The following lecture was given at the annual congress of UIPI, Union Internationale de la Propriété Immobilière, in Liège, Belgium, in december 2009.
A French Abstract / Un résumé en Français est accessible via Objectif Eco.
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Simultaneous housing shortages and vacant homes
The incredible outcome of misguided state's anti-property policies
Liège, dec. 9, 2011
I've always heard and read, during my life, that "Housing is in a crisis". When we look at historical records of how the situation of housing is perceived in the press, "housing" seems to be inseparable from "crisis".
And, by the way, in my living country, it's not difficult to see that this crisis is real.
What "bad housing" means for real world families
According to official sources or Non Profit Organizations, in France, about 700 000 households have either no home, or "precarious" ones. Many of them use derelict caravans or Mobil homes. For the least lucky, cavities in bridge pillars or carton boxes on the sidewalks are common places for sleeping.
Our bridges are their homes
If the exact figures of people in such poor conditions are difficult to grab, sharper statistics released by our national statistic office (INSEE) show that about 2.5 million individuals (about 1 million households) live in a housing unit presenting "severe problems" of obsolescence, heating or water adduction, overcrowding, or all problems together. Another 3.5 million individuals are experiencing more moderate problems of discomfort or slight overcrowding.
For sure, if these people were solvent, there would be a huge demand for new homes, either for rent, or for purchase. But these people, at current market conditions, can't find homes matching their needs.
On the other side, we're told that there are too many vacant homes in France, and some people say that if these vacant homes were properly used, a good part of the housing crisis could be solved. We'll see further that this predication is a bit overrated. But of course, from this statement, many people suggest that vacant homes should be subject to a "special legislative action" to force owners to bring them either on the market, or, even worth, to occupiers without any market process.
Before examining what diverse NGOs are proposing, let's see what reality do the "vacant homes" phenomenon covers.
Vacant homes: several different types
First, we should notice that in France, the nationwide rate of vacant homes is decreasing. It's now reaching 6.4 % of the housing inventory, versus 7% at the beginning of the new millennium and 8% in the 90s. This remains about twice as much than in Great Britain or Netherlands, at par with Germany, and much less than in Spain or in Italy.
But when looked further, the figures show a very diverse reality.
First, the geographic repartition of vacant homes, studied by our national electricity provider, EDF, shows that vacant homes are mainly staying in areas with low demand.
On this map, you can see that big inventories of vacant homes are located in rural areas, and big metro areas like Paris, Lyon, or Lille, show vacancy rates under the national average.
But what exactly does the expression "vacant home" mean?
From an INSEE study, based upon a poll of vacant home owners, we can draw an accurate picture of what vacant housing means - multiple answers possible, columns totalling more that 100%:
|
Cause of Vacancy / % (multiple |
Urban |
Rural |
Aggregate |
|
Temporary vacancy |
30,4 |
14,6 |
22,2 |
|
Difficulty to finance |
19,6 |
29,2 |
24 |
|
Necessary time |
33,8 |
32,2 |
33,8 |
|
Inheritance problems |
6,5 |
10,5 |
8,6 |
|
Home for sale, |
19,6 |
12,6 |
14,6 |
|
Home for Rent, |
8,5 |
12,3 |
10,5 |
|
None of the above situations |
22,00% |
23,40% |
23,20% |
The latest line is the most interesting. It covers owners who don't want to give to the surveyors any reason for letting their homes vacant.
Of course, we can sometimes doubt of the good faith of the surveyed people. You have to know that, since 1999, there is a tax an homes let "voluntarily vacant" by owners in the 8 "most distressed urban areas" in France, so people tend to declare that their vacancy is due to one of the factor that makes possible to escape the tax...
But it's interesting to see that over about 2 million vacant homes, about 500 000 homes are neither obsolete, nor impossible to sell or to rent, but are neither for sale nor for rent. These homes are the real ones that could slightly relieve the pain felt by the households in trouble to find a convenient home.
