Hard News by Russell Brown

178

Housing, hope and ideology

As reported this morning by Radio New Zealand, Prime Minister John Key has given a few more clues to the mystery parcel that is his government's housing policy -- and in the process, contrived to make that policy seem even more alarming.

The thrust of it is that the government believes subsidising rents will be a more effective way of bringing people out of poverty than providing conventional public housing. This may sound like a familiar idea to mature readers -- because it's not unlike the National government's housing policy in the 1990s.

Back then, the government ordered Housing New Zealand to begin charging market rents to its tenants, on the promise that the state would take up the slack by transferring its social obligation to an expanded accommodation supplement available to both public and private tenants.

This time around, the government's exit from public housing provision is being sold on cost-benefit grounds. It's a matter, says the Prime Minister, of bang for buck:

John Key said the cost of paying more income related rents would be a fraction of the cost to build more state houses.

"So for a thousand people to support them in income related rents costs us $12 million, to build a thousand state homes costs us half a billion. So the fastest way of us moving people out of poverty is to deliver more income related rents."

When the Bolger government reformed housing policy in 1993, the change came with similar promises. As this 1999 paper by David Thorns of the University of Canterbury explained, the cost of the expanded accommodation supplement was forecast to increase to $476 million by 1996, then stabilise around that level. In the real world, the cost in 1996 was already $560 million annually -- and it exceeded $800 million by 1999. By that point, the government was arguing that its own scheme was too generous and needed more targeting:

However, as Murphy (1997) has pointed out, the Govern- ment through the way it has set up the new institutional framework has built in some of the upward pressures itself. HNZ, forced under the Restructuring Act to operate as a commercial enterprise, seeks higher rentals based on what it considers the market will allow. This upward movement opens up the `rent gap’ for the tenant between their wage or benefit and the rent which then puts political pressure back on the Government to increase the Accommodation Supplement to reduce housing-related poverty. Increased benefits then set the cycle going again as landlords (including the state) see the opportunity to raise profits.

In the last five years of the policy -- the time when it was supposed to stabilise -- the cost of the expanded accommodation supplement increased 78%. Had the new Labour government not restored income-related rents in public housing in 2000 (and promised a home-building programme it only partially delivered), we can only guess how high the spiral the government created with its own hand might have gone.

Because even after the Clark government's intervention, the cost to the taxpayer continued to climb, just not as dizzingly. As Interest.co.nz reported in 2011:

The government is being urged to boost the supply of affordable housing to help wean people off a state rent subsidy which could cost NZ$2.2 billion a year - almost twice as much as official predictions - by 2016.

But any fix could require a large up-front investment in state house building, and/or require action from the private and community sectors to help increase housing supply, and therefore affordability, at the lower end of the price spectrum.

The government, as we have been told lately, is set on doing exactly the opposite thing. And remember, this wasn't some lobby group plucking a figure out of the air, but a Statistics New Zealand projection. Mr Key's plan to save money by increasing an already out-of-control cost to the taxpayer seems, to put it mildly, risky.

In its submission to the Productivity Commission, the Salvation Army was emphatic that the situation was unsustainable:

The existing programmes have become more and more expensive and at the same time have not directly addressed issues of adequacy of supply. The existing subsidies have created a dependency both by tenants and landlords which has been locked into the housing market in terms of house prices but which offers little if any hope that future needs will be met.

But perhaps we should consider the other side of the argument: perhaps taking money away from housing provision for a smaller group and spreading it more widely in the 1990s did actually help ease overall poverty.

Unfortunately, it didn't. While, as Thorns noted, a substantial increase in the number of people receiving the supplement and an increase in choice could be seen as a policy success, housing-related poverty didn't decline as the costs of the policy ballooned:

One factor here is the institutional reforms and the creation of Housing New Zealand as a profit-driven company. It appears that the supplement may have simply raised rents and thus landlords’ profits. Overall choices thus remain restrictive due to the way in which the market has responded, there has not been a large increase in low-cost units of accommodation. Hence, the claim for the supplement that it would reduce marginalisation by increasing housing choice for low income households has thus far not eventuated.

To be fair, the authors concluded that the situation might improve if new forms of housing provision -- from sweat equaity and self-build to housing associations -- were to emerge and actually expand the housing stock the way the National government originally fancied its policy would do. The Salvation Army also sees a role for community housing providers -- alongside a "direct" role on the part of Housing New Zealand.

This time around, the government is in fact actively and openly relying on third parties to make its housing policy work. But it's asking them to buy some of the public housing stock it runs out -- and not, apparently, to undertake significant building work.

In the absence of an accompanying state building programme -- again, the government aims to do the opposite -- it seems extremely optimistic to suppose that third parties will step up and build at the necessary scale. And that the expansion of subsidies to landlords won't simply drive up house prices even further.

I presume -- well, hope -- the government has expert advice to the contrary. But wishing won't make it so. And it is useful to remember two things about the 1990s. The first is that the government's fond predictions of fiscal sustainability were blown out of the water almost immediately. The second is that the second half of the 1990s saw the emergence of appalling public health problems that we deal with to this day.

There may be something I'm missing here -- I'm no expert. But it seems that policy predicated on no more than an ideological desire to get the state out of social housing provision could well go terribly, terribly wrong.

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