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The University of Auckland's Wasay Majid argues three flaws in the accommodation supplement need fixing

Property / opinion
The University of Auckland's Wasay Majid argues three flaws in the accommodation supplement need fixing
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Last year, New Zealand government paid out NZ$2.34 billion in accommodation supplements to 364,000 renters and mortgage holders. Sandra Mu/Getty Images.

By Wasay Majid*

New Zealand’s accommodation supplement scheme is facing scrutiny, with Social Development Minister Louise Upston recently saying “there is merit in considering whether the current settings are fair and sustainable long-term”.

The means-tested accommodation supplement is a weekly payment helping households with rent, board, or mortgage costs. Following a NZ Herald Official Information Act request, the government revealed in the year to January 31 2024, it paid out NZ$2.34 billion to 364,000 renters and mortgage holders.

Yet despite rising rents and an increase in accommodation supplement recipients, government spending on the supplement actually decreased by $37 million last year. In fact, the scheme rarely exceeds its annual budget.

And my own research shows it’s become an important part of many New Zealanders’ household budgets. Government spending on the supplement directly affects people’s spending on food.

So before the government makes any significant changes, it is worth understanding how the accommodation supplement works now – and how the government could make it fairer.

How the accommodation supplement works

The accommodation supplement can be traced back to New Zealand’s welfare reforms in the early 1970s. In 1975, the Labour government of the day introduced the “additional benefit” – a supplementary allowance for housing costs and special expenses. This evolved into the “accommodation benefit” in 1981, which later became the accommodation supplement in 1993.

The accommodation supplement is calculated with a negative income tax formula. So for eligible taxpayers earning below a specific income threshold, the supplement is a cash payment deposited directly into their bank account, allowing people to spend it as they see fit.

The payment can increase or decrease independently of rent and mortgage costs. If a recipient’s income, tax credits, other sources of income, or personal savings increase, supplement payments decrease – and vice versa. Annual revisions of the main benefit can also lower supplement payments. Simply put, the supplement functions as an income maintenance scheme.

Accommodation supplement eligibility is based on income and wealth levels of households, not rents or housing choices.

My own recent research on the accommodation supplement has shown supplements do not distort the rental market by pushing up prices.

Current policy settings

Maximum payment settings for the accommodation supplement have been revised only twice since being set 1993. That is, clients’ payments can not exceed the maximum payment for years on end and essentially remain capped for around 13 years.

Current settings divide New Zealand into four geographical areas for rental payments, ranging from the most expensive (urban centres such as Auckland, for example) to the least expensive (rural communities). Even if the policy was revised to adjust payment settings annually to fairly reflect rent changes, compensation would not take into account local rent variations.

Capped maximum payments mean recipients depend on their income and not the supplement to cushion rent rises, keeping government spending on the supplement to around 0.5% of the gross domestic product.

Research from the United Kingdom found reducing housing allowances does not lower rents, but may cause overcrowding. Whereas maintaining the supply of accommodation allowances in the United States helps low-income households stay in their homes despite rent increases.

The flaws in the system

If the government wanted to make accommodation supplement work better to help the 364,000 renters and mortgage holders who rely on it today, there are three key issues it needs to address.

  1. The supplement does not provide relief proportionate to market rents and housing affordability. Rents have increased, but the accommodation supplement has not.

  2. Means and asset testing disqualifies couples from the supplement if they have cash assets exceeding $16,200 (for singles, the limit is $8,100). This is 1.75% of today’s median house price, restricting a couple’s ability to save for a mortgage deposit while receiving the supplement. This limit was around 17% of the median house price when it was last adjusted in 1988.

  3. Finally, the supplement has a mixed impact on recipients. It allows homeowners accessing the supplement to build housing equity, while renters can’t accumulate enough for a home deposit, widening wealth disparities. The supplement also benefits banks as they can use supplement eligibility to assess mortgage applicants.

Widely recognised as a measure to address rising rental costs, the accommodation supplement needs to be more responsive to changes in rental expenses.

Rather than scrapping the supplement, or reducing the number of people who receive it, changes can be made to ensure the policy is more effective in helping New Zealanders with housing during the current cost-of-living crisis.The Conversation


*Wasay Majid, Research Assistant, University of Auckland, Waipapa Taumata Rau.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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60 Comments

Academics...

As everyone else knows since the accommodation supplement was introduced, subsidies simply increase the price point. Rents are determined by the tenants ability to pay.

Scrap it.

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21

I support scrapping it, as it has always seemed like an "adding fuel to the fire" measure.

But how do you actually scrap it without all sorts of short-term carnage?

