within my needs and budget towards the future, that seems to be the biggest problem that people cannot budget to save themselves and they get into debt and the tax payer bails them out with funds like this.

    If the government was able to cut that 1.2 billion expense by even 10% and put it into house building (not state houses but more along the KiwiBuild scheme) they could create 300 additional houses per year (based on 400K land and build). It may only be a small amount of houses being built but if they actually concentrated in areas of extreme need it will make a difference and will have to make sellers think about that 400K (doer upper) they have on the market and actually sell the house on its real worth and not the inflated price the market has given it. (correct me if I’m wrong but) 400K is an ‘affordable’ mortgage for working families and would allow people to break out of money trap of private renting or buying an inadequate house which could pose a potential health risk. My Uncle won’t even insulate the house my sister and neice stays in, even with that $1000 insulation grant that is around. I’d hate to see the conditions of other rental accommodation and the lack of inaction to bettering the conditions of their tenants.

    • bbc

      AFAIK students aren’t eligible for this, the students you know getting housing support would be getting the accomodation benefit which tops out at $50 a week and is basically only for people who are also eligible for the student allowance.

      • Liz

        Not entirely true. If a student is not eligible for the student allowance then they can sometimes still apply for the accommodation supplement. Also, there are weird circumstances where someone might be eligible for more from the accommodation supplement than from their student allowance, in which case they get a top-up from the supplement.

  • harrymc

    Lucy, I agree that the accommodation supplement has fallen victim to the law of unintended consequences. It has become a de facto subsidy to landlords. However, how to phase it out is the problem. Merely abolishing it full stop would cause a lot of dislocation. New Zealand is a low wage country and people find accommodation costs in Auckland are beyond their means.
    Most of the remedies are anathema to this government: raising benefits, lower taxes on the low paid, actually doing something to raise wages like raising the minimum wage, a capital gains tax on second houses.

    • jonno1

      harrymc, I agree in general with your first para. But you really need to rethink your second para in the light of the “unintended consquences” you allude to in para one. Three out of your four suggestions will not assist the low-waged one iota, while the other (lower taxes) is already in place, ie zero net tax up to $xxk (I don’t want to quote an incorrect figure, but I believe it’s quite substantial).

  • jonno1

    Wow, I’m a landlord and have never heard of this! But then, it’s an issue for the tenant and not the landlord’s business. I’m in two minds over subsidies, firstly, there’s always a risk that being overly generous will lead to distortions (eg the problem that Christchurch employers are having getting/keeping minimum wage employees who are otherwise on the dole). But OTOH, if the tenant is working to the best of his/her ability, ie trying not to be a burden on other taxpayers, then a helping hand is reasonable. It’s no different really from WFF which, while well-meaning, is also open to abuse. Of course it would be much more tax-efficient to adjust* tax rates, reduce/eliminate subsidies, and cut out the bureaucracy involved, but that’s another story.

    As for landlords not insulating their properties or otherwise skimping (Drake’s comment), it may depend on whether the landlord can actually afford it, ie whether they are living off the rent or if it’s just a sideline. In my case it’s the latter (part of retirement portfolio), and my approach is to maintain/add future value while not making a loss. But others, including myself at some future date, may actually need all the income they can get.

    *I initially had “reduce” but replaced it with “adjust” in an attempt to avoid cries of dismay over Cullen’s “rich pricks” creaming it. All I’m suggesting is that tax rates should logically match realistic living costs without the bureacratic burden of wealth redistribution.

  • walkable

    I work for MSD, and while what you say is absolutely valid, I’d like to point out the Accommodation Supplement more serves to subsidise – via the taxpayer – NZ’s low wage economy, in a general sense. I’m just not sure it’s being gamed in the way you describe, but good post. I’d say a big whack of people are unaware of their entitlement to the Accommodation Supplement, and it could cause the Government a budgetary pressure if everyone applied – you don’t actually have to be a beneficiary to receive it of course…

  • Owen Thompson

    Accommodation Supplement is a subsidy to landlords, same as WFF as a subsidy to employers. If a living wage was paid, then employees would be able to pay their own accommodation costs.

    • Matt Lee

      I don’t know if you are right. “All things being equal”, you would expect WFF to increase the level of wages, via a reduction in labour supply.

  • harrymc: It’s a bit like the Common Agricultural Policy in Europe – originally a plan to relieve wartime food shortages, it eventually mutated into Europe’s biggest corporate welfare scheme. Like the Accommodation Supplement, it’s in dire need of reform, but vested interests are too powerful to take the first step.

