VATT study: Increases in housing allowance do not increase the rent paid by beneficiaries
Housing allowance was reformed in Finland in 2015 so that the size of the allowance was no longer dependent on the size of the dwelling. This reform significantly increased housing allowance for small homes. It was feared that the increased support for small homes would raise rents, diverting the benefits into the pockets of landlords. A recent study by VATT has shown, however, that the changes to housing allowance did not have a significant impact on rents.
According to a new study by the Government Institute for Economic Research (VATT), the increases in housing allowance were targeted at low-income housing allowance recipients and did not end up being transferred to their landlords to any significant extent. The study was conducted by VATT Research Leader Teemu Lyytikäinen, Essi Eerola, who recently transferred from VATT to the Bank of Finland, Aalto University Assistant Professor Tuukka Saarimaa, and Tuuli Vanhapelto from Toulouse University.
The 2015 reform simplified the housing allowance system. In the past, the size of general housing allowance was limited by a square metre limit. This was replaced in the reform by an upper limit for total rent which is only dependent on the size of the household and the municipality of residence. For example, the square metre limit for a 25 square metre apartment in Helsinki was about EUR 15. In other words, someone living in such an apartment could receive a maximum of EUR 375 of housing allowance. After the reform, a person living alone in Helsinki can receive a maximum of EUR 482 of housing allowance regardless of the particular home in question. The housing allowance reimburses 80% of the housing costs exceeding the deductible right up to the upper limit. The reform significantly increased housing allowance for small dwellings.
The study examined how changes in housing allowance resulting from the reform affected the rent levels of beneficiaries. In addition to the size of the dwelling, the changes in allowance levels also depended on the municipality in which the dwelling was located and the year of construction. No evidence was found of an impact on rent levels. Thanks to the size of the research data set, the statistical margin of error is small. Nevertheless, a small impact on rents cannot be completely ruled out. For this reason, landlords may have benefited from the reform, especially if this possible small rent effect also extended to tenants other than those receiving housing allowance.
“For example, the monthly housing allowance for dwellings of 15–25 square metres increased by almost EUR 70 compared to dwellings of 35-45 square metres. However, the trend for rents of homes of different sizes remained on the same course after the reform was introduced. Low-income recipients of housing allowance gained a great deal from the increases,” the researchers conclude.
The study examined the rents of the beneficiaries living in non-subsidised rental housing and focused on new rental relationships where there would have been potential for rapid rent increases following the reform. The study used research data covering all recipients of general housing allowance over a period of several years.
Even though the increase in housing allowance particularly applied to rental of small apartments, allowance recipients did not apply for such dwellings more often than before. This may explain why the rents for small apartments did not rise after the reform.
In 2021, a total of around EUR 1.6 billion in general housing allowance was paid out to approximately 400,000 households. Replacing the square metre limit in 2015 with the upper limit for total rent contributed to increased housing allowance expenditure.
“The results indicate that the removal of the square metre limit particularly improved the position of beneficiaries living in small rental apartments, while its reintroduction would weaken these people’s livelihoods,” the researchers summarised.
Link to the study.
Housing selected as the theme for VATT Day 2022
This study on housing allowance will be part of VATT Day 2022 (Thu 13 October 2022, Botta, 13.00–16.00), which will be exploring the topic of housing. At VATT Day, top-level international researcher Professor Christian Hilber will present on the impacts of housing construction restrictions on the housing market, VATT researchers Sander Ramboer and Cristina Bratu will discuss the impacts of housing regulation, Teemu Lyytikäinen will present on the property tax reform, and Essi Eerola will discuss the effects of housing allowance on rent levels.
Teemu Lyytikäinen (tel. +358 295 519 431, [email protected])