Is the housing allowance shifted to rental prices?

Abstract

This paper deals with the incidence of housing subsidies, which we analyze using Finnish panel data. The main data set includes 50,000 households that received housing allowances during the period 2000–2008. In addition, we utilize repeated cross-sections of all Finnish households for 1989–2008, the annual sample exceeding 10,000. Estimation results suggest that a part of the subsidies will indeed go into rental prices. A conservative estimate of the size of the shift is one-third, but it is certainly possible that the number is as high as 50 %. On the other hand, the subsidy seems to have increased housing demand more than the subsidy-induced income effect would have implied, which is in accordance with the goals of the subsidy program. Our results seem to be consistent with other studies, which have also indicated relatively large rent effects. If this is indeed the case, we are advised to reconsider the need for reforming the system of housing subsidies, at least with respect to the share of costs that remains on households’ own accounts and the implicit indexation of the system.