    At the very least, the AS could be far better targeted.

  • Matt Lee

    You right about the distortionary effects, but to some extent this applies to any tax or transfer policy.

    I think the idea of the accommodation supplement was two-fold

    to provide a level of assistance to all households on low incomes, instead of only those fortunate enough to avail themselves of a state house.

    and, to introduce a variable component into the benefit schedule, reflecting the higher cost of housing in Auckland and Wellington compared to the provincial New Zealand.

  • Anthony

    NZ is not a low wage economy. If it was, overseas countries would be relocating labour intensive manufacturing here along the lines of China, Vietnam, etc.
    $1.2B is huge. Another scam between family members is to rent houses to each other and this would be another situation where this benefit could be ripped off.

  • Confused!

    Not saying a disagree with what you wrote Lucy. But is this really a “transport issue” in a “transport blog”? I have the feeling this topic would best be covered in other sites related to cost of living, or a left wing political blog.

    Confused by this topic being on here. Almost as relevant as blogging on the Government´s free trade agreements with various countries.

    • While this is called transportblog and most of our posts are directly related to transport, we have also evolved to cover a greater range of urban issues. Lucy has been doing a series of posts on housing affordability which is clearly an issue the city/country faces and this is just one aspect of it.

      • Mr Anderson

        Yes and housing has a huge connection to transport outcomes, which is why we focus much more on housing issues than on, say, free trade agreements.

    • Bryce P

      For instance, if Manukau was heavily intensified, housing wise, there is a pretty good chance of some affordable housing very close to the town centre and PT close by which could lead a family to not requiring a car. It is all linked.

    • Bored

      Evolved? diluted rather…

      i read this blog for transport related issues, not financial or property issues, there are other blogs that deal with that.

      • Financial and property issues are transport issues. How the city is built has a significant bearing on its transport infrastructure and the options available to its residents, and the costs of transport are a large portion of household budgets. If it’s expensive just to have a roof over your head, affordable transport becomes ever more important.

  • Confused!

    Bryce – what you say makes sense, of course. However, moaning about people getting allowance from the Govt has nothing to do with what you mention.

    Matt L / Mr Anderson – Sure it’s an issue this city/country faces….still allowances given to low income earners is not a transport issue, whatsoever.

  • Your guesstimates have some issues. Although you’re reading the top cut-off point right, you haven’t touched on abatement rates (the rate at which additional income causes the benefit to reduce).

    Abatement will be occurring at a straight-line rate (every dollar you earn above the threshold will see $0.x cut from the supplement), and we can calculate that rate as maximum_supplement/(cut_off – threshold). That gives us an abatement of $0.25, meaning every dollar earned above the threshold will reduce the supplement by 25 cents. Using that, we can see that by the time a person reaches the cut-off they’re only getting 25c of supplement (yes, really. There’s no minimum supplement, other than $0). If you’re getting $50 as a single person your weekly income is $723. It’s just over $39k per year, which is over $2k belowthe mean waged income for the whole country. That’s also gross income, not net, so if you’ve got a student loan your in-the-hand income is $567.44 (without student loan it’s $603.04). That’s actually not terribly much.

    The accommodation supplement is absolutely a subsidy of low-paying employers and over-charging landlords (both categories of whom will, largely, be absolutely against welfare, of course), but don’t get too caught up in how much you think people who are earning an OK income can get. Once you get near the top end you’re getting very little, and most people don’t even both applying because it’s not worth the hassle.

  • jingyang

    I’m not terribly impressed with this post. Here in Wellington for example my flatmate currently receives $200 a week in unemployment benefit, with a maximum of $76 added in accommodation allowance. That $276 amounts to approximately 70% of the minimum after tax- wage – and you are seriously suggesting that this $76 simply amounts to a subsidy to landlords? Don’t make me laugh.
    I very much doubt that if the “subsidy” was removed that $200 a week would be enough to survive on in Wellington or Auckland for that matter. I bloody cerytain too, that rents would not fall if this supposed “subsidy” was removed either.
    If you want to know the real culprit for the expensive housing in this country, I suggest you read the latest North and South magazine.
    Why don’t you stop the bene-bashing, and come up with some practical solutions to resolving the country’s housing crisis.

  • Confused!

    With a transportblog going off the rails onto completely unrelated topics, I am too not over impressed with this post. Don´t get me wrong, I like Lucy´s post, just in the wrong forum.

