Explaining demand side subsidies

How do demand side housing assistance programs impact housing markets?

27 November 2019

The importance of financial assistance for Australian households on low incomes who are renting in the private rental market is apparent when we consider that of the 1.31 million income units who received Commonwealth Rent Assistance (CRA) in 2018, 68 per cent would have been in housing affordability stress if they hadn’t received the subsidy.

CRA is a ‘demand side subsidy’, a form of housing assistance given to the consumer (i.e. a tenant or home buyer) of housing to ‘boost their effective purchasing power in housing markets’, and not to the providers of housing (such as a social housing provider or to a financier to lower the cost of providing housing).

The annual cost of CRA to the Australian Government in 2017–18 was $4.4 billion, making it one of the largest social housing costs after the states and territory governments recurrent expenditure of $5 billion on social housing ($4.1 billion) and specialist homelessness services ($0.9 billion) in 2017–18.

While demand side subsidies are very important to those who receive them, they may modify or distort the general housing markets in a community. Depending on local housing markets, there are, in general, three possible short-term outcomes when a housing subsidy is given to eligible tenants:

  • If there is a shortage or restriction in the supply of rental properties: increased competition from tenants who now have extra money to pay for rents may encourage landlords to put up the rent. The existing tenant of a rental dwelling (whether they receive the subsidy or not) may have no other housing choice and be obliged to pay a higher rent for the same dwelling
  • If there is an adequate supply of rental properties: with more money available for housing costs the tenant can move to a better property (e.g. closer to employment, better amenities etc.) and, using the subsidy, pay a higher rent (although they may pay the same amount of their personal income as previously)
  • If there is an adequate supply of rental properties: rents don’t change, so that using the subsidy enables the tenant to pay less of their personal income in rent (which may be for the same or an alternative dwelling).

An AHURI literature review looked at a number of international studies into the impact of housing assistance programs on housing markets. Overall, the review found strong evidence to support the contention that a proportion of demand-side housing subsidies is capitalised into higher rents in the private rental market. All studies noted that the ability to increase housing supply is the key factor that determines how much a landlord can increase a dwelling’s rent. The less elasticity there is in the market, the greater the proportion of landlord capture (the subsidy that goes to the landlord in the form of higher rental prices) will be.

Housing ‘elasticity’ is a measure of the responsiveness of the quantity of housing supplied to any change in the price of housing,  and is expressed as the ratio of the percentage change in the quantity of housing supplied to the percentage change in the price of housing. For example, if a one per cent increase in house prices leads to a less than one per cent increase (i.e. a ratio less than 1)  in the quantity of dwellings being made available the market (such as building new ones or repurposing old ones from other uses) would be said to be ‘inelastic’. If a one per cent increase in house prices leads to a greater than one per cent increase in the quantity of dwellings (i.e. a ratio greater than 1)  the market would be said to be ‘elastic’.

In the AHURI review, the different studies cited estimated that, through rent increases, landlords capture between 30 and 78 per cent of any increases in housing assistance, although such estimates should be treated with caution as all the studies made a large number of assumptions about the factors influencing demand and the supply of housing.

The AHURI Literature review on the impact of demand-side housing subsidies on the housing market is available in the AHURI research library.