The $2 billion social housing cliff no one is talking about

Public housing tenants get far greater support than other tenants. Photo / Andrew Warner

There is a group of New Zealanders with very high social needs.

About 54 per cent of this group have had no income in the past 12 months, 50 per cent were on a main benefit, 10 per cent have received help from mental health and addiction services, 6 per cent had a police proceeding and 1 per cent were in prison.

There is another group of New Zealanders with almost identical – arguably worse – indicators.

Forty-nine per cent had no income in the past 12 months, 69 per cent were on a main benefit, 13 per cent received mental health and addiction support, 8 per cent had a police proceeding and 2 per cent were in prison.

Members of the first group are given a public house, paying no more than a quarter of their income in rent thanks to generous taxpayer-funded income-related rent subsidies (IRRS) worth an average of $18,443 per household last year.

Those in the other group are given only an accommodation supplement, worth an average of just $5812 – about a quarter of IRRS support. Unlike IRRS tenants, the rent they pay is not capped at 25 per cent of their income. In fact, it is not capped at all. This group of people live in private accommodation, where their rent is determined by what their landlord thinks they can charge.

These costs can be very high – much higher than 25 per cent of someone’s income. Stats NZ’s Household Economic Survey found that 27.5 per cent of households where people don’t own their own home pay more than 40 per cent of their net income in rent.

What determines who goes into the first group, getting generous support and capped rents, or into the second, with miserly payments and rents set at the whim of private landlords?

It’s not always need – as the social statistics quoted above show – the needs of the two groups are nearly identical.

It’s not quite luck either.

IRRS public housing is allocated based on criteria set by the Ministry of Social Development (MSD). But commentators and researchers, including the recent Kāinga Ora report by former Prime Minister Sir Bill English, have noted that once someone is in IRRS housing, they have very little incentive to leave it, even when their circumstances improve.

The incentives all go one way: towards the most expensive sort of social housing assistance. There are few incentives pushing people the other way, back into the costly private rental market.

Speaking to the Herald, English described this as a “cliff edge” between two different forms of assistance.

Over the four-year forecast period, the difference in costs between the few people receiving IRRS-supported housing and the many receiving the less-generous accommodation supplement was $2.4 billion.

As an extreme example, if the Government were to switch all people on the accommodation supplement to IRRS housing (which not everyone on accommodation assistance would need, and which there are not currently enough public houses for), it would cost an additional $4.3b a next year – $6.6b in total.

That doesn’t include the cost of actually building the houses.

A more realistic figure is about $470 million, which would be the annual cost to provide IRRS to all 25,000 households on the social housing register waiting for a public house – $1.8b over the four-year period.

The situation creates something of a mismatch and an issue of “horizontal equity”, in the words of Alan Johnson, co-convenor of the Child Poverty Action Group, who wrote his own review of Kāinga Ora.

Put another way, one group of people is “unlucky” enough to be “lucky” enough to enter the walled garden of public housing, and that group has every incentive to stay there.

The other group is “lucky” enough not to be “unlucky” enough to get an IRRS-funded public housing place, despite often having very similar needs. They receive just over a quarter of the accommodation support their IRRS peers receive, and pay as much rent as their landlord can charge.

Johnson said getting a public housing place is still determined by “need”.

“MSD reports different grades of priority, so there is a fine gradation of things that determine need and the more you can put into your case to decide that need will put you up the priority list,” he said.

“But the irony is once you are in the house, once you are in that house, many of the problems are resolved and you are no better or worse off in income terms than someone who is stuck renting accommodation in the private sector.”

The recent English report said the review panel saw “evidence that suggests social housing is not necessarily being accessed by those households who currently need it most”.

In fact, the English report cited research based on MSD data that found the needs of people getting IRRS-supported housing through Kāinga Ora and Community Housing Providers (CHPs) were often slightly less acute than the needs of those receiving the accommodation supplement, in part because once people get into IRRS housing, one of the most generous forms of state welfare, their needs reduce.

“We have seen that, on average, current Kāinga Ora and CHP tenant populations are similar, but the population of tenants receiving the accommodation supplement have higher and more complex needs. At the same time, there is little incentive or ability for social housing tenants to move to more cost-effective support as their needs change,” the English review said.

“The research also suggests that social housing, as one of the most expensive forms of housing assistance the Government can offer, is not necessarily accessed by those households who currently have the greatest need. Research by MSD... also shows a stark difference between the needs of those on the housing register and in emergency housing and those already in social housing.

“While some of this difference is to be expected because of the beneficial effects of being in a social house, it further emphasises that social housing could be better targeted, and that lower cost options to improve affordability and security of tenure could address the needs of more households,” the English review said.

There is little incentive or ability for tenants in social housing to move to more cost-effective housing tenures because the accommodation supplement generally provides less support than the IRRS.

This drives households towards social housing and on to the social housing register – once a household receives a social housing place, they face very little incentive to move out of it because of the gulf between paying 25 per cent of one’s income in a public house and market rent, which can be much much higher.

Even if a social housing tenant works more, for higher pay, they may be no better off after they move out of a public house, forgoing their capped rent for the costly private market.

There is immense cost whatever form of support is used, although the cost of IRRS flows mainly from one part of the state (the Ministry of Housing and Urban Development), to another (Kāinga Ora), while the accommodation supplement mainly ends up in the hands of private landlords.

In the year to January 2024, accommodation supplement totalling $2.3b was paid to 364,000 renters and mortgage holders. IRRS costs $1b less a year, with payments totalling $1.5b, although the number of beneficiaries is lower too – about 80,000 households live in IRRS accommodation.

The “cliff” between social and market housing has vexed governments for decades. The supplement can be traced back to 1975, when 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” under National in 1981, which later became the accommodation supplement in 1993.

Former Finance Minister Ruth Richardson’s decision to abolish income-related rents for state houses and charge market rents with the assistance of the accommodation supplement was in part designed to solve this problem and create more movement off social housing when people no longer needed it.

Nevertheless, the problem has persisted. English told the Herald that “it’s a longer run issue how you deal with the cliff edge. There have been a number of attempts over the last 30 years and no one has quite resolved it, but in the meantime you can make sure that the right people get the appropriate assistance available”.

“The fact that there is an historical problem there doesn’t mean you can be lazy about matching people’s needs to the right assistance,” English said.

Johnson said the issue wasn’t that the IRRS was too generous but that the accommodation supplement was not generous enough. The generosity of the supplement was constrained by a desire not to see that money fuel inflation of the private rental market.

“If household incomes rise 10 per cent, rents would rise 10 per cent. That’s the nature of the market. If there is more money available in the pool of households who rent, then the rents will rise... you end up getting into a vicious cycle where additional subsidies fuel further inflation, which requires additional subsidies,” he said.

Thomas Coughlan is Deputy Political Editor and covers politics from Parliament. He has worked for the Herald since 2021 and has worked in the press gallery since 2018.