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.

Many submissions to the Falinski inquiry call for “inclusive zoning”, “affordable housing”, “social housing” and similar programs.
A central feature of these policies is rent control, with housing being allocated by a mix of queueing, bureaucratic formula and randomness. 1/6

— Peter Tulip (@peter_tulip) October 28, 2021

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.