I LIVE IN rented accommodation on the North Circular Road in Dublin.
Our house is split into two, a one-bedroom apartment downstairs in the basement and our own home over two floors on top. Two doors up, a slightly larger house, with an extension at the back, contains seventeen bedsits. Yes, you read that right: 17! This modern urban tenement is being sustained entirely by the taxpayer, as only those on rent supplement live in the cramped accommodation that the house offers. Why is it, when the private market has moved on to higher standards of accommodation, that the taxpayer is funding the worst kind of accommodation?
Rent Supplement: the story so far
A couple of weeks ago, the latest Daft.ie rental figures came out. The picture was one of stabilising rents, particularly in the urban areas and in the larger homes segments, with rents actually rising in some markets. However, there is something of an asterisk attached to all of this. Whatever about segments where rents are increasing, stabilising rents may reflect as much government intervention in the market as it does stable demand. For those not familiar with rent supplement, a system of state-provided rent supplement is available to the unemployed, with maximum rents which vary by local authority area. Effectively, if you’re on this scheme, you can rent properties with monthly rents up to those indicated.
This is a huge scheme. The Department of Social Protection in Ireland funds about half the private tenants in the residential lettings market in the country: in June 2011, there were 97,000 recipients of rent supplement nationwide. As of the 2006 Census, there were just 150,000 households privately renting in the country.
Even if that is an underestimate and the true figure was 200,000 and has since grown to 300,000 (which would require the ‘would-have-been first-time-buyer’ cohort to grow significantly faster than the ‘we came here to build properties and have since headed home’ cohort), the Department controls a third of the market. This is huge market power. And just like in the case of electricity, where the same Department is trying to get a better discount out of the ESB than the current meagre 1%, the Department should use it to the advantage of the taxpayer.
But this is about more than just using market power for the benefit of the taxpayer. This is about a potential price floor, which keeps the cost of accommodation higher for all tenants and thus reduces Ireland’s competitiveness.
This is because there is no incentive for a tenant on rent supplement to see their rent reduced, as their likely contribution stays at €24 a month.
Are taxpayers paying for a price floor?
So, as rents generally fell by 25% over the course of 2008 and 2009, they got closer and closer to a point where working tenants could effectively be outbid by welfare tenants. Granted, rent supplement has been cut twice since 2007. The first time, in the Supplementary Budget for April 2009, it was effectively cut across the board by 8%. The second time, in June 2010, maximum supplements were cut in many cohorts but not for single persons (i.e. not for one-bedroom accommodation).
Overall, since 2007, maximum rent supplements have fallen by an average of 14% across the country. However, rents have fallen by closer to 30% for most types of accommodation. The result is that, for one-bedroom properties in particular, taxpayers may now be artificially propping up rents… and footing the bill.
To see this, consider the chart below. It shows how the maximum rent supplement compares to the average rent, both at the peak of the market in late 2007 (the blue line) and now (the red line). The closer to 100% it gets, the more the taxpayer has set a floor on rents, as those who are ambivalent to higher rents (those on rent supplement) can outbid the average working tenant.
(Notes for the graph are below)
As you can see, despite the reductions in the supplement, there has been a definite drift towards supplement acting as a price floor. The only segments where this has not occurred (in Connacht and Ulster in 3-4 bedroom homes) were among those segments most distorted to begin with, with rent supplement covering effectively the average mortgage on average.
The most noticeable increases, i.e. where the potential is greatest for a distorted market where there was none previously, have been in Leinster and Munster. Where rent supplement had traditionally been 80% of the average rent, it is now 100% or greater. This is particularly acute in the two-bedroom segment, where every single local authority has maximum supplements for a couple above the average rent paid. If I’d compared single person supplement with bedsit rents (not one-bed accommodation), the problem in that segment would look equally serious. The short version is: welfare tenants – with no incentive to haggle down their rents – are easily able to outbid working tenants.
And yet lower rents may be wishful thinking (for some)…
I would be careful about believing that reform of rent supplement will push rents significantly further down in all segments. Within Dublin, for example, there is a noticeable difference between Dublin’s southside, where maximum supplements are still just 50%-75% of average rents, and the North city and West Dublin regions, where particularly for two, three and four-bedroom homes, the figure is over 100%. Where rents are well above supplement rates and not only stable but rising at the moment, there’s little to think that reduction in supplement rates will have an impact.
Added to this, it may also be the case that working tenants and welfare tenants form separate markets, at least in some parts of the country. On daft.ie, those listing their ads can state whether they will accept rent supplement. Only one in six do, meaning that there are large cohorts of landlords who are not interested given the perceived extra costs associated with Rent Supplement tenants. (There are also, presumably, many roll-over Rent Supplement landlords, who don’t need to advertise on daft.ie.)
What to do next?
Ultimately, the problem here is that Rent Supplement tenants are currently being sent into transactions with their landlord, without any incentive to haggle the rent down. The cost, as ever, falls on the taxpayer. Reforming Rent Supplement without addressing this is just a stop-gap.
It’s my own belief that rent supplement should be incorporated into general welfare payments, or ‘social income’ and that this income should be treated as taxable. This would level the playing field between workers and welfare recipients and make it far easier for someone coming back into employment to take a job offer. It would also encourage Rent Supplement recipients to haggle on their rent, as they would see some of the savings.
Clearly, there are issues about those on Rent Supplement regarded as vulnerable, including those with addictions. However, that is not an excuse not to reform a broken system. Where there are vulnerable people in society, provisions should be made for making sure they are not damaged by lack of care for their welfare.
That property two doors up from me I mentioned at the start, the one with 17 bedsits, went on fire a few weeks ago. The woman who discovered the fire said to me out on the street “How can they allow people to live in accommodation like this?” And she lives there. One can hardly argue that the current system, which sustains properties such as that one, is working for our most vulnerable.
In the forthcoming budget, the Government has the opportunity to achieve a triple-win by reducing rent supplement. The first win is for the taxpayer: the taxpayer is currently spending about €500m a year on rent supplement for almost 100,000 tenants. Significant savings can be made as the Department uses its market power to lower rents. The second win is for the welfare tenant: by making better quality accommodation more affordable, society can at last move beyond the modern urban tenement.
The final win is for the working tenant and for Ireland’s competitiveness: while some tenants will see no reduction, particularly in family homes in the cities, many will enjoy collateral benefit from the Department using its market power. The glut of property in the country generally should mean Irish rents are cheap compared to other countries and thus the post-rent disposable income here compares favourably. This December, with the Budget, a major step in that direction can be taken.
Ronan Lyons is an Irish economist based at Oxford University, and runs the Economic Research unit at Daft.ie. You can read more articles on his blog, where this originally appeared.
Notes for the graph: (1) The figures include the €24 contribution provided by recipients on top of their supplement. (2) This graph compares the market average with the local authority maximum. The Department of Social Protection tells me they expect those on rent supplement to find accommodation at the 40th percentile, i.e. at a quality a little below the market average. This means that the price floor is even more of an issue as they are competing with bigger budgets for accommodation that costs less than the average. (3) I’ve assumed that both singles and couples with no kids are in one-bedroom accommodation, and that an extra room is added for each child. Where singles are required by their local authority to live in bedsits, or where children are of the same gender meaning two adults and two kids are expected to share two-bedroom accommodation. Again, this would push the bars above higher, as the same household has a bigger budget for cheaper accommodation.)
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