This report documents an investigation of stakeholder views about the operation of the Australian Government's Rent Assistance (RA) programme, in the context of broader housing affordability issues. It has been prepared in support of work being carried out by the Department of Family and Community Services (FaCS).
At the December 2003 Housing Ministers' meeting Ministers endorsed work to be undertaken to:
- increase the supply of affordable housing;
- increase access to affordable housing, with states and territories asked to focus on the reduction of workforce disincentives and to attract private sector involvement into affordable housing as priorities in the 2003 Commonwealth-State Housing Agreement (CSHA);
- enhance delivery arrangements; and
- consider market efficiency and effectiveness.
RA is the single largest targeted support programme for households in the private rental market. At the Housing Ministers' Conference (HMC) on 3 December 2004 the Minister for Family and Community Services, Senator the Hon Kay Patterson, announced agreement to a "no commitment" consideration of RA in the context of affordable housing. To further that goal, Minister Patterson agreed that FaCS would carry out focus group sessions on the operation of the programme, also on a "no commitment" basis. FaCS engaged the South Australian Centre for Economic Studies (SACES), in collaboration with Kate Barnett and Associates, as a consultant to assist in the running of the sessions. This report presents a synthesis and analysis of the information received from stakeholders.
Key themes from the Focus Groups
Shortage of affordable housing
There was felt to be a significant shortage of affordable housing for low income households. Many low income households are unable to service the mortgages which go with home ownership, which means that they rely on public and community housing or the private rental market. Public and community housing deliver reasonably good affordability results for those who can access it, but waiting lists are quite long.
This shortage is manifest in long waiting lists for public housing and a substantial number of private renter households spending large proportions of their incomes on rent. A third of Australian private renter households spend more than 30 per cent of their income on rent and 11 per cent spend more than 50 per cent (even if FaCS data, a source needs to be quoted and specified if this is "all private renters" or only RA).1
The dimensions of the shortage of affordable rental housing vary considerably from one region to another, arising mainly from differences across regions in average rents. Shortages are generally most pronounced in Sydney, but also exist in Melbourne, in both inner city areas and some regional areas.
Private Rental Housing
Participants felt that the reduction in funds to public housing has led to increased pressures in the private rental market to provide low cost housing. Related to this, there was a widely held view that more resources should be put into the public and community housing systems to expand the supply of affordable rental housing for people on low incomes. However, this view is not universally accepted - see e.g. Gans and King (2003).
It was argued that for many people private rental housing is inferior to homeownership and public and community housing in that it has insecure tenure. Most obviously tenures are physically insecure, with leases rarely exceeding a couple of years. But they are also financially insecure in the sense that tenants can be exposed to long term adverse rental trends.
There is also said to be significant discrimination in the private rental market. At the most basic level there is outright "profiling" of prospective tenants, with Indigenous Australians being extremely disadvantaged, and a tendency for landlords to look unfavourably on people with insecure employment, people on social security incomes, young people and recently arrived migrants.
There has also been a growth in the use of tenant databases to make judgments about prospective tenants. These tenant databases purport to record details about people's past performance as tenants and are in that sense different from "profiling" as a selection mechanism. However, it was argued that the information recorded on tenant databases can be subjective and inaccurate and can be highly prejudicial to people's chances in the rental market. Moreover it is costly or quite difficult for people listed to challenge adverse listing whereas the onus should be on database owners to ensure the validity of listings.
Homelessness
When homeownership, public and community housing and private rental fail to deliver housing to a person or family, they may become homeless. A range of physical accommodations are involved: stays in unsafe or unhealthy house structures; temporary stays with family or friends; stays in hostels, caravan parks, tents; and stays in cars, squats, or living on the streets. The Supported Accommodation Assistance Programme (SAAP) is the main governmental direct policy response to homelessness, and is delivered primarily via non government organisations (NGOs). These providers assist people who are homeless to make the transition to a secure housing arrangement in a range of ways and also provide emergency accommodation. SAAP providers indicated that they are significantly under-resourced in the sense that there is a substantial unmet demand for the support services that they offer. It was also felt that the customer load has increased and that the increases have included some very high need customers, for example people with mental health issues.
