The incidence of rent subsidies: Evidence on rents, housing choices and supply

This paper asks whether, and under which circumstances, rent subsidies to low-income households increase rents. We study a reform of the Finnish housing allowance system that caused large quasi-random variation in housing allowances. Using register data spanning five years before and after the reform, we find that large increases in allowances for affected housing units had little or no effect on their rents relative to other units. The effect of a one-euro increase in housing allowance on rent is roughly 0.036 euros with a standard error of 0.028. We provide novel evidence on the underlying demand- and supply-side responses that drive the rent effects. The reform led to only small changes in recipients’ housing choices, and at most modest changes in rental supply. Our interpretation is that rent subsidies can be effective in helping recipient households even in supply-constrained contexts, if recipients’ housing choices are unresponsive to the subsidy.