POLICY ISSUE ANALYSIS

Consumer choice, welfare reform and housing assistance

What is the policy issue?

Government initiatives to promote consumer choice (individualisation) are a feature of contemporary welfare state reform. Indeed, the Productivity Commission is holding an Inquiry that will release a draft report in May 2017 and final report in October 2017 on how to apply increased competition, contestability and informed user choice to the delivery of human services so as to improve outcomes for users and the community as a whole.

In the context of housing policy, demand from low-income consumers for affordable dwellings can only be realised if there is an effective supply-side response. Yet, for people on government benefits and low incomes there are shortages of affordable rental accommodation and long waiting lists for public housing. How can demand-side measures that promote consumer choice be reconciled in a housing system that requires increased supply?

Key fact

Currently, there are not enough dwellings (i.e. a supply-side deficit) for low income renting households. AHURI research reveals that, in 2011, only 76,000 dwellings were affordable and available to the 347,000 Australian Q1 households who rented in the private market. As a result, 78% of Q1 households who rented were in housing affordability stress.

Figure 1: The national situation facing 347,000 Australian Q1 households renting in 2011

Figure 1

Source: Table 15, Hulse, K., Reynolds, M., and Yates, J. (2014), AHURI Final Report no. 235: Changes in the supply of affordable housing in the private rental sector for lower income households, 2006–11.

Policy development options

There are four different policy approaches to addressing the issue of promoting consumer choice in housing:

  • market demand focused – provide funds or other resources (e.g. CRA or First Home Owners Grant) to provide low-income households with increased purchasing power in the market;
  • government service focused – create market signals and quasi-choices in the design of government services (e.g. choice based letting in the allocation of public housing);
  • demand-supply focused – marry consumer choice measures to the building of new housing supply (e.g. limiting Shared Equity schemes or the First Home Owners Grant to newly built dwellings only);
  • supply focused – drive new supply of dedicated affordable housing to better enable consumers to realise some choice (e.g. inclusionary zoning).

In a context of constrained supply, the first two approaches have limited probabilities of success as they each rely upon an adequate supply response for the consumer choice to be realised. The third approach seeks to marry increased consumer choice and increased housing supply. The fourth approach seeks to realise increased consumer choice by increasing the supply of dwellings in the affordable segment.

For analysis of these options see AHURI Final Report no. 253 Individualised and market-based housing assistance: evidence and policy options.

1. Explanatory statement

A 'market demand' policy approach provides funds or other resources to low-income households so as to give them increased purchasing power in the private rental market.

2. A real world example

One example of this approach is the use of Commonwealth Rent Assistance (CRA), which is paid by the Federal Government to eligible 'income units' who rent in the private market or in community housing. The advantage of a system such as CRA is that people can decide their own housing-demand priorities and 'buy' those from the rental market.

3. Scope of the practice

In 2014–15, across Australia, 1 343 431 income units received CRA at a cost to government of $4.2 billion. Of these income units, 41.2% paid more than 30% of income in rent (i.e. were in housing affordability stress) even though they received CRA, although 68.5% would have been in housing affordability stress if CRA was not available.

4. Effectiveness/impact

CRA's effectiveness in relieving housing stress for low-income households has been questioned in the context of rising unaffordability of rental housing in Australia’s major cities. A key criticism is that the subsidies have not been able to keep track with rising housing costs in inner and middle suburbs of major cities, thereby reducing the extent of individual choice.

Economic modelling of removing the upper limit for CRA showed the overall rate of after-housing poverty for private renters fell by (a relatively modest) 4.85% compared with their situation under current CRA rules. However, the removal of the CRA upper threshold could result in behavioural change among both landlords and tenants – landlords could raise rents in response to such an increase in subsidies, and tenants might choose to move to larger or better quality rental accommodation. Modelling the scenario, whereby 'CRA was uncapped but rents for households with CRA increased by the median increase in CRA', showed the overall rate of after-housing poverty for private renters fell by an even more modest 1.89%.

5. Guide to evidence

Evidence on the effectiveness of CRA is found in AHURI Final Report No. 101 Commonwealth Rent Assistance and the spatial concentration of low income households in metropolitan Australia, and AHURI Final Report No. 109 The regional impact of housing costs and assistance on financial disadvantage.

Evidence on 'market demand' policy approach is found in AHURI Final Report No. 253 Individualised and market-based housing assistance: evidence and policy options.

1. Explanatory statement

A 'government service' policy approach gives welfare recipients quasi-choices in the government services they receive.

2. A real world example

An example of a 'government service' approach is seen in the UK where social housing was allocated using choice-based lettings.

In choice-based lettings schemes, when social housing dwellings become vacant they are advertised so that eligible registered applicants can ‘bid’ for (i.e. express an interest in) renting the property. The intention is to empower clients to make choices about their housing and therefore increase their satisfaction with it.

3. Scope of the practice

In 2001–2003, 27 pilot projects of choice-based lettings were undertaken in the UK. In choice-based lettings:

  • households bid for properties they were interested in living in
  • vulnerable households were awarded ‘priority cards’
  • bids were then ranked
  • an offer was made to the highest ranking bidder, based on the entitlement and prioritisation policies of the providers.

Social housing providers set the rules in terms of:

  • eligibility criteria for bidders
  • prioritisation systems (e.g. wait-term and priority, segments/bands, and priority points)
  • labelling properties for specific household types, such as older people or people with a disability.
4. Effectiveness/impact

An evaluation of the pilot projects showed choice-based lettings were successful in providing more open, transparent and simple systems that were seen as offering more choice for recipients. The letting system can guide social landlords on developing and providing the ‘housing product’ that customers want.