E.g. let's say it was gone overnight. You'd wake up to a world in which many renters of more modest means can no longer afford their rent. In the longer term you'd expect rents to decrease (they are - as you say - a function of the ability to pay) but that doesn't solve the short-term problem of a whole bunch of renters not being able to pay what they are contracted to pay.

So you either wind up with a scenario in which tenants get chucked out because they can't pay (although admittedly the tenancy system is slow to work through this) or you need to hit it with the 1-2 combo of ending the subsidy and then doing something really drastic like saying "no tenant can be evicted for unpaid rent for the next 12 months", which then invites tenants who could afford to pay to instead not pay up.

To me it's a bit like WFF, which seems to be a grossly inefficient way of empowering employers to pay crap wages by allowing the taxpayer to pick up the shortfall. I'd imagine that in the long run, removing WFF would force employers to pay more as ultimately you need staff to get the job done. But in the short term ... chaos.

To paraphrase Trigger from Only Fools & Horses - "government support programs are like the Moonies, easy to get into but a bark to get out of". 

 

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6

The tenants would all be on street, and the Govt would be forced to pay billions to motel operators to house them all temporarily while KO makes plans to build more public housing.  Then the taxpayer will be paying for those tenants accommodation for life.  

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5

Why would they be out on the street?  The landlords need to have tenants, so if they can't get the rent anymore they want they either sell (to a former tenant or new landlord at a lower price to make the new yield equation work) or reduce the rent.

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11

Landlords might decide to knock the house down and build townhouses and sell them to Singaporean (aka Chinese) investors to leave empty (very popular strategy here in Christchurch!).  They may convert the house to a boarding house, kick the family out and replace them with 12 immigrants, 4 per bedroom.  They may put the property into the AirBnB pool.  They may decide they are better off just arranging for the house to be burnt down and collect the insurance (very popular strategy during the GFC).  They may install family members as tenants (instead of having their kids live with them until they're 35).  Or they sell the property to a newly arrived immigrant with residency (see today's other Interest article).  Landlords have options, low income tenants not so much.

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6

If they have these options that are so much more profitable why hasnt it already occurred? Its not due to ethical concerns, that is for certain. 

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12

Because currently high rents are more profitable - if rents go down, then landlords look to the next most profitable option.  But even currently many rentals  have become AirBnBs as landlords switched to a more profitable business model.  Others became emergency housing providers.  In Christchurch, large developers are back to building properties specifically for AirBnB, they are not even pretending that they are going to be owner occupied.

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5

Some pretty irrational, fringe or unlikely landlord reactions there.  Burning down your house and leave an empty section at the risk of jail time because you don't want to accept lower rents???  And the Chinese property buyer via Singapore angle exists anyway. 

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8

Quite the emotional backlash against the prospect of losing taxpayer welfare subsidies for rental yields, yes.

The subsidies if any should be invested in supply, not in demand and raising rental yields.

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10

It actually happened. So not that irrational, fringe or unlikely.   https://www.theguardian.com/business/2008/may/16/subprimecrisis.usecono…

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0

Weird stuff happens just not very often.

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1

And the boarding house option actually reduces the amount of people out on the streets doesn't it?  Be careful not to conflate immigration pressure on housing supply versus the impact of the accomodation supplement, which is the subject of this article.

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5

As usual K.W. is here to throw a whole lot of very wild hypotheticals.  

You could have just said they'd sell the house for $30, buy a lotto ticket and win $20m.  

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8

Well, whatever landlords have been doing, over the last 6 years its resulted in a 1000% increase in the number of people in emergency housing, and a 500% increase in the number of people on the public housing waiting list.  And that's with rents going up. What do you think will happen if rents went down?  You assume landlords would just have to suck it up, but they havent to date, its been the low income tenants that have paid the price for Labour's housing policies.  That won't change.  Rents won't come down, as landlords would just find a way to extract higher rents or cash up the property.  And low rents guarantee that there would be zero supply of new rental housing, so that alone would increase the demand on the public housing system.

And you think burning down your house is a wild hypothetical?  It happened.

https://www.theguardian.com/business/2008/may/16/subprimecrisis.usecono…

It may be an extreme way to kiss goodbye to a dream home – but a growing number of Americans are torching their properties when they find themselves overwhelmed by sub-prime mortgages.

Insurance investigators around the country have flagged scores of cases of houses going up in flames just days before bailiffs are due to cross the threshold.

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1

Well, whatever landlords have been doing, over the last 6 years its resulted in a 1000% increase in the number of people in emergency housing, and a 500% increase in the number of people on the public housing waiting list.

I suspect they've been doing their darndest to avoid adding to housing supply by continuing to buy up existing houses to rent out.  