The obvious question is: "why".
The first problem facing the landlord is the expectable yield if he rents a home. Here is a chart showing the evolution of rental yields in Paris:
Rental yields in Paris
And here's another one showing how bad the situation has become for landlords, Figures for France, source: Marc Candelier
Blue line: housing prices - Red : rents - Black-strong dashed : rentals yields
In a bubble, rents grow much slower than home values. So, if you bought your home when the prices were low, incentives to sell are higher than incentives to rent. If you want to invest now in rental units, you'll look elsewhere... except if you get subsidized
But it doesn't say why some owners don't rent.
A low yield doesn't explain vacancy by itself: Rationally speaking, if you have to choose between low revenue and zero revenue, you'll choose low revenue.
Of course, taxes will erode that revenue, bringing the locative yield to an even lower level. But some of these taxes (especially estate taxes and, for the richest, wealth tax) are due even if the owner doesn't rent, so his interest should be to rent, shouldn’t it?
Sometimes, not!
The risk factor
Here's the real problem which plagues the rental market in France: if the tenant stops paying his contractual rent, and if he's well advised, he'll be able to remain in the home more than 18 or 24 months. This may be achieved by using every way of recourse provided by law to tenants who can't pay their rents. Useless to say, « Strategic default » on rent payment has become a quite common behavior in our society.
The number of judicial conflicts for non payment of the rent is about 125 000 per annum in France (either for subsidized homes, public homes, or private rental units). This might sound few (it's about 1.5% of the total rental inventory) but there's more. About 25 000 cases find a negotiated conclusion. About 100 000 end up with a court ordinance of eviction. About 10% of these ordinances are executed by force every year, many of them are executed voluntarily by the defaulting tenant before the use of force, but a growing share of evictions tend to remain unexecuted during numerous months.
In most cases, the landlord will get back his home in very poor shape (bad payers are seldom the most careful), and as the tenant is insolvent, you won't be able to get more than the guarantee that the tenant gave you when he entered the home, i.e. 1 month of rent, by law.
So, if you reintegrate the risk factor in the rental yield equation, then you'll realize that you're at risk of much more negative profitability if your tenant is not serious about his duties, than if your home remains empty.
The risk is not that high, but many of the landlords who don't rent their homes any more are found among those who experienced once the pain of trying to get back their homes after a conflict with a bad tenant.
If your home remains empty, you can use it as a reserve of value, sell it at higher price, or transmit it to your children. But if you rent, you might be in trouble, with a home you can't resell because it's badly occupied.
The cost is not only a financial one: landlords, after such an experience, are discouraged to rent another time.
Governments’ bad ideas
Facing a highly unpopular housing crisis, our government has imagined many « solutions » that can't work, just because they haven't tried to figure out the real root causes of the crisis. Before discussing the good ways to solve the current problems, let's have a look on what our politics have tried, or thought, for the future.
Issuing a legal « right to housing » :
In France, since 2007, a « Right to housing » has been established by law.
The Idea itself of housing as a right is preposterous. Rights, in their original meaning, have been viewed in first place as ability to make a responsible use of your freedom, until you don't harm other's same rights. Liberty and property come from this.
But in the wake of post-war rise of welfare states, other rights have emerged, which suppose that even if you don't give anything to society and live as an « entitled parasite », the society must, by law, provide some services to you. In the early years of welfare states, these rights covered mostly « right to education » and « right to healthcare ». But after 60 years of extension of this society of entitlement, the concept of «a right to» dramatically expanded, and some people feel entitled, just because our societies are rich, to a growing share of this wealth, even if they don't give anything in return.
So the concept of « Right to housing » emerged.
If you apply the concept in its semantic purity, it reveals itself inapplicable.