Access to appropriate housing has consequences that go beyond the immediate comfort of the people being housed. Inappropriate housing makes it difficult for people to participate in employment and education. It can increase risks of domestic violence and disease and it makes access to health care more difficult. Moreover, without an appropriate housing environment it is difficult for people to connect and belong within the community.
Housing outcomes for Indigenous Australians
It was said that housing outcomes for many Indigenous Australians are much inferior to housing outcomes achieved by most non-Indigenous Australians. Indigenous Australians have a much greater prevalence of homelessness, overcrowding and occupation of substandard dwellings. It can be very difficult for Indigenous Australians to get private rental properties.
The take-up of the RA programme by indigenous people is not particularly high. Although RA is payable in community housing, rents paid in indigenous community housing are often below the threshold for RA eligibility.
Governments' housing policies
It was felt that government housing programmes in Australia could be more integrated to provide a holistic response to housing affordability issues. There is a range of policy instruments that affect conditions in housing markets including taxation, direct expenditure and regulations such as building codes and zoning. These policy instruments are allocated across all the levels of government (and in various departments). It was said that governments have not been effective in identifying a common purpose and that therefore their programmes do not fit together particularly well.
It was felt that more needs to be done to expand the supply of affordable rental housing for people on low incomes. Participants often contrasted two types of interventions: supply-side interventions which directly target the number of houses being built and supplied in the rental market, and demand-side approaches which expand the purchasing power of selected renter groups and allow their increased capacity to pay to induce a supply response. The range of suggested policy responses includes:
- increase the flow of funds from the capital market to social housing providers with a Commonwealth bond (AHNRC 2001, ACOSS 2003a);
- establish a stock exchange listed company as a vehicle for private sector investment in affordable housing (AHNRC 2001);
- set a prescribed ratio for investment in affordable housing for certain investment entities (AHNRC 2001);
- cease universal access to negative gearing concessions for property investors and target the savings to investors in low cost rental property (e.g. as in ACOSS 2003a);
- redirect development profits to investment in low cost rental housing (ACOSS 2003a); and
- land tax reform (Yates 2002).
It was also argued that increases in the supply of accessible, as well as affordable housing for people with a disability should be encouraged, eg through legislation for standards that guarantee access in all dwellings.
The Rent Assistance programme
Comparisons were drawn between the affordability impacts of RA and public housing. Public housing rents are generally set at 25 per cent of income, and consequently they are more effective in diminishing housing stress. RA payments, on the other hand, are not tightly linked with income. As a consequence, participants generally felt that RA is poorly targeted. One participant commented that "of the existing recipients, a third don't need it because they're not under housing stress, and of the two thirds who do need it, only half are getting enough." For example, 36 per cent of recipients spend 30 per cent or more of their income on housing. There were also concerns about the ineligibility of people who are subject to housing stress - for instance low income individuals or families without children (and therefore not in receipt of family tax benefit), certain Austudy recipients, migrants subject to benefit waiting periods.
There was also a widely held view that the failure to adjust RA payment levels in line with regional variations in rents is a shortcoming of the current system. As it is, the maximum rate of RA available for a particular household is the same everywhere. Yet there are quite wide variations from one region to another in the rents that must be paid to get adequate rental housing. It was felt that the maximum rate of RA should be varied in line with market rents in different cities and regions. It was argued that the current RA structure encourages relocation to areas with low costs and poor employment prospects, contrary to the thrust of labour market policy.
Although some participants were concerned that RA is not as closely linked to income as some other forms of housing assistance, some discussants noted that there is a downside to income-contingent RA payment levels in that the RA withdrawal rates are, over the relevant income range, an increment to effective marginal rates of taxation. Although actual marginal tax rates are relatively low for people on low incomes, the withdrawal of social security entitlements in proportion to income means that effective marginal tax rates (EMTRs) may be high (even exceeding 100 per cent) for some people with social security entitlements. Linking RA more directly to income could create excessive EMTRs for some renters.