Landlords won't suck it up because unless the state is successful in mass house building (see Kiwibuild), then migration will continue to add pressure to a housing market that just cannot keep up because the demand and incentives are in the wrong place.  

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8

Some on here even openly seemed to admit they're keeping houses empty as investments - speculating for capital gains - while not being open and honest with the IRD about the fact they're buying and selling property for the purpose of capital gains.

They might need a boot camp.

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2

https://www.thepost.co.nz/business/350072877/mega-landlords-father-and-…

I've been a victim of these guys , absolutely ruthless , and leave multiple properties empty after turfing good tenants out . 

Very little protection for small business's on commercial leases , and guys like these exploit it to the max. Have plenty of empty houses too. 

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2

Wow. Staggering level of bigotry in that comment there, K.W.

Give everyone an internet connection and the obstinate or intolerant devotion to some people's opinions and prejudices are there for all to see.

No wonder we live in divisive times, ay?

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1

Freezing existing tenants rents for 12 - 24 - ? months would do it, as was done in Covid. After all landlords have had the benefit of elevated rents for decades.

Everyone also knows that WFF is indeed "...a grossly inefficient way of empowering employers to pay crap wages by allowing the taxpayer to pick up the shortfall." It should also be scrapped.

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12

Possibly simplistic, but what's to stop the government just restricting it to existing tenancies? They could even say "next year, any new tenancies will only be eligible for 75% of the current amount, the following year's new tenancies 50%, then 25%..." Ideally it could be tied to new provision of social housing so that as more government provided housing becomes available new private tenancies are eligible for less and less subsidy.

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5

Yep. As we all know, I'm simplistic.

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0

Ha. Didn't mean to imply that!

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1

I didn't take it that way. 😉

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0

This is one area where the law of unintended consequences will come into play.  As the author points out, rents won't go down but overcrowding will increase.  Families will squeeze into smaller homes, people will start sleeping in garages, young people will live with their parents for longer, people will start sharing bedrooms, share houses will turn into dormitories.

It may even influence new build decisions - instead of building apartments developers might start building more of those shared living type places, where renters get a bedroom but have to share bathrooms, living areas, and kitchens with all the other tenants, and that will become the rental norm.

And landlords are usually cashflow negative in the beginning, so lower rents will simply mean less supply of new rental housing. Which places more demand on public housing.  Its pointless saving money on the AS if it just means KO has to spend ten times as much on buying/building houses.

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1

Your last sentence probably reaches the point. It's better for the taxpayer to subsidise more supply than demand for existing housing. The latter is unnecessary welfare handouts for property speculators.

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6

Everyone doesn’t know, everyone believes the theory, which is logical and intuitive. However, as the article points out, the evidence doesn’t support this theory

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0

More like "Dumb guy with an internet connection"

Did you read Wasay's research paper? If you think Wasay is wrong then perhaps address where he is wrong.

Here is it ... (from the article above) ... https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4222083

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2

"So before the government makes any significant changes, it is worth understanding how the accommodation supplement works now – and how the government could make it fairer."

I don't think this article actually says how the author thinks the government could make it fairer, despite the above statement, unless I have missed this?  I can see highlighted three flaws, but can't see/ understand the proposed solutions to these flaws and whether the author believes the system will then be fairer if implemented?

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8

No, he didnt say.  I too would have liked to have seen the suggested changes, so we could discuss them. Maybe this article needs a Part II

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6

Man alive, what a pickle we’ve got ourselves into. 

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6

Murphy's Law.

Economists warned of the distorting effects when the A.S. was first suggested.

Politicians - who never think more than 3 years ahead - ignored them and went ahead anyway assuming the next government would come up with an enduring solution. (An oft repeated pattern that is slowly destroying and distorting how markets function in NZ.)

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1

Politicians also mysteriously and coincidentally invested heavily in property while constraining supply and subsidising demand and yields...

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0

Wanna make it fairer ? Give it to everyone with no strings attached....(this will never happen) ... therefore we can deduce that 'being fair' is a myth in this day and age.... Hard to see why folk working and getting a rental subsidy would want to save....when doing so means paying higher rent eventually...So Bob might have worked hard and saved an excessive amount of money but has to pay full rate zero subsidy  , But Jim who likes a weekly flutter on the pokies and a few pints eternally enjoys low rate rent care of the State. Nothing fair about that. The prudent are punished..... because they valued every dollar.

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8

Wanna make it fairer ? Give it to everyone with no strings attached....(this will never happen)

or the opposite, scrap it completely. 

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3

"Wanna make it fairer ? Give it to everyone with no strings attached ..."

You mean like adjusting the tax bands so those who receive it get taxed less to make up for it?

That could work.

