"Stolen from GI." The label, scrawled on state houses being removed from the Auckland suburb of Glen Innes shows the anguish already being generated by a radical reform of social housing policy.

Fleur Palmer, the architect of a project that will use some of the Glen Innes houses for homeless families in Kaitaia, is fully aware of the moral conflict involved.

"I believe in social justice," she says. "We have families living in appalling conditions in caravans and cowsheds."

The group she is working for, He Korowai Trust, has received a $720,000 grant from the Government's social housing programme towards buying 20ha on the edge of Kaitaia where it will eventually install 27 Glen Innes houses for families that must have at least two children and be living in "substandard, unhealthy or unreliable living conditions".


The land is being converted into communal Maori ownership so each family will have to pay only for a "right to occupy", making the houses among the country's cheapest at $130,000 each. Families will pay $220 a week for 20 years, or a net $145 a week after claiming accommodation supplements.

Students in Fleur Palmer's spatial design course at Auckland University of Technology are preparing the plans for the complex, and the physical work will be done by Northtec construction and landscaping students.

Plans include a health clinic and kohanga reo, and all families involved will sign deeds to keep the whole site free of alcohol, drugs and violence.

The trust will also provide training and employment support for families to get off welfare.

"I would say 60 to 70 per cent are on benefits," says trust chief executive Ricky Houghton.

"The reality of this community is that nearly 57 per cent are on some form of benefit, 63 per cent are Maori and 37 per cent are single parents."

But housing Kaitaia's homeless is coming at a serious cost in Glen Innes, where Housing NZ is removing or renovating 156 houses to make way for 78 new or renovated state units, 39 homes for community providers and about 140 privately owned homes.

Sue Henry of the Tamaki Housing Group says an elderly woman who had to move out of her state house in Taniwha St a few weeks ago has since died.

"She's the sixth or seventh one who has died," Ms Henry says.

"That woman Fleur, the whole community was angry with her. She came to our public meeting and everyone got stuck into her.

"What she is doing is morally repugnant. It's taking from the poor to give to the poor."

Glen Innes is just a foretaste of much wider changes that are just beginning. All new state house tenants since July last year have been put on fixed-term rental contracts to signal that they should plan to leave as soon as possible, rather than regarding a state house, as many elderly Glen Innes tenants have, as "a house for life".

Housing Minister Phil Heatley has said the state can no longer afford to meet the need for social and affordable housing by itself, and wants to encourage "third-sector" non-profit trusts such as He Korowai to fill the gap.

But to make them viable, the Government recognises that they need housing subsidies comparable to those available to state tenants. That has sparked a fundamental review of the two main existing subsidies - income-related rent for state house tenants, and the accommodation supplement paid through the welfare system for private renters.

The Government pays Housing NZ just over $600 million a year to compensate it for the difference between market rents for its 70,000 state houses and the rents it charges most of its tenants, which are fixed at 25 per cent of the tenants' incomes.

Work and Income pays a further $1.2 billion a year in accommodation supplements for 312,000 people, including more than half of the 480,000 households in private rental housing and about 4 per cent of our 990,000 homeowners.

Most beneficiaries in private rentals get the supplement, and low-income working households can also get it at reduced rates. For example, single parents with high rents or mortgage payments can still get partial supplements on incomes of up to $800 a week in rural areas or up to $1400 a week in the former Auckland City or North Shore.

The Government believes this system is unfair. Officials told Mr Heatley last December: "Some people are receiving more assistance than they need, and for longer than they need it (disproportionately state tenants), while others are receiving less (some households in the private sector on accommodation supplement)."

They said the supplement was "significantly less generous for most households". A sole parent beneficiary with three children would pay only a quarter of her income, or $128.80 a week, for a state house anywhere in the country, but a net $212 a week for a three-bedroom privately-owned house renting for the Auckland regional average of $437, even with the maximum accommodation supplement of $225.

"Households in state houses with more than one adult who is earning income may receive significantly more [subsidy] than they need, as only the incomes of the principal tenant and their partner are tested for income-related rent," the officials said.

Social Development Minister Paula Bennett told the National Party conference two weeks ago that state house tenants could receive board from up to two adult children, who could both claim accommodation supplements, without affecting the main tenants' income-related rent.

Board from more than two boarders is counted as income for calculating both income-related rent in state houses and accommodation supplement in private rentals, but Ms Bennett said it was possible for up to six people to share a house and all claim supplements which could add up to more than the total rent.

Most people, she said, would see that as a rort.

Most budget advisers contacted for this article said they had never actually seen such a rort, although some had heard of it in the community.

Work and Income's computer system does not allow cross-checking by address, but can check benefits paid to other named people in a house.

"When you apply for housing assistance you have to write down all the people you live with," says West Auckland budgeter Maureen Little.

Community Housing Aotearoa president Alan Johnson, representing about 160 non-profit groups with about 5000 homes, says his members can't finance expansion on a purely commercial basis because they want to keep rents below commercial rates - typically around 75 to 80 per cent of the going rate.

"The thing that is holding community housing back is a desire to hold rents down," he says.

The Productivity Commission, in its recent report on affordable housing, says below-market social housing is needed "as a contribution to a complex set of social needs that typically occur in clusters".

In other words, people with other problems such as unemployment, illness or disability typically need help with housing as well as income, health and social services.

It recommends paying the accommodation supplement to community trusts as if tenants were paying market rents, even though the trusts actually charge below-market rates.

Officials told Mr Heatley in December that creating a level playing field among housing providers would require "current differences in levels of assistance to [Housing NZ] and other social housing tenants to be reduced or removed", and "all social housing tenants to pay a market rent (or a discounted rent, where a provider was charging a discounted rent)".

On the face of it, that suggests Housing NZ tenants could be moved off income-related rents on to something similar to the trusts' preference of around 75 or 80 per cent of market rents.

"The implication is that they want to move away from the current income-related rent regime," Mr Johnson says.

But he has heard that officials are also looking at cutting costs by measures such as stopping accommodation supplements to anyone getting subsidies of less than $10 or $20 a week. Axing the 34,000 households getting supplements of under $20 would save $24 million a year.

Salvation Army social policy director Major Campbell Roberts says he would rather raise the threshold for the supplement from 25 per cent to 30 per cent of household income, and raise the subsidy rate above that threshold from 70 per cent to something closer to the 100 per cent that state tenants get now.

"I don't think you can take accommodation supplement up to 100 per cent, but you can increase that subsidy," he says.

Mr Heatley says officials and an external consultants' group led by former Inland Revenue official Robin Oliver are reviewing both income-related rents and the supplement, and he does not want to pre-judge their findings.

"We expect that group to look at all the options, we are expecting them to dig very deep," he says.

"I don't want to close the door on anything except market rents for state house tenants."

How the present system works
Housing NZ rents
* 25 per cent of income of main tenant and partner, including family tax credits.
* $128.80 a week for sole parent beneficiary with three children.
* Income of up to two boarders, such as adult children, is ignored.

Accommodation supplement
* 70 per cent of the rent above a threshold which is about 25 per cent of relevant benefit for family type.
* Subsidy up to $177.80 for sole parent paying $351 average rent for 3-bedroom house, making net rent of $173.20 or more depending on region.
* Maximum subsidy varies by family type and region from $45 a week for single adult in rural area to $225 for 3-plus-person family in former Auckland City or North Shore.
* Subsidy reduced by 25c for every $1 earned above $373 a week for single adults, $500 for sole parents or $568 for couples.
* Income from up to two boarders, such as adult children, is ignored.