Suppose everyone is entitled to a home. Why should I pay for one expensive home in the private market? I'd better find the state, or the local council, and say: hey, I've a right to housing, just give me one. The only way to accommodate this demand, for the cities, would be to provide « bad homes ». Bad quality of right to housing homes would be the only incentive, for occupiers, to find a better one by themselves.
By the way, right to housing has been experienced at large scale in now defunct USSR. In communist countries, none was supposed left out without a dwelling. But as USSR was unable to provide good homes to all their citizens, they built a lot of very bad ones, and forced families of modest condition to share the same flats. In Moscow, 29% of homes were known as Komunalkas, homes that were shared by two families, placed there by force.
Other households, except for the Nomenklatura, had to live in miniature flats. Government set up the lower limit for an acceptable home size, to 9 square meter per person in the home, but this limit could be brought down to 7 in exceptional times. And needless to say that building quality was awful.
9m2 per individual... but, in fact, it's precisely the figure that has been chosen by French lawmakers to define the lower limit of an acceptable home. What a progress since the good old times of Soviet Union!
So, the lawmakers know that right to housing is actually impracticable. So they have turned it into a bad joke, an uneasily enforceable right to housing. Homeless people can apply for right to housing, and, if their file is selected, after a long and cumbersome process, they go to the top of list to get a subsidized home, a so called affordable rent housing unit, HLM in French. Since its promulgation to December 2010, 35 000 families have been relocated from... 206 000 applications.
Right to housing is just a way to remind to the subsidized public landlords who own HLM that theses homes should primarily go to the poorest... fantastic innovation, isn't it?
But the idea has been put in people's mind. I guess that, in a few years, people will ask for « actually enforceable right to housing ». And the sovietisation of our housing sector will go on.
Requisition of vacant units
Some people have « the solution ». According to them, state should just take the 400 000 aforementioned vacant homes and use them to relocate « right to housing » applicants. Is it that simple?
So, would this requisition be brought to legal life, the message would be clear: “If an owner doesn’t use his home as the state would like, the state can take it”.
Oh, they will say: “there will be a loan”, “State will help the new tenant to pay its rent”, but I guess this will not reassure owners, faced to the same risk of “net value loss” of an housing unit due to “bad and unrecoverable occupancy”. You can’t expect that an owner could easily recover a requisitioned home: since the requisition would be made to the profit of “underprivileged” families, the requisition would certainly come with some clauses preventing the requisition to be ended easily.
Would this foster a new appetite for rental investment from individuals or specialized companies? Certainly not.
But there are more serious and ethical implications in such a proposal. The redactors of the 1789 human rights declaration didn’t put the “property” as a fundamental right just for mercantile purposes. Your property is the wealth that your freedom allows to form. If you own your life, then you own your past, your present, and your future. And your property is your past. Seizing your property for the profit of third parties would be a way to steal your past, a path to slavery, a major breach in the current social contract between western states and people, still based upon liberty, even if this liberty is, every day, challenged. In my opinion, if such a law was enacted, the economic implications due to behavioral changes would be huge, not for the best. People would diminish their investments in “visible” and easily seizable property, just like in third world countries with no functional formal property rights.
Rent Controls :
France is currently experiencing rent controls, in a soft version: the rent is set freely at the signing of the lease but can’t be raised faster than an official index mostly based on Consumer Price Index.
Some politicians want to tighten rent regulations. These people are either ignorant of our economic history, or reaching new heights in harmful demagoguery. France experienced the toughest rent controls in Europe between the two world wars. As a result, in 21 years, we built three times less homes than UK, and before the WWII, we experienced a shortage of 2 million units. The WWII added 2 other millions to the shortage.
The rent controls were only partly stopped in 1948, but for new homes only, so it took many years for the rental market to become functional again, i.e to allow to a demand and a supply to meet each other and set up a regular price.
Oh, and the worst part of rent control is that it always comes with provisions preventing the owner to recover easily his dwelling. As in the aforementioned case of requisition, you should expect hardcore rent controls to come with hardcore tenant protections, otherwise, owners would just end the lease and try to resell their homes once emptied.