    If the transportblog tries to be everything to everyone it will become not very good at anything. Just like the CBT forum users can often make the topics go completely on a tangent.

  • LucyJH

    hi guys. Thanks for your feedback. I wasn’t able to respond sooner as I was busy. I agree that this blog post isn’t too closely related to transport. I was planning a few more posts about housing that are much more directly related to transport and urban design. This one was a bit of a tangent because when I started looking into housing affordability I found out a bit more about the accommodation supplement. I thought it was an interesting benefit that is quite problematic in some ways although I agree it is difficult to see a better solution.

    @jingyang. I absolutely agree that people on lower incomes really need the accommodation supplement to survive. My question is whether it is really the best way to support them? For one thing, every new benefit we create adds a level of complexity to the system and increases our administrative costs. Second, arguably the more benefits we have the more confusing the system becomes for people in need to deal with and the more likely they are to miss out on at least some of their entitlements. Personally I would happily pay more tax to see benefits rise across the country. I’d also support raising the minimum wage which would effectively reduce the number of people who need this benefit quite substantially. Finally, most people who earn $950/week are not beneficiaries and they are the people whose eligibility I question.

    @Matt Cloud – I don’t think the cut off points work in the way you describe but happy to see research or a OIA to support your theory. I actually know because me and my partner recently looked into applying for the accomodation supplement that we would have been eligible for about $50/week on an income of over $1000 (in the end we decided not to take this beneift, partly because our circumstances changed but also because we felt we just didn’t need it enough). Also one of the main things that bothers me about the accommodation supplement is the complexity of administering this benefit – it must be a fairly considerable cost to MSD I think and if we are paying out to people at the top end of this scale at anything less than say $30/week I question whether the administrative costs are worth it.

    @walkable – thanks for the positive feedback. I agree that the level of gaming is probably very low (as with any benefit). But the inequality of access is one of the things which bothers me a bit about acc. supplement – I ssupect most people who are in fact eligible aren’t applying – if they were it would surely be costing govt quite a bit more than $1.2 billion/year? AS it is probably quite a few of the people who get it are beneficiaries who’ve ended up at WINZ cos they can’t manage on their current costs – which is fine because they are probably those most in need. But I do wonder if a small group of quite well off NZers might also see it as a way to exploit the system.

    Also to all the commentators who’ve criticized me for simultaneously a) attacking beneficiaries and b) being a left-wing whinger. I’m not sure those two positions are compatible.. Asking that benefits be more tightly targeted to those most in need and that they don’t cause market distortions isn’t a right or left-wing position – it’s a pragmatic one around getting the best value for money from our taxes.

  • Actually the accommodation supplement is going to cause traffic to migrate. The supplement is not enough to cater for the increase in rental rates in this country for those on a fixed income. The government benefits do not keep up with real cost increases. They use considerable lag in keeping up with cost fluctuations to minimize their cost of support. Similar to petrol prices lag.
    So the effect is that a large part of society that probably have a minimum spend on transport are in fact receiving a majority of the accommodation supplement.
    E.g .. where I live the mean rental for a 2 bedroom townhouse is $250 a week.. the best accommodation supplement you would get is $75 a week. Now consider that a benefit is typical about $230 dollars a week. Can you and a child or two live on $65 dollars a week?

    So… are the areas with the cheapest rents provided with the most cost effective public transport?
    Because when your living on a very tight budget the cost of maintaining a car is very quickly becoming prohibitive.

    Ultimately the answer is that accommodation should be least of every citizens worries in this country. The affect of this blatant business profiteering is farming people into regions and groups. This polarization is going to affect the country’s ability to have diversity and room to be prosperous.
    Increasing immigration will not help… that imported money only last a generation.

    I think decentralization and making provinces become more productive can only be achieved if transportation is not too expensive.. for economical reasons. Seems to me like this relationship of economies is being skewed by NZ silly preoccupation of making profits out of a life essential need.. housing. If housing wasn’t an affordability problem we could probably be better at business.

    So .. whats cheaper… centralized high cost highways or multiple decentralized sealed roads of lower volume? I think we need to hamstring the rental and housing market so as people don’t just think of it as the only option to make some income. And perhaps come down harder on white collar fraudsters… and regulate the investment industry so that it works better… so more people will use it. That might have spins offs into industry investment (like happened in Australia) and could be more sustainable an economy.

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