The majority of participants put greater weight on the inequities (as they perceive them) of the current system than on these incentive effects. Accordingly they believed that RA should be extended to all low income households and that the payment amounts should be changed to reflect regional rents. Respondents did not offer any clearly specified savings measures within the RA programme, although put the view that high income families in receipt of RA are treated very generously by the social security system. It was generally felt that the costs that would arise from extending the RA programme would need to be met with more resources and that the current resourcing was simply inadequate. But if savings were to be found within the programme, some argued that the payment structure should also take into account income levels, so that resources could be redirected away from households that receive RA but are not in housing stress to households whose high levels of housing stress are not resolved by the existing RA payment structure.
Observations in response to stakeholder views
A number of observations can be made in response to the wealth of information provided during the focus groups.
Research supports the view that inadequate housing, overcrowding, and especially homelessness are very disruptive to the fundamental aspects of a happy life - health, avoidance of violence and crime, economic participation, educational achievement and social participation. A lack of appropriate housing would seem to be a more detrimental outcome than affordability stress.
There is a high prevalence of inappropriate housing in Indigenous communities and this is closely associated with poor social outcomes. There is a degree of circularity involved: poor housing in an Indigenous community could also be a consequence of other problems such as people's inability to participate successfully in the labour market or difficulties in managing financial resources effectively. But the evidence is that a stable housing situation is a precursor to good health, education and employment outcomes, and therefore housing is a prime candidate to be one of the policy instruments that can help to break the cycle of Indigenous disadvantage.
Participants were generally of the view that public housing has been scaled back over the last two decades, leaving more low income households to satisfy their housing needs in the private rental market. Many focus group participants felt that it is desirable to boost resources in the public housing sector. However, it has also been argued (e.g. Gans and King 2003) that private rental markets have advantages over public housing. There are several issues that are relevant in an evaluation of the relative merits of public housing and private rental.
Gans and King argue that delivering affordability support via the private rental market is preferable to the public housing system because it allows a greater degree of choice for renters. In the private rental market there are more properties to choose from. The wider range of choices available can deliver significant benefits, for instance in terms of people being able to strike the best trade-offs they can in terms of location, dwelling size and condition.
Public housing provides greater security of tenure than the private rental market, and at the same time maintains tenant flexibility. Public tenants are less likely to be required to give up their housing in the short to medium term than private tenants. A private tenant can be given relatively short notice because of an unforseen and uncontrollable event such as the owner selling the rental property. In addition, private tenants often have to commit to landlords for a lease period and assume financial responsibility for maintaining the rental stream to the landlord over the life of the lease, whereas public tenants do not.
It might be argued that the tenures that are observed in the private rental market are an outcome of mutual agreement in the market. While this is strictly true some reservations should be kept in mind. Private landlords are in the main individuals and short tenures are a way for landlords to maintain the liquidity of housing assets. If rental housing were held in a portfolio it would be possible for investors to maintain liquidity by selling their units in the portfolio, while the portfolio itself could offer longer tenures to tenants. But in fact portfolio investment is more the exception than the norm. The reasons for this are not entirely clear but might include: a widespread preference among less sophisticated investors for tangible investments (of which "bricks and mortar" are one of the best options), the operation of the capital gains tax (capital gains tax liabilities are quite dependent on the timing of transactions, and the investor controls this better with direct ownership), and the ability of landlords to provide their own labour in support of their rental property. If there were more portfolio investment in the private rental market it is possible, although not conclusively demonstrated, that longer leases would be offered.
There are two types of discretion in a tenancy agreement that should be distinguished. On the one hand there is the landlord's discretion to end a tenancy. On the other hand is the tenants discretion to end the tenancy. Other things equal, the first is disadvantageous to the tenant and the second is advantageous. Yet the two often go together in the private rental market. It is unusual to see private rental landlords offering the combination of secure tenure for the tenant but easy departure terms which are common in the public housing system. There is no reason to think that portfolios would offer arrangement of these type without charging a premium to do so.
