Will Tax Credit Increase Housing Supply? Experience from U.S. and Prospect for Australia

Abstract

While the world went through rapid urbanization in the last half century, house prices in many densely populated metropolitan regions are becoming increasingly unaffordable. As a result, many families turn to rental housing. However, the high rents in some markets also place significant burdens on low-income households. Thus, a lot of housing policies and strategies have been introduced by national and local governments to subsidize low-income families to improve their rental housing affordability.

The low-income housing tax credit program (LIHTC) in the USA and the national rental affordability scheme (NRAS) in Australia are such examples. Both policies aim to increase supply of affordable rental housing for low-income families. LIHTC finances the development of affordable rental housing through a tax credit system, whereas NRAS provides an annual tax-free incentive for investors to purchase new affordable dwellings and rent them at 20% below market rents to low-income families. LIHTC has been implemented in US for more than a quarter century since 1986, while NARS has relatively short history since 2008. However, whether these programs will increase the long-term housing supply, or will they simply “crowd out” other type of affordable rental housing remains an open question.

This paper first studies the long-term impact of LIHTC on housing supply, using the property level LIHTC data from 1986 to 2011, as well as other housing subsidy and housing supply data, including non-LIHTC rental subsidy programs, housing vouchers, housing permits, etc. An empirical linear OLS model is estimated to find the long-run sensitivity of housing supply to LIHTC program, controlling for other supply/demand variables. We find LIHTC has strong positive effect on overall housing supply.

Then we compare LIHTC to NRAS program and try to forecast the effectiveness of implementing NARS for increasing affordable rental housing supply, with limited historical data. Similar results show that NRAS has fully compensated for traditional public rental units decline.

The comparative study is important because it makes it possible to evaluate the effectiveness of such different approaches, and would enable decision makers to put the tax payers’ money for better use. The research results will also be useful for national and local governments when designing low-income housing subsidy programs.

Keywords: housing policy, low-income housing, housing subsidy

JEL Classification: H25, O57, R28, R31