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0

The supplement does go up as rents have increased as it is based on how much your rent is. Due to this relationship, as rent goes up your landlord benefits, not you.

Is is asset tested. So if you save over $8,100 you cant get it, but you can get it if you own a home (exempt asset) with hundreds of k’s in equity.

A disincentive to save or own assets - no help for a non home owner saving up.

Business owners can’t get it if their assets exceed this minimal  amount. A disincentive for business owners. 

In summary, a taxpayer subsidy to landlords and a leg up for rents and house prices, not much help for anyone else.

 

 

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14

Agree.

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3

"[It] is asset tested. So if you save over $8,100 you cant get it, but you can get it if you own a home (exempt asset) with hundreds of k’s in equity."

What if the excess over $8,100 is put into Kiwisaver (to be withdrawn as a house deposit)?
Or if the money is 'paying' for a relative's expenses (that will come back later as a gift / loan for a house deposit)?

I'm sure there are many legal and illegal (and possibly found, but never challenged) ways around such limits. Oldies have been using them for years.

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2

KS is exempt as an asset…is an option.

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0

We're in a terrible situation that will be complex to unwind, but if nothing else, I'm glad it's getting airtime and consideration.

 

The idea of a 5'ish year phase out seems best idea so far.

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1

That would require x party support: they & the MSM will still be arguing about it in 5 years time.

Just do it.

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4

It would have to be a band aid ripping I think, as giving it too much airtime would result in endless stories on the news featuring the likes of Paddy Gower and John Campbell giving it sad faces and wringing their hands about the plight of the poor tenants, who are ultimately on the receiving end of the accommodation supplement rogering through higher rents and property prices. 

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5

Why not combine it with a total overhaul of the tax system instead? i.e. start again from a brand new base?

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0

Want to test his thesis?....withdraw AS tomorrow and watch rents and property values drop.

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7

Wouldn't that be testing your thesis? ;-)

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0

I suspect if the accommodation supplement was scrapped, rents won't change one iota and the social housing wait list will explode.

The changes this author implies sound really sensible.

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0

You think that if in excess of 2 billion p.a. is removed from the rental/mortgage market tomorrow that somehow that sum will be made up from somewhere else?....interesting, where do you think such a sum may come from?

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10

The same as when any subsidy is removed or tax increased. People's pockets.

 

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0

But we're not talking about a few percent against a range of consumer products, we're talking a fairly good proportion of rent being propped up by taxpayer subsidy.  

Removing the subsidy does not result in you or I picking up the renter's shortfall.  So either the renter or the landlord does.  But in usual form, Landlords will just claim the solution is simple, if their tenants can no longer afford to pay they'll be forced to evict and then rent to the many working professionals that currently have nowhere to live.   

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6

Or, you can regulate the residential rental market, thus eliminating the need for the supplement (and for the type of increases suggested by the author).

What we need in NZ are fair/equitable rents, not fair/equitable supplements.

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7

Would you be advocating for a rent control similar to the greens policy?

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0

Not sure what their proposal is, but I think it might have to do with a cap-type regulation.  Rent here is already unaffordable as is witnessed by the amount paid out in supplements.  So capping already unaffordable rent is a waste of time.

My approach is a formula one based on rent price being no more than 30% of the median household income for a particular district; explained here;

https://www.interest.co.nz/property/119377/katharine-moody-takes-look-r…

On implementation, the supplement would be phased out altogether.

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3

Not just rental regulation.

Also impose a major lending restriction on second and subsequent dwellings. Say 60% equity required.

The banks are laughing all the way to their strong rooms.

Debt availability has been a big driver in property value increases (IMO).

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5

In many opinions.

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0

Maybe they could of made the interest deductible a rent reduction payment,  since that's what most landlords are going to use it for anyway.

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0

Bit of perspective.

Bank profits $7b.

AS goes in most cases direct to interest payments $2.3b

Therefore taxpayers indirectly pay 1/3 of (excessive ) bank profits.

🤔

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8

Interesting :-)!

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0

On point 3, how is it that mortgage holders can access this and hence build equity? This seems nuts. If mortgage holders cannot pay their mortgage they need to sort their own situation out or sell up if all else fails, period. We already help landlords enough.

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4

I wonder how many public houses the accommodation supplement could have built over the years it has been in existence?

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5

Kinda offtopic , but interesting that no political party that i'm aware of , proposed different methods of tackling house / rent inflation other than OCR rises. 

Someone mentioned upping kiwisaver contributions temporarily , i've suggested lower interest agreements for mortgagees that up their repayment part of their loan payments to match what they would of paid in extra interest . both would take money out of the economy without pumping money in via interest payments to investors.  

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0