Wednesday, November 3, 2021

Public housing is way cheaper than rental subsidies

A discussion about the best way to provide below-market-priced housing popped up on Twitter recently. Peter Tulip noted many of the limitations of such systems—queuing, quotas, qualifying criteria, etc—concluding that a cash payment to help pay market rents is an economically-efficient way to get the policy outcome of reducing housing costs to low-income households.
I am not against providing such cash payments. They are clearly better than nothing. But the reason I believe governments should build and own some housing is that it provides a better bang for your housing subsidy buck.

Consider the two alternatives over a “tenant life” of say 30 years.

With cash rental assistance, the government pays, say for the sake of argument, $13,000 per year the first year. But to have a meaningful effect this must grow over time to reflect growth in rents and incomes. At a 2% growth rate, by year 30, the subsidy is $23,000 and over 30 years the total subsidy paid is $527,000. The present value of this 30-year flow of subsidy payments at a 2% discount rate is $374,000.

With public housing ownership, the government builds or buys a dwelling worth $500,000 today to supply that dwelling at a rent that is currently $13,000 below market rent per year (i.e. the same rental subsidy to the resident). The remaining rent paid by the tenant covers ongoing costs only. Like the cash rental subsidy, the gap grows over time to be $23,000 in the 30th year. Instead of $374,000 in present value terms, this option costs $500,000 today to build or buy the dwelling (much less if built on under-utilised publicly-owned land).

However, with public housing ownership, a government agency owns the property at the end of the 30 years. Over this period, the asset value grows. Even if it grows in line with the 2% growth of local incomes it means that the property is worth $890,000. In reality, because incomes at a location rise faster than the average (because cities expand), it is likely to be more. For reference, this is only a 76% rise in three decades; a conservative figure when compared to the 143% price rise seen in Australia’s capital cities in the past 18 years. 

The table below shows a comparison of the two alternative ways of providing the same value of housing subsidy to a resident over 30 years. Although the public housing ownership option costs $500,000 upfront, today's value of the final sale price is $490,000, leaving a net economic cost of just $10,000. This approach gets 40x better value for the budgetary spend. If capital growth is closer to historical norms then public housing can more than pay for itself.

What we learn from this is that 
  • The cost of rental assistance over the long term is not much different than simply buying a dwelling and giving it to the household ($374k vs $500k). 
  • The cost of rental assistance over the long term is much more than providing the same rental subsidy via owning the property ($374k vs $10k) 
  • Getting out of the housing ownership game over the past three decades and shifting towards rental subsidies has cost government budgets billions.
[UPDATE] I've updated the figures to reflect 2% growth of incomes and rents and 2% interest and made the spreadsheet available here. Play around with the numbers. 

[UPDATE] People seem to think that interest payments need to be taken into account somewhere. They do not. Prevailing interest rates are incorporated via discounting. 

[UPDATE] Thanks to Jago Dodson for letting me know that a 1993 review by the Industry Commission (now Productivity Commission) ranked public housing first in terms of efficiency and cost-effectiveness out of a variety of alternative housing subsidy approaches they assessed. 

[UPDATE] Thanks to Vivienne Milligen for letting me know that the 1989 National Housing Policy Review found similarly—that public ownership of housing is the lowest-cost strategy for housing poverty relief. 


  1. I would like to see this on an excel spreadsheet, maybe if I get time.
    Broadly agree with Cameron, plus I think there will be a social dividend with less crime and problems as low income families find financial stability.

    1. I've posted the spreadsheet here and cleaned up the numbers in the post to reflect this version.

  2. maintenance contract's should be salary job's or fixed agreement and rent assistance payment's should be available as alternative to social housing residency - bad luck tenAnt's should not be evicted without rent assistance payment's to begin again, retrain, learn basic living skill - check-in code should be mandatory!

  3. Makes perfect sense to me. As a youth worker in residential care for a mid size not for profit, nearly all our funding comes from the govt. I was astonished to see in our annual reports that we received approximately 350k per young person (16-25), per year. Don't get me wrong many need complex care and it is lucky we are here. But there are also many who were made homeless by the housing crisis when their parents couldn't afford rent or to downsize anymore.

    It was strange watching young people stay with us for three years, trying to get minimum wage jobs to pay rent or struggle through uni living in a dingy share house - all the while knowing that if we just directly gave these young people the money we received for them, they could own their own home outright after two or three years and have the stability they desperately needed. Or like you said, the govt could own it, charge an affordable fee, provide stable housing and have a reliable income stream and appreciating capital gains.

    Keep banging the drum Dr Murray. They cant ignore facts forever (I hope).

    1. *Just a quick note on the above^ comment. The young people often had to go to "dingy sharehouse"s after they reached the max age we could look after them.

    2. I had a job doing research in the NFP sector and was also blown away by the level of public funding given towards service providers. It was incredibly weird seeing them boast about housing developments built entirely with public money. Why are they even involved in the first place for anything other than unnecessary admin costs?

      Sometimes feels like this system exists to politically offload these issues into 'charity', even if it'll cost us a fortune.

    3. "Sometimes feels like this system exists to politically offload these issues into 'charity', even if it'll cost us a fortune. "

      I think you are spot on there.

  4. How does the public housing program suggested here compare to the ones in places like Singapore and Hong Kong, where the government builds apartments and sells 99-year leases to the public at below-market prices? For comparison's sake one might think of a 30-year lease instead.