Just to show you how the market was distorted during rent control years: my own grand father had to buy a home in Paris in 1952. But he could only find occupied homes, because there were nearly no new private buildings in Paris at this time. So he had to pay twice: 350 000 francs of these times to the actual owner, and… more than 800 000 francs in “black money”, to the tenant, so this one accepted to leave a home with a so ridiculously low regulated rent that he had no interest to change his location for a new home provided by the slowly emerging free market.
To be clear: the flat was worth 1 200 000 Francs (in 1952 FF), and the true owner of the flat could get only less than one third of this amount!
This shows what a tough rent control is: a confiscation of the value from the landlord to the tenant.
But there’s no such thing as a free lunch: Exactly as law against easy evictions do, rent controls protect current tenants at the expense of people entering the housing market: young families, people forced to change location for job issues, and so on.
What to do: return to property right basics
There are many other “brilliant” ideas from politicians to “solve” the housing crisis, many ideas which have been tried but haven’t solved anything. Public and private subsidized housing, private affordable housing mandate, public guaranty on rent payments, and so on. I won’t discuss them in detail, but just underline their common feature: they’re all based on property right infringement, either developer’s, or owner’s, or taxpayer’s one.
But no one addresses the basic issues that lead to the bad situation in first place.
The first one is the causes of the price bubble that many countries are experiencing; the second is the already discussed above “risk of loss in value” for bad tenancy.
Bubble
Contrary to what is said everywhere, the bubble on home prices has not been global in every booming economy. Yes, abundant (artificially) credit is essential to create a RE bubble. But is it enough? Middle America and middle Canada didn’t experience such kind of bubbles, although easy credit madness was the same as in other places.
Comparison of home prices between bubbling
and not bubbling areas in the USA
There’s a second factor that is required to foster a bubble, it’s a tough land use management, or tough housing permit management, by the authorities. Or both. The fastest growing big metro areas in the USA, during the bubble years, were Atlanta, Dallas, Houston, and the fastest growing mid sized areas were Austin, San Antonio and Kansas City. All these cities have flexible land use legislations which allow short time to market even for big development projects.
On the contrary, places like California, Florida, Oregon, mandate cities to adopt tough land use regulations, where opening new land to development results from cumbersome processes and takes much more time. As a result, supply never adapts to demand in booming years, despite the fact that this demand has been 2 to 8 times less important in bubbling cities than in non bubbling ones. Economists say that in bubbling market, “consumer surpluses are captured by the suppliers of the scarcest ressources”, and, on the contrary, remain in the pocket of consumers in the markets where meeting consumer demand is easy and creates competition among suppliers.
When I mention these figures to unprepared audiences, I’m generally facing lot of skepticism. People can’t understand that Houston is more attractive that the so glamorous Los Angeles, its sunny shore and its movie stars. They think just as if all people were choosing home location in the same way a French retired would do to choose his secondary residence on the Azure coast. But most people just think their location in terms of job opportunity. And in this area, Texas (and Middle America) beats California by a huge margin, as internal migration figures published by the US census Bureau show. Attractiveness is in first place a matter of jobs. And markets with low housing prices are markets with low estate costs for businesses, too. Flexible land use regulations are the key to virtuous economic cycles.
Another factor amplifying the bubble is the heavy subsidies to rental building, as we see in France. Rental profitability decreases, so the lawmakers have “the” solution: subsidize it ! But when land resources are scarce, subsidies don't help investors, they just help land owners to sell it at higher price. This contributes to lower the rental yields, sparking more political demand for... new subsidies.
