How fair is the Rent Reduction Act?

Current issues related to economy, (responsible) investment, pension and income: every week an APG expert gives a clear answer to the question of the week. This time: macroeconomist and expert strategist at APG Charles Kalshoven on the introduction of the Rent Reduction Act. How fair is it really?

What is going on? The Senate recently passed the Rent Reduction 2023 bill for low-income tenants. With this bill, tenants whose rent exceeds 575 euros (price level 2023) will receive a rent reduction as of July 1, 2023. The reduction applies to households living in independent social housing and earning no more than 120 percent of the minimum income in accordance with the Rent Supplement Act.

A good initiative, one would say at first glance. Yet there is criticism. Social tenants of private rental housing are not only seeing their rents rise more sharply than last year, but due to the introduction of the Rent Reduction Act, their rents are also rising significantly more sharply than those of social housing owned by corporations. Tenants in the free sector are even worse off. The question therefore arises; how fair is this new law really?

Economist

“What is fair? That is really more a question for a philosopher, rather than an economist. John Rawls, for example. He employed the thought experiment of the ‘veil of ignorance’. What distribution would you think is fair if you don’t know in advance, for example, your gender and social status in society? Then people arrive at a less skewed distribution than they currently do, because they think they could be among the unlucky ones,” Kalshoven said.

But that’s simply not how it works, he also realizes. “So an economic judgment on the fairness of this law is difficult. But economists can say something about the effectiveness, the effects and the consequences. And what I see is that the law does not apply to everyone; only to some 510,000 people with social housing. Those people will be paying less rent. Does that group need it more than other tenant groups? I don’t know. Social rented housing is often very well insulated, perhaps better than many private sector rental properties.”

“This costs money, however; money that the government is paying by removing the landlord levy for housing cooperatives. This amounts to 1.7 billion euros. So that means that the government’s deficit is increasing. That money that will now have to be collected in another way. Is that fair? Maybe it is. Because you’re taking something away from one person, who may be able to pay it easily, and giving it to someone else.”

Poverty Reduction

In that context, Kalshoven said it is also important that the law be effective. “If you’re working on poverty reduction, this can help. After all, those 510,000 people with incomes less than 120 percent of the minimum will get a lower rent. But you actually don’t really know if that group is where the need is greatest.” On top of that, the group of people who are left out is a lot bigger. “So by this measure you have a few lucky people, but you’re not doing anything for the tenants of private social housing.”  

The shortage of affordable housing is not reflected in rents, but in the long waiting lists. The insiders are lucky; the outsiders lose out. The rent reduction makes social housing even more attractive. So the tenants are not likely to leave any time soon, in Kalshoven’s view: “They rent inexpensively, which makes the move to another, often more expensive housing unattractive.  This is gumming up the gears of the much-needed flow.” In this regard, the APG economist draws a comparison with the USA. “There, the mortgage is linked to the home. So people who pay 3 percent mortgage interest in this time of rising interest rates - in the U.S. it is now around 7 percent - are really not going to move. This puts a lock on the market there.”

Mismatch

The same is true in the Netherlands, Kalshoven knows. “And rent reduction doesn’t help that. Just as it doesn’t end the mismatch in the market. In fact, research by the Nederlandse Bank (link) shows that 1.8 million households live in ‘the wrong house’. In particular, many young people rent, but they would rather buy. On the other hand, many elderly people own their homes, but would prefer to rent. And then you have the skewed tenants, people who earn too much for the rental property they live in. Is that all fair? No. But again, there are 2 sides. Having to look for a new home because you earn too much also creates a lot of anxiety. You just don’t know what rental properties will be available a year from now and at what rent. That’s a challenge for those people. Then again, as more people are in housing that is not actually meant for them, other people are also not living in the right place. That perpetuates the mismatch.”

Kalshoven’s point is that there are different ways to look at the new Rent Reduction Act. “For the people with social housing it’s nice, but it doesn’t do that much for the housing market. By building more you might be able to break that impasse. But even that is easier said than done. Are there enough skilled workers? And materials? And how do we deal with the nitrogen problem? It is a complex issue.”