Applicants were confident about which areas they wanted, or did not want, to live in, valuing safety, familiarity and community facilities. After a number of unsuccessful bids, applicants were least likely to change their views on area and more likely to change the type of accommodation they bid on i.e. changing bid from a 3 to a 2 bedroom dwelling if they felt their future bid was more likely to be successful.

Applicants who were continually unsuccessful felt frustrated that there was not enough social housing and that ‘ordinary people’ were missing out. Individual feedback was considered to be very important to bidders’ perspectives; they were very positive about choice-based lettings where feedback was available, but dissatisfied where it was inadequate.

5. Guide to evidence

Evidence on the effectiveness of choice-based lettings is found in AHURI Final Report No. 97 Improving access to social housing: paradigms, principles and reforms.

1. Explanatory statement

A 'Demand-supply' policy approach ties consumer-choice measures to the building of new housing supply. Examples are seen in government backed Shared Equity schemes or First Home Owners Grant that limit new homebuyers to newly built dwellings.

2. A real world example

A 'demand–supply' focused option is seen in the Western Australian Government-backed Expression of Interest (EOI) shared equity initiative that is directly linked with the building of new dwellings.

In the EOI project, the Department of Housing WA procured, at scale, newly-constructed, affordable dwellings from the market at discounted rates. The EOI sought submissions from builders and developers to deliver new housing into the scheme. The discounts to market prices achieved by the Department became their equity share in a portfolio of properties.

These properties were then made available for eligible low income buyers through The Shared Start loan. This loan operates in either of two ways: the Department retains its share of the property in perpetuity thus ensuring it maintains partial ownership in a supply of affordable houses in key locations; alternatively, buyers are encouraged, over a number of years, to refinance with an alternative lender so as to purchase the Department’s share of the property.

3. Scope of the practice

By 30 June 2013, the shared equity EOI initiative had delivered 1005 low-cost dwellings.

The initiative is targeted at households with the following income mix:

  • $50 000–$55 000 (10%)
  • $55 000–$60 000 (20%)
  • $60 000–$65 000 (30%)
  • $65 000–$75 000 (20%)
  • $75 000+ (20%)

The Shared Start loan has a maximum value of $330 000 for singles, $380 000 for couples, and $480 000 for those living in the state's north west. Household income limits are $70 000 for singles, $90 000 for couples, and $110 000 for singles and couples in the north west. In addition, households can not own liquid assets with a value of more than 15% of the market value of the property.

4. Effectiveness/impact

The Department negotiated significant construction and supply discounts from builders and suppliers of around 16%, which resulted in the Department’s equity share in the properties being worth $58 million in September 2013. This form of housing assistance, rather than resulting in significant government expenditure, will see a surplus of funds delivered to government over time.

5. Guide to evidence

Evidence on the effectiveness of the WesternAustralian EOI shared equity initiative is found in the AHURI-Price Waterhouse Coopers Final Report New approach to delivering shared equity opportunities in Western Australia.

Evidence appraising the design of Shared Equity schemes is found in the AHURI Final Report no. 137 Innovative financing for homeownership: the potential for shared equity initiatives in Australia.

1. Explanatory statement

A 'supply side' policy approach encourages the supply of new dedicated affordable housing. By increasing the overall numbers of affordable housing, lower-income households can have more choices in the dwellings they are able to rent or buy. The use of inclusionary zoning and/or developer contribution in planning schemes to ensure the building of affordable housing is an example of 'supply side' policy.

2. A real world example

The South Australian Government Housing Plan (2005) mandates a 15% affordable housing component for 'significant' developments. At 30 June 2014, the scheme had delivered 1489 affordable homes and a further 3300 were committed. These affordable homes include:

  • new social housing
  • affordable private rental (NRAS style) dwellings
  • affordable homes sold to eligible households.
3. Scope of practice

Inclusionary zoning schemes can also be required by local governments. The City of Sydney mandates an affordable housing component (of around 2%) in specified zones e.g. Ultimo/Pyrmont. In these areas, developers either include affordable housing within developments or pay an affordable housing levy.

4. Effectiveness/ impact
5. Guide to evidence

Research finds that planning interventions appear most effective within certain market contexts, such as when there has been a long-term undersupply of new housing opportunities relative to demand.

Background to the policy issue

In countries such as the UK, the USA and Denmark there has been a move towards more individualised packages of support for people who require assistance due to older age, disabilities, homelessness, health issues and a range of other vulnerabilities.

The aims are to give people greater control over their own lives; promote personal responsibility; develop a diverse range of services which can meet needs in a more customised way; diversify service provision through the involvement of a range of private and not-for-profit providers; and make government assistance more cost-effective.

In Australia, promoting consumer choice (individualisation) is featured in both the National Commission of Audit 2014 and the National Disability Insurance Scheme (NDIS) Act 2013. The premise underlying 'individualised forms of welfare assistance' is that:

The National Commission of Audit 2014 stated:

'There is no better way of improving services than by giving consumers real choice' and that governments should 'respect personal responsibility and choice ... personal responsibility and choice are fundamental to our democratic system.'

The 2013 National Disability Insurance Scheme (NDIS) Act proscribes that people with disability:

Evidence in action

Recent research on this issue

The AHURI Inquiry, 'Individualised forms of welfare provision and reform of Australia’s housing assistance' concluded in August 2016 with the release of the final Inquiry report: 'Individualised housing assistance: findings and policy options'.

The Inquiry developed a clear policy framework and direction for reforming the housing assistance system. This research will enable customised packages of different types of housing assistance and related support.

Find out more about this AHURI Inquiry.