There’s been movement on two fronts of the NSW State Government’s ‘Future Directions for Social Housing‘ agenda.

Last week the Social Housing Minister, Brad Hazzard, announced that from mid-2017 some 14 700 dwellings currently let to public housing tenants will be transferred on 20-year leases to community housing providers (CHPs), with CHPs also set to take on 3 300 dwellings to be built under separately-announced estate renewal programs. It is transferring the properties, says the State Government, because tenants get better service and support from CHPs – and because CHPs get better rent revenues from the tenants who, as non-government tenants, become eligible to receive Rent Assistance from Centrelink (worth about $1 billion over 20 years, according to the Minister). The State Government has assured affected tenants that their tenancies will be transferred automatically to the CHPs (by operation of ‘concurrent leases‘), and that FACS staff will be ‘given the opportunity to take up jobs in the expanded community housing sector’. 

The other area of activity relates to improving employment opportunities for social housing tenants. The State Government has commissioned the Independent Pricing and Regulatory Tribunal to review current rent models and eligibility criteria, and ‘recommend an appropriate rent setting framework for social and affordable housing that improves incentives for workforce participation.’ And last month FACS Housing convened a consultation session with CHPs, employment service providers and other stakeholders to sound out two proposed new programs: ‘Personal Support Plans’, to case manage social housing clients towards job-related goals, and ‘Pathways to Jobs’, a specialised employment service targeting social housing estates. The stated aim is to ‘support people to avoid social housing’ and to achieve a ‘5 per cent increase in positive social housing exits’.

Building up the capacities of unemployed people is great, but FACS NSW should take care that it does not link employment support and housing assistance through unrealistic conditionality. On the one hand, it needs to be recognised that there are almost 200 000 unemployed persons in New South Wales (in all housing tenures) – and about 70 000 job vacancies. There’s just not enough jobs. No amount of ‘personal support planning’ and case management will change that.

And on the other hand, FACS Housing needs to recognise that under its current policies, public housing tenants who look like beating those odds and getting jobs are strongly discouraged from doing so, and public housing tenants who are in work are strongly discouraged from increasing their incomes beyond a low level.

Policy settings that impose costs that reduce the rewards of work so much that people will knock back work are known as work disincentives – or, more precisely, ‘unemployment traps’ (settings that discourage a person from working at all) and ‘poverty traps’ (settings that discourage a person from increasing their income through more or better work). For some time there has been concern that system of income related rents in public housing and community housing throughout Australia (by which tenants pay a rent rebated to 25 per cent of their household income) operates as a work disincentive (contributing to poverty traps, if not unemployment traps). This is particularly so when considered along with the effect of income tax and the tapering off of social security payments: straightforwardly, income-related rents add 25 percentage points to effective marginal tax rates (EMTRs).

However, against this concern we should also set:

• the notion of fairness represented by income-related rents (the old-fashioned idea of ‘from each according to one’s ability, to each according to one’s need’);
• the fact that income tax and social security settings have a larger effect on EMTRs; and
• the research evidence that shows similar persons have higher rates of unemployment when on the waiting list than when in social housing  – suggesting both that the prospect of losing eligibility under the tight income thresholds is a worse disincentive, and that the security and affordability of social housing helps some tenants get job-ready and into employment.

The particular problem in New South Wales is that public housing is beset with two additional policies with even sharper work disincentive effects.

The first is the regime of higher rent rates for ‘moderate income’ tenants, by which the usual 25 per cent rate slides up to 30 per cent for households within a certain range of income defined as ‘moderate’ by FACS Housing. Calling it a ’25-30 per cent sliding scale’ belies its work disincentive effect, because that’s not a marginal rate that applies only to additional income in the moderate range, like progressive income tax rates do – instead, the moderate income rent rate applies to all the household’s income. Expressed as a marginal rate – which better represents the way people think about the costs and rewards of increasing one’s income through more or better work – it’s 45 per cent sliding up to 55 per cent.

In other words, if a tenant increases their income into the moderate range, on average half of the increase would go to FACS Housing in rent. And that’s before income tax. The moderate income rent rate policy adds, on top of the usual 25 percentage points from income-related rents, another 20-30 percentage points to EMTRs. This makes rent the largest contributor to EMTRs for persons in the moderate income range.

For example: say you’re a single person in public housing on an income of $754 per week. This is what a mid-level 4-day per week community service worker might earn; it’s also just below the moderate income range. Under the usual rules, 25 per cent of that goes to rent. Now say you earn precisely one dollar more – just enough to put you in the moderate income range, where the rent rate starts to slide up. At just one dollar into the range, the rate rises only fractionally – by 0.026 per cent – but that rate is applied not just to that additional dollar of income, but to every other dollar of your income too. Across $754 dollars, that’s 20 cents. Add that to the 25.026 cents of rent for the additional dollar, and it’s just over 45 cents out of that additional dollar that goes in rent. From the remaining 55 cents, you have to pay income tax – 32.5 cents – leaving you with 22.5 cents from your additional dollar of income. That’s an EMTR of 77.5 per cent.

Say your income is near the top of the moderate range ($987) when you earn an additional dollar: the fractional increase in rate applies across even more dollars, resulting in 55 cents out of that additional dollar going in rent. Factoring in income tax, you’re facing an EMTR of 87.5 per cent.

This would weigh heavily on anyone’s decisions about work. For some households, the policy affects other decisions too. Say your household includes a young adult child who is entering the workforce. Because the rent rate is determined by household income, the young person’s wages can result in a higher rate of rent for all household members, including non-working parents whose income has not changed. This household is faced with decisions not just about work, but also about whether the young person can still live at home.

The second additional work disincentive comes from FACS Housing’s reviews as to continuing eligibility. Since 2005, all new public housing tenants have faced a review of their eligibility to continue in public housing every two, five or 10 years (coincident with the expiry of the fixed term of their agreement, which depends on FACS Housing’s assessment at the start of the tenancy of the tenant’s circumstances). If at review a household’s income is above the top of moderate income range, FACS Housing will proceed to terminate the tenancy.

Particularly for households in Sydney, the income thresholds at which continuing eligibility is lost are well below the incomes required to affordably rent in the private market. A single person at the top of the moderate income range ($988) will, in public housing, pay $297 per in rent (at the 30 per cent rate); in the private market, they would be looking at $470 per week (median rent for one-bedroom units across Sydney). Add to that the insecurity of private rental housing, and insecurity of employment, and it becomes rational – even wise – for a public housing tenant to knock back work in order to stay housed.

And this is what has happened. As reported by the NSW Auditor General, less than two per cent of tenants reviewed at the two-year period were found to be ineligible. The rate of exits from public housing has slowed since the introduction of these two policies 10 years ago – ironically, as part of a reform agenda aimed at  moving employed tenants out of public housing.

In the UK, which followed New South Wales’ misguided lead and encouraged social housing landlords to use fixed term and reviewable tenancies, many of those landlords are now disenchanted with the policy. In New South Wales, however, the community housing sector took a critical view early on and, when moderate income rent rates and continuing eligibility reviews were being implemented in public housing, managed to persuade the State Government that the policies should not apply to community housing tenants. The 14 700 public housing households soon to be transferred should benefit from this treatment – there should be no question of these counterproductive policies being brought into community housing now. And they should be lifted from all those remaining in public housing too. The guiding principle for Future Directions should be that social housing tenants will have nothing to lose from working.