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2
Housing allowance
2.1
Some theoretical issues
Theoretically, a housing allowance tied to its recipients’ actual housing
conditions has two main effects: 1) a decrease in the relative price of
housing that, for a given initial housing consumption level, results in
redistribution between households of different income levels (i.e., an
income effect); and 2) a change in the relative price between housing and
other goods that is assumed to result in increased housing consumption
relative to other consumption (i.e., a substitution effect).
An income effect arises when the housing allowance increases the
household’s disposable income, inducing it to increase its consumption of
housing, provided that the recipients regard housing and its attributes as a
normal good (which is the usual assumption for housing). However, since
the income elasticity of housing demand among low-income households has
been demonstrated to be below unity (Fallis, 1990), and since it can be
somewhat risky for its recipients to treat the housing allowance as a
permanent increase in income, the assumed income effect of the housing
allowance on housing consumption is ambiguous.
In addition to the income effect, housing allowances are distinguished from
general income support in that they also cause a substitution effect, i.e.,
housing consumption becomes cheaper, relative to other consumption, due
to the decrease in the price of housing relative to that of other goods. This
substitution effect is assumed to stimulate housing consumption. The
magnitude of the sum of the income and substitution effects, i.e., the price
effect, depends mainly on the price sensitivity of the households and the
number of available dwellings. The existence of high transaction costs for
housing is assumed to make household housing demand relatively price
insensitive.
In summary, theory provides no clear-cut prediction of what impact the
housing allowance will have on the recipient’s housing consumption, and
specific features of the particular housing market and housing allowance
scheme appear to be influencing factors.
2.2
The Swedish housing allowance system
This section presents the Swedish housing allowance system for single
parents living in rental apartments as configured in the 1994–1999 study
period. The rules of this system are still broadly applicable today, except for
an increase in compensation levels. Furthermore, except for the 1997
reform, the housing allowance system was not otherwise reformed during
the study period. Though some changes in the means testing were
introduced on 1 January 1994, these changes affected all recipients in a
similar way.