Public housing in Australia typically involves larger subsidies to tenants than the subsidies available in the private rental market. For instance, Australian Institute of Health and Welfare (2005) reports that rents collected in Australian public rental housing were 71.6 per cent of the rentals that would have been paid at market rates after deducting RA.2 It seems likely that support for public housing is at least partly due to the larger subsidies that it offers. But of course this is a matter of policy and is not actually intrinsic to public housing.
Public housing has an important role redressing some of the discrimination that may occur in private rental markets. Discrimination is a commercially rational behaviour in private rental markets whereas public housing can, and usually does, adopt allocation policies which assist groups who are likely to be discriminated against in the private market. In effect the public housing authority is a guarantor for bad risks (albeit the guarantee is internal, from its social policy arm to its asset management arm). This function is in addition to the provision of affordability support. For private rental markets to perform the same role, either the implicit guarantee or a corresponding insurance premium for some tenant types needs to be offered in an explicit way in the private rental markets (a uniform guarantee is probably more practical than the differentiated insurance premia that would be required).
With RA structured in this way it is possible that the private rental market could more effectively replicate the "safety net" offered by the public system while offering the additional benefit of allowing households more say in their housing outcomes. And it is possible that such a system would induce the private market to produce more housing stock suited to the needs and preferences of low income households.
A range of suggestions have been put forward about how to boost the supply of private rental properties for low income households. In most cases they involve a government subsidy, whether delivered through the tax system, expenditure, or regulation. A key point of difference often is their targeting and it is important to recognise this in evaluating the proposals. It is safe to say that targeted policies will be more cost-effective in reaching a group for whom assistance is intended. The question is whether targeting creates undesirable behavioural incentives, causing people to lock in the disadvantages that qualify them for assistance under the targeted arrangement.
If RA eligibility were extended to low income working people or couples it could be withdrawn as income increases, just as social security payments are withdrawn as private income increases. Such an arrangement would boost EMTRs for this group. However, the existing EMTRs for this group may not be particularly high. High EMTRs are most likely to be found among people who are already in the social security system. Such a change would also make the incentives more favourable to moving off other forms of benefit and into employment.
Many participants felt that RA should recognise regional differences in market rents. There are strong arguments in equity for such a change. But it would also undermine incentives for people to locate where housing costs are lower.
Because RA entitlement is withdrawn at the rate of 75c in the dollar over a range, it operates as a subsidy to housing costs over that range. Its effect is that an extra dollar of housing costs just 25 cents (in that range). Other things equal, it will induce people to make more costly housing choices than they otherwise would. This can be contrasted with a voucher system, under which eligible families receive a fixed housing subsidy but meet the marginal costs of housing choices at 100 cents in the dollar. Unless the externalities associated with "extra" housing are very large - in the ratio three to one - the subsidy may constrain the recipients to use the resources provided on their behalf in a less than optimal way. For instance, a low rent but with a long commute time would be more attractive under the voucher system. It is not clear whether the effect is of material significance.
The existing subsidy arrangement may go some way to dealing with interregional variations in housing costs. It has the consequence that RA payments will generally be higher in regions where rents are higher, whereas a voucher at a uniform rate would not achieve this. However, a voucher which was set at different rates in different housing markets could allow for interregional differences and give the tenant greater choice in the disposition of the financial support.
An extension of the RA programme, or indeed other measures to assist renters, are likely to have costs. It is notable in this respect that support provided by the RA programme to people and families is generally less than they would receive in public housing and also less than the value of tax concessions received by many homeowners. While externality arguments might support some differentiation of the assistance amounts to different tenure types, and in particular some preference to homeowners, they do not explain the current suite of concessions.3
1 These figures are similar to estimates for all Australian private renter households as reported in Australian Bureau of Statistics (2005).
2 The figure would be lower still if one imputed a value to the more favourable terms of public rental tenancies.
3 Under the current system the owner-occupier tax concession for a property with a given value is higher the higher is the owner's (a) income(because this determines the marginal tax rate) and (b) equity in the property (i.e. the smaller the outstanding mortgage).