Housing allowance has less impact on rents than previously believed

According to a study by the VATT Institute for Economic Research, rents are not higher for dwellings for which housing allowance is granted more generously.

Kuva: Popova Valeriya / Shutterstock.com

The study by Research Director Essi Eerola and Senior Researcher Teemu Lyytikäinen finds that the differences in general housing allowance are not reflected in rents. 

These results contradict earlier Finnish studies, according to which differences in housing allowance have a strong impact on rents. In the new study, the impact of the housing allowance granted to a household to the rent it pays can be estimated more reliably and transparently than before.

Research data on the impact of the housing allowance system on rents is important when assessing the functioning of the system. The housing allowance a household receives is dependent on income and family size, among other things. The new results by Eerola and Lyytikäinen indicate that a more generous allowance granted to certain groups is not transferred to the landlords but targets the allowance recipients.

“In public debate, the assumption of the housing allowance being largely transferred to rents is often repeated, but according to our results, this concern is exaggerated”, Eerola says.

In measuring the impact on rents, the characteristics of the housing allowance system in force until 2015 were used.

Until 2015, the general housing allowance was stepwise dependant on the floor area of the dwelling. This was due to a ceiling on the rent per square metre specified in the housing allowance system, above which no housing allowance was paid for the exceeding part of the rent. For instance, the rent ceiling for a flat with 30 square metres was higher than for one with 31 metres. The study shows that the rents paid by recipients of housing allowance do not display any steps similar to those in the rent ceiling. In addition, the margin of error of the impact assessment is low.

According to Eerola and Lyytikäinen, generalizing the results must be done with care. The study provided direct evidence that differences in the ceiling for the rent per square meter do not have an impact on the relative rents of different dwellings. The results can potentially be generalized to differences in the amount of housing allowance due to other factors as well. However, the results do not show whether, for instance, the housing allowance system as such raises the general level of rents.

The study focused on allowance recipients living in large towns in small, privately-owned rental flats. Within this group, the rent ceiling was binding for more than 80 per cent of the allowance recipients, so the differences in the rent ceiling had a strong impact on the housing allowance paid to them.

The study was based on data from the Social Insurance Institution of Finland (Kela), covering all recipients of housing allowance in 2008–2013.

Further information:

Research Director Essi Eerola, +358 295 519 407
Senior Researcher Teemu Lyytikäinen, +358 295 519 431

Research:

Housing allowance and rents: Evidence from a stepwise subsidy scheme. VATT Working Papers 88