Housing Standards 2003/2004:
Housing Policy in the Czech Republic - More Efficiently and More Effective

2. General assessment of selected housing policy instruments

2.5 General pros and cons of the two types of subsidies - comparison and assessment

A simplified approach of some theoreticians and practitioners dealing with housing could seem to offer a picture of a clear trend toward a gradual and, with respect of future development, permanent reduction in the supply subsidies to the benefit of demand subsidies: namely, a shift from social housing to income-tested housing allowances (rent allowances). This shift is due to the theoretically lower financial demands of housing allowances on public budgets than those posed by the construction and operation of social housing. Similarly, there is an economic argument proving that with the same amount of subsidy, demand subsidy is more efficient than supply subsidy because in the case of demand subsidy entitled households achieve greater utility than they would achieve with the same amount of supply subsidy.

Let us now provide a comparison of the relative advantages and disadvantages of both the housing policy instruments.

Social housing

Disadvantages

• high likelihood of poor effectiveness in allocating social dwellings;
• high likelihood of poor efficiency in constructing social dwellings - construction costs are higher due to missing competition pressures than in the case of a free market situation;
• low mobility of households due to the fear of losing privileged access to the social housing sector in a new place of residence, which has negative consequences for the labour market, the unemployment rate, regional economic differentiation and state welfare expenditures;
• great danger of abusing the right to allocate social dwellings for political purposes if the municipality is the owner of social dwellings;
• a certain degree of crowding-out effect on private investment - the state/municipality invest where private capital would be investing otherwise;
• danger of poor efficiency of the support in a long run - the eligibility to social housing, once allocated, often does not terminate once a household reaches a higher income and therefore regulated rent is also enjoyed by households with a higher income;
• danger of creating an artificial housing shortage - since in the social housing sector the rent is kept at a lower than the market level, housing demand - even among those who could afford market rent - is concentrated precisely on the social housing sector;
• danger of a black market with social dwellings - if the difference between market rent and controlled rent in the social housing sector is considerable, then there are only a few people who are leaving social dwellings and many people who are interested in being allocated such a dwelling. If a household no longer needs a social dwelling, it is profitable for such a household to rent such a dwelling illegally at higher than the regulated rent amount or to "sell" the right to the low rent;
• a vicious circle of social housing often ending in the establishment of ghettoes of socially most disadvantaged households, a phenomenon known as social segregation or also social exclusion.

Advantages

• in some cases the state can react to expected trends or a sudden housing deficit more flexibly than the market. "In some countries large-scale migration, caused by exogenous factors, has had to be accommodated but unaided markets have not been able to respond adequately. An example is the movement from Eastern Europe into western Germany." (Ball & Harloe 1998: 63)
• the state/municipality have the power to relatively quickly and flexibly ensure low construction costs (subsidy policy, provision of land lot for the construction site free of charge) for fast and extensive production of financially affordable rental dwellings;
• unlike private landlords, non-profit organisations or public operators of social dwellings will not abuse the excess of demand in a certain situation to generate "profit due to lack", and thus a temporary decrease of affordability of rental housing is avoided;
• the crowding-out effect is relatively low in social housing because the private sector is not very interested in providing higher quality of living to relatively risky groups of consumers;
• private rental housing constituted by minor investors owning one or two dwellings for lease is not a true alternative to long-term lease agreements in the social housing. Minor investors owning one or two dwellings for lease tend to react immediately even to short-term shifts in real estate prices and thus they often quickly sell their dwellings when a significant short-term appreciation of real estate prices occurs;
• direct support for social housing construction increases the supply of dwellings on a given housing market and thus creates pressure on immediate reduction of rent. The demand subsidy through a housing allowance potentially increases the supply of dwellings indirectly (as a reaction to a higher income of a household) but if the market is for some reason inefficient, then the indirect nature of such support can have precisely the opposite effect than was the originally intended one.

Housing allowance (rent allowance)

Disadvantages

• If the market reacts slowly, or more precisely, if the supply is not elastic, then stimulating housing demand results in a price increase of existing housing, inflation pressures, at least in a short-term horizon;
• As is the case with other social support or assistance benefits, the group that is most hit by an introduction of an allowance compensating for an increase of rent is the middle class. A situation can even occur when for average income households owner-occupied housing would remain unattainable on the one hand and on the other hand, due to the restrictive nature of the housing allowance limited to socially disadvantaged households with lowest income, rental housing would become inaccessible;
• Standard disadvantages of all income-tested state support benefits such as stigmatisation, personal deprivation due to the necessity to apply in regular intervals for the benefit, often also bureaucracy when completing the relevant forms;
• An increase in regional economic inequalities. Unlike supply subsidies (e.g., for modernisation of municipal dwellings in poorer regions), a shift toward demand subsidies usually means, with the same amount of money, lower subsidy in poorer regions and subsidy distribution to the benefit of economically more developed regions;
• Significant administrative costs (direct and indirect) related to the payment of the allowance;
• As with some other benefits, the allowance may create anti-stimulation effect on the labour market, i.e., it de-motivates households from increasing their income;
• Regardless of the fact that the allowance is a cheaper alternative to constructing or operating social housing due to its precise targeting and fast adaptation to changes in a household income, prioritising the allowance combined with rent deregulation in the rental housing usually leads to an acceleration of the social exclusion process (households with the highest income leave for the owner-occupied housing);
• "Minor investors" who today exceed the number of institutional investors on the rental housing market have a greater tendency to react relatively quickly to short-term changes in dwelling prices due to various short-term shocks. A housing allowance can then become a very expensive instrument how to maintain the attention of private investors on the rental housing;
• Great distortion of the housing demand which can lead to a reduced affordability of the most demanded housing;
• A shift away from social housing to a housing allowance and private capital does not address the issue of a growing number of homeless people, socially disadvantaged households, and income polarisation, i.e., efficient help to those who sorely need it.

Advantages

• In view of the fact that this is an income-tested benefit, it is in principle an efficient housing policy instrument which, at least in the short run, is cheaper for public budgets than constructing and operating social dwellings;
• A housing allowance can indirectly, by supporting demand, stimulate not only new supply (depending on price elasticity) but also investments into regeneration, maintenance, repairs and modernisation of the existing housing stock;
• Unlike administrative allocation of social dwellings, the housing allowance does not restrict the choice of an entitled household where to live according to their own preferences, and thus results in greater satisfaction and utility of housing consumption;
• High efficiency of support (income-testing of the benefit) and great flexibility of the amount of this benefit if the social situation of a household changes;
• No matter what the danger of the poverty trap is, the housing allowance supports flexibility on the labour market more than the rigid system of social housing with low rents. The allowance is a transferable benefit that can be claimed in various locations;
• Within the entire area of housing policy, the housing allowance allows greater rent deregulation and arrangement of relations on the often distorted rental housing market;
• A properly constructed housing allowance model stimulates households to seek adequate housing.

As Oxley and Smith (1996) claim, the most important factor when assessing the relative advantages and disadvantages of the two instruments is the supply elasticity in long- and short term and in individual rental housing market segments in a concrete economic, administrative and social environment.