SOURCE: Journal of Public Economics, Vol 83, 2002
By Scott Susin, New York University, Center for Real Estate and Urban Policy, New York, NY
Summary of article provided by David Hulchanski, University of Toronto
Since the early 1980s, low-income housing subsidies in the United States have increasingly shifted towards vouchers which allow recipients to rent in the private market. By 1993, vouchers subsidized as many households as lived in traditional housing projects, although most low-income households did not receive any subsidies.
This study investigates whether this policy has raised rents for unsubsidized poor households, as many analysts predicted when the program was conceived.
The main finding is that low-income households in metropolitan areas with more vouchers have experienced faster rent increases than those where vouchers are less abundant.
In the 90 biggest metropolitan areas, vouchers have raised rents by 16 percent on average, a large effect consistent with a low supply elasticity in the low quality rental housing market.
Considered as a transfer program, this result implies that vouchers have caused a $8.2 billion increase in the total rent paid by low-income non-recipients, while only providing a subsidy of $5.8 billion to recipients, resulting in a net loss of $2.4 billion to low-income households.
Since its origins in 1937, subsidized housing has traditionally consisted of government funded construction known as public housing projects. However, since the Reagan administration, there has been a dramatic shift in the allocation of housing subsidies. New federal dollars no longer subsidize much new construction. In recent years, two-thirds' of new subsidized housing units for the poor have been funded by vouchers (also called 'certificates'), which are used to rent in the private market. By 1993, over 1.3 million households received vouchers, about the same number as lived in traditional public housing projects.
Recent proposals could dramatically expand the use of vouchers. The Clinton administration put forth plans which would essentially privatize traditional housing projects. All subsidies going to projects would be turned into vouchers, which the tenants would be free to spend elsewhere (Yeager, 1996).
However, there are some reasons for being cautious about privatizing or leveling housing projects. This paper investigates one possible side effect of vouchers: their potential to bid up market rents. The reasoning here is simple. Subsidies to tenants shift the demand curve up, as the subsidized choose more expensive housing. Further, since housing assistance is not an entitlement, but is instead rationed via a waiting list, subsidized renters compete with a large group of income-eligible non-recipients. In fact, about 70 percent of those with incomes low enough to be eligible do not receive vouchers, live in housing projects, or receive any other housing subsidy. These non-recipients will be hurt by vouchers if the increased demand raises market rents.
The main finding of this study is that the voucher program has already caused a large increase in the price of housing for the poor in the 90 metropolitan areas examined here. The most robust estimate presented here suggests that the voucher program has raised the rent paid by unsubsidized poor households in the average metropolitan area by 16 percent.
An upward sloping supply curve also has the familiar implication that vouchers are not simply a transfer to those who receive them, but also to landlords. Considered as a transfer program, the estimated 16 percent increase in rent implies that vouchers have caused an $8.2 billion increase in the total rent paid by low-income non-recipients, while only providing a subsidy of $5.8 billion to recipients, resulting in a net loss of $2.4 billion to low-income households.
Vouchers will drive up rents if they fail to stimulate a supply response: inducing construction, reducing demolition, or increasing maintenance. It has not generally been recognized that without a supply response, housing subsidies cannot improve the housing conditions of the poor. If the effect on supply is small, vouchers will mainly redistribute the stock of housing from one group to another. In the extreme case, where the stock of housing is fixed, voucher recipients will trade places with the unsubsidized, and there will be no net benefit from the program. In fact, the results presented below suggest that the elasticity of supply is very close to zero, that vouchers do very little to increase the size or quality of the low-income housing stock.
There has been a fair amount of study of the supply of newly constructed housing (see DiPasquale, 1999, for a review). However, there has been very little examination of the housing supply mechanisms that are probably most relevant to the market served by vouchers, such as demolition or the maintenance of rental housing.
Because little is known about the supply response to vouchers, little can be said about their cost-effectiveness. Vouchers have lower budgetary costs, and are often promoted as a cheaper solution than construction subsidies. Knowing that a voucher costs the government, say, $400 a month while subsidizing construction costs $600 a month tells nothing about how many new (or better) units are supplied by the subsidies. Although vouchers may induce landlords to maintain their buildings better, and stave off demolition, it is quite possible that construction subsidies, which target the marginal unit of the housing stock, are a more efficient way of supplying new housing.
These calculations clarify two points. First, the small elasticity implied by the results suggests that, despite its moderate size, the effect of the voucher program on rents is surprisingly large. The calculations also imply considerable insulation between lower and higher income housing markets, since the ability to move easily between markets, or substitute towards higher quality housing, should mitigate the price rise. Since the lower trecile coefficient is about as big as could be expected from a theoretical analysis that assumes that movement between markets is impossible, it follows that the other coefficients must be small. Hence the data tell a consistent story, since the estimated effect of vouchers on middle and upper trecile rents is close to zero, as expected.
Another way to characterize the size of the results is to calculate the redistributive effect of vouchers; the 'leakiness of the bucket,' to borrow Arthur Okun's metaphor. Some simple calculations, reported in Table 9, suggest that vouchers do little to redistribute, in the aggregate. Specifically, vouchers cover about two-thirds of recipients' rent, costing $5.8 billion dollars in total (excluding administrative costs). There are about 9.6 million households in the lower third of the private rental market, whose rents have been increased by 16 percent as a result of the voucher program, according to the results presented here. In total, therefore, while vouchers transfer $5.8 billion to recipients, they cost similarly impoverished non-recipients $8.2 billion dollars. The net transfer is $2.4 billion, which goes from poor households to landlords.
An important topic for future research is studies that distinguish among these various explanations for low elasticities. Low elasticities also have important implications for tax and subsidy policy. In particular, they suggest that construction subsidies may do more to improve the housing conditions of the poor than do demand side subsidies like vouchers.