We Have to Build, but That Won’t Fix the Housing Problem
The original (Spanish) version of this article can be found here.
The root of the housing problem is macroeconomic, which is why it is happening simultaneously all over the world. As it becomes harder to find investments in the productive economy that offer a quasi-guaranteed high return — as was the case years ago with the development of various industries — a huge amount of money is moving into real estate. The consultancy McKinsey estimates that up to two-thirds of all global wealth is “found” in real estate.
This results in two types of actors competing for the same asset in housing: those who want to live in it, and those who want to conduct an economic activity. The more homes are in the hands of people who want to do business, the fewer homes there will be for people who want to buy them to live in.
This becomes very obvious when homes are used for short-term tourist rentals, but it is exactly as true when they are used for long-term residential rentals. It is an economic activity of the same nature.
That is why increasing supply will never make prices fall; because there are two types of demand. And while the demand from people who want to live in these homes is limited to the inhabitants of a city, the demand for assets yielding an 18% return is as vast as the amount of money in the world. Many startups cannot deliver that kind of return over the long term, and they are a high-risk investment.
Moreover, in recent years we have devoted ourselves to giving “real estate investment” exceptional protections from the state, making it practically risk-free, and on top of that, it benefits from scandalous tax advantages.
One might think that limiting profitability through rent control could reduce this demand for housing as an asset. But the reality is that there are not many investment products as safe as housing that deliver more than 4% or 5% interest, plus appreciation. Surely many actors, such as pension funds, would continue to invest in housing even if the returns were lower.
This leads us to another problem: entrenching the idea that part of the population will live just to pay rent, even if it is not extortionate rent, while others save through home ownership. We would move from being a nation of homeowners to a nation of tenants and landlords. A feudal system. This would be an unsustainable source of inequality. And for now, that is the path we are on: if the urban development push of the 1970s and 80s in Spain reduced the proportion of the population renting from 30% to 11%, today we are getting close to 30% again.
That is why I believe the solution to the housing problem does not lie in building more, but in requiring a license to rent, as is done with any other economic activity in any city.
But this does not mean we shouldn’t build again. In fact, we should build a lot in the coming years.
First, because construction is a sector with the power to create many good jobs in many areas, as we saw during the bubble years. It is a sector that, moreover, is a leader in Spain and is doing very interesting things in sustainability innovation, for example.
And part of the sector is dying.
In recent years, the lack of professionals threatens to wipe out the entire building rehabilitation industry, which is far more artisanal than new construction. That shortage of talent is a rebound effect from the bad experience of so many young people who found themselves unemployed at the end of the housing bubble, and it would be worth correcting because these medium-skilled jobs are the ones disappearing everywhere — and the ones we need the most.
The second reason is that Spain has a serious problem with its housing stock. A very large proportion of the country’s buildings are old, and many were built as social housing with poor materials, bad insulation, and little natural light. A recent study estimates that up to 2 million buildings are in poor condition, but there are many more that could be significantly improved.
The problem is that the fragmented ownership of these buildings, combined with the enormous economic, administrative, and logistical costs of rehabilitation, makes it practically impossible for them to be changed without a very significant push from the administration.
Transforming these buildings would be an excellent national project for the coming years. It would be a promise of a better life for all the people living in these neighborhoods. And it would be a wonderful creative exercise making use of a resource that is completely underutilized in Spain, where we have some of the most important architecture schools in the world and tens of thousands of excellent professionals. The model of building developments that copy one building’s architecture over and over underuses all this talent.
This could be organized very simply through a public-private partnership mechanism. If city councils increased the buildability of the plots subject to intervention, this could make rehabilitation economically viable for private initiatives. It could be the necessary incentive for these buildings to be renovated or demolished and replaced with new ones.
Even better, this could be done with the requirement that the new homes built thanks to the increased buildability have the city councils as preferred buyers, instead of going straight to the open market. Or that they be designated as social housing. Or even as public facilities. These interventions would open up the possibility of creating a new stock of public housing in consolidated urban areas without using new land.
If well designed, it could also be a very efficient redistribution mechanism, because these buildings, by their characteristics, are generally inhabited by the poorest people in society.
It is a small idea with a big impact.