Quality demagoguery    

By: psr | 2007-09-19

Several recent announcements in Spain provide for some amusing and saddening analysis:

  1. The Government of Spanish PM Rodríguez Zapatero announced state aid for young people (under certain income level) to pay the rent on their house or apartment.
  2. Some time ago, they announced that landlords would be protected against defaulting tenants, by a state agency that would pay the landlord the amount owed by the tenant.
  3. The Andalusian regional government (ruled by the same party as Rodríguez Zapatero’s) has also recently announced they would “give away†flats for free to people earning less than €3,000 per month.

Aside from the fact that these are purely populist announcements, just in time for upcoming elections, they are yet another proof of the downright ineptitude of Rodríguez Zapatero:

1) and 2): The Prime Minister is a coward, covering up the housing problem in Spain with free money, rather than tackling the real problem. If rental prices are high and unaffordable for some, the solution is not for the Government to pay part of people’s rent.

The solution is quite simple: It’s a matter of supply and demand. Rental prices rise if supply of rental housing is low. The Government should take steps to reduce prices as a consequence of increased supply of rental apartments. How to increase supply? The answer: by making it attractive for apartment owners to feel inclined to rent their apartments out to people (many flats are unoccupied). How to persuade them? Simply, owners will feel confident to rent their property if they have the guarantee and assurance that defaulting tenants can be evicted immediately, in a matter of hours if necessary, and that any damage to their property will be paid for by the tenant.

Currently, tenants cannot be kicked out of an apartment even if they owe several months of rent. Spanish law sides with the defaulting party of the contract, rather than with the compliant party. The flat owner is unprotected and feels not compelled at all to rent out their property thus reducing the supply of rental housing in the market.

Subsidizing housing will not solve any problems; Its price is not affected. Sadly, the Spanish Government is unwilling to take the really necessary steps to avoid unaffordable prices, which are much harder to implement than a simple populist subsidy.

Government-paid rent for defaulting tenants is equally wrong: It is public money, given to the defaulting party of the rental contract, while the compliant party sees their property forcibly occupied by non-paying residents.

Finally, idea 3) is also utterly immoral, for it uses public money to pay for the housing of some people, for them to enjoy free housing, while others have to pay full price. Moreover, the group of people earning less than €3,000 per month is quite likely the vast majority of the population. Where will the Andalusian government obtain the funds to pay for housing to give away to over 70% of the population?

In summary, the three initiatives by Rodríguez Zapatero described above will only lead to:

  1. Increased dependency of people on the Government (people get accustomed to getting monetary help from the Government)
  2. Promoting irresponsible behavior (people get used to being bailed out by the Government when they do not pay their rent)
  3. Fattening of the Government, increased public spending, and increased tax collection, resulting from the Government’s very failure to face the real problems.
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By: psr | 2007-09-19 | Braindead - Economy - Spain | Trackback | Comments [RSS 2.0]

2 Responses to “Quality demagoguery” »»

  1. Erik
    Comment by Erik | 2007-09-23 at 22:52

    Ok,

    1) It will affect the prices subsidizing housing, the owner will simply rise rent accordingly.

    2) It would be more attractive to make empty property available on the market, either for rent or sale by increasing taxes on property that is not primary house. This will make people buy other stuff for investment and houses for living, hence increasing offer and thus lowering prices.

    3) To compensate for the increased tax on property owners, the legal fees on sale should be lowered to a fixed cost corresponding to the actual work. This increases peoples ability to buy and sell because they need less to finance buying. This will give more movement in the market.

    2+3 should add up to no cost total for the state and on average for the individual.

  2. Erik
    Comment by Erik | 2007-09-24 at 16:38

    An alternative to subsidizing rent is that the state takes some risk from the owner. Currently, the process to kick out a person for failure to pay rent cannot be started until after two months without payment. And then it’s a slow process through the legal system. Obviously, the renter will not pay any subsequent months if he knows court will rule against him.

    Government could guarantee paying the rent for the months beyond, just to pick a number, the first 6 months. This limits the risk for the owner and encourage the legal system to speed up the process.

    This maintains the renters’ legal protection against abusive owners, while not relieving him from economic liability. The state likely has much more power to collect the money, for example by denying access to social welfare until the sum has been paid up. Knowing this, renters will have a clear incentive to keep their part of the agreement.

    Further, since the owner will pay the first 6 months, this model prevents abuse. The owner still accounts for a certain risk, but it is greatly reduced and more important it is reduced to a fixed maximum.

    With a limited risk, more will be inclined to offer their property for rent thus lowering the price. And it would likely be at no extra cost to the tax payers: Obviously, such a guarantee can only be offered to owners renting out their property legally, and thus paying taxes which would likely make up for the losses the state may have to cover.

    Everyone know that cheating the system is a national sport ranking higher in popularity than soccer, and a large part of the rental market is illegal. This model encourage all parts to follow the rules. And it is probably the least bureaucratic model to stimulate the market, since bureaucracy only kicks in in the exceptional cases.

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