So, there are attractive places with very high demand, where prices didn’t bubble as much as elsewhere, just because the regulations of land development and house buildings are much more responsive and let the owner be the first decider of the way his land will be affected. Preventing housing bubbles from soaring in good times should be a priority, not only because we can now see their deadly impact on the economy as a whole, but because they make housing more difficult for people entering on the housing market. Thus, we should give back the power to affect land to the owner of the land. Some people see such freedom as the mother of an anarchic development. Examples of fast growing areas in Middle America and middle Canada, which are far from being urban hells, show that the opposite is true. Of course, there must be some regulations, but they must not prevent new development, they should just set up the minimal requirements that any new privately operated development should meet to avoid bad traffic and environmental side effects.
Hence, we should achieve to make problems of unaffordable housing really marginal, limiting social interventions to real emergency situations.
Landlord vs. Tenant’s rights
The second issue for a more efficient rental market is to remove the fear of “unexpected losses” due to bad tenancy. And there is no miracle in this area: cities and countries which have a fluid rental market all make sure that a tenant who doesn’t pay his rent will be evicted in a short delay. In Montreal, even in the coldest Canadian winters, tenants who miss their payments are evicted in less than 60 days, and thus, despite a very low 3% vacant homes figure, homelessness has always been a marginal issue there. Landlords are not afraid to rent, and when a tenant sees difficulties coming to afford his rent, he, generally, can organize himself to relocate in a smaller and more affordable home before being evicted. Landlords don’t ask for numerous guaranties to every potential tenant, making sure that even the more precarious families could find a place to live. This contractual freedom – and more flexible land use regulations- has allowed Montreal to experience a real estate price bubble of only one third of the big one seen in Toronto or Vancouver, where housing prices have become simply insane.
Evicting families in distress could sound like a heartless attitude. But a policy must be judged by its results, not by its intentions. Rewarding bad payers, sometimes with bad faith, ensures that many poor families, eager to pay their rent even in difficult times, won’t be able to find a home.
Conclusion: The two paradoxical situations created by state
The paradox #1: we have thousands of families who can't find good homes, many people who pay their rents, but with difficulties, but nearly half a million vacant dwellings that are voluntarily let out of the market by owners. Some say it’s “market inefficiency”. Deeper analysis shows that it's the result of state's interventionism on housing markets.
The paradox #2: Investors generally look at the ratio between performance and risk when evaluating the opportunity of an investment. But misguided policies have achieved this unconceivable outcome: they've turned rental investment into a low yield/high risk investment.
Any government plan “for” housing should be conceived to reduce the risks associated with bad tenancy, and not to increase them. Otherwise, you'll see more paradoxical and undesirable outcomes, like more vacant homes in conjunction with more homeless individuals or families.
Thank you for your attention.
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Vincent BENARD, graduate from a French civil engineering and spacial planning school (ENTPE), worked from 1990 to 2006 in various positions for the french ministry of planning, including seven years in operational planning. From this experience, he developed a highly critical insider's view of the flaws of centralized and technocratic planning policies. He then joined the Turgot Institute, and published a major study advocating free market solutions to solve housing woes in France, published in 2007: “Logement, Crise Publique, Remèdes Privés”. The book is Available as PDF for free.
Then he studied the financial crisis under the unconventional prism of the dereliction of the rule of law in the United States, publishing another book in 2011, “Foreclosure Gate”, provocatively subtitled “les gangs de wall street contre l'état US” (Gangs of Wall Street against US state). The book shows how the US state broke the traditional protections that free market societies created against dishonesty and reckless risk taking, allowing these usually well contained behavioral patterns to become endemic, and thus, “systemic” and so harmful.
While he mostly writes for a french audience, some of his articles, alongside with some guest posts, are available in english - See Also, on Housing Issues, "Land use regulation and its impact in France"
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"carton boxes" cardboard boxes plutôt non ?
Sinon, très bon article résumant ce qui ne va pas dans le marché immo français. Il manquerait peut être d'insister sur le fait que la difficulté à trouver un nouveau logement diminue la mobilité et donc les chances de trouver du travail pour beaucoup.
Rédigé par : Arkh | jeudi 09 février 2012 à 11h48