If the Government wants its announced increase to the Accommodation Supplement to do any good, it had better have some policies ready to help increase housing supply. Otherwise, landlords are likely to be the main beneficiaries. At least in Auckland.

Figuring out who really pays a tax, or benefits from a subsidy, is always trickier than just looking to see who writes or receives the cheque. It depends instead on the specifics of the market.

In places where it is easy to build new housing, accommodation supplements encourage more construction. Demand for rental accommodation goes up with the income boost, and more housing developments get underway. But in places where it is difficult or impossible to build, tenants simply have more money with which to bid against each other for scarce rental units.

Economists generally expect that the costs of a tax, or the benefits of a subsidy, are split between buyers and sellers, with the greater part of the effect felt by the side of the market that is less responsive to price changes. When regulation makes housing supply relatively inflexible, that means landlords receive most of the benefits from subsidies to tenants.

The theory held up well when tested against American housing market data. There, federal vouchers subsidise rents for lower income tenants. A study by Eriksen and Ross found that the voucher programme, on average, had no effect on what landlords charge in rent. But that masked huge differences across cities. In cities where new building was easy, the programme resulted in lower rents – and in tenants’ shifting up to higher quality accommodation. But where city planners made it hard to build, landlords instead hiked rents.

Citing advice from the Ministry of Social Development, Prime Minister English suggested his Government’s increase in the Accommodation Supplement will not affect rents. But he should be careful if MSD based its advice on the effects of the last large change to the Accommodation Supplement, in 2005.

Auckland’s sharp decrease in housing affordability since 2005 points to a city that has a harder time building to meet demand – and one where the Accommodation Supplement will have different effects.

The Initiative has a few ideas about how to let New Zealand’s cities grow. The government needs to act on it if the Accommodation Supplement is to do the job it is meant to be doing, rather than mostly lining landlords’ pockets.