Asset Publisher

null On the Housing Problem

Insights
On the Housing Problem
19 Sep 2021
Like Like Save Save Share
CATEGORIES: Spain Macro Spain Real Estate Politics Insights AER Public

Analysts of over indebted companies often say sarcastically: "Human beings have basic needs: providing themselves with food, finding a home, raising a family... and keeping debt off their balance sheets". In this article, I will delve into the housing problem, and leave for coming editorials the tragicomic issue of off-balance-sheet debt, of which pensions are the best example.

Although hominids have been evolving for more than two million years, our species, Homo (I apologise for the sake of political correctness) Sapiens has been evolving for some 250,000 years. The first instances of urbanisation seem to date back to the Neolithic period, around 8,000 BC. Since then, this phenomenon has moved with the evolution of human beings. Raising a family is linked to building a home. Nowadays, young people face challenges in accessing housing. It is not surprising, therefore, that families are not being formed either and that the fertility rate is at historically depressed levels, below the 2.1 children per woman that ensure the preservation of our species (United States, 1.7; Europe, 1.6; Spain, 1.3; China, 1.7; South Korea, 1). In a few years, for the first time in history, we will be fewer, and not because of epidemics or wars. 

Why is access to housing such a challenge? Let us analyse the reasons.

First, land accounts for virtually one fifth of the selling price of a home. Spain is the second largest country in Western Europe (only France is narrowly ahead) and has a very low population density. It has plenty of land. So why is it so expensive? The reason is that land cannot be ‘produced’. Land that is suitable for development is coded as ‘zoned for urban purposes’ and land that is zoned for building, ‘zoned land’, with the rest being called ‘rural’. Countries must protect the environment but also their populations, which requires ‘producing’ land, or turning ‘zoned land into ‘zoned for urban purposes’. Since the great financial crisis of 2007, this process has been catastrophic, not only in terms of quantity, but also in terms of the number of years required for land to become zoned for urban development (from eight to twelve years, believe it or not). The result is paradoxical: a rich country with so much land has hardly any space to build on. The consequence is obvious: the price of the few remaining plots of land zoned for urban development has risen. Young couples looking for their first home will eventually pay the price premium.

Second, labour is a key cost in the construction of a home. If housing construction accelerates, the price of labour can skyrocket, and this increase could be passed on to the selling price of the home. During the 2002-07 economic expansion, the industry was partly blamed for the school dropout rate, as a young person could earn a good salary soon after beginning to work. I remember that in those years the army had to launch powerful advertising campaigns to attract recruits in order to face job offer competition from the construction sector. During the crisis, the opposite happened. Spain moved from starting more than 800,000 houses in 2006 (half that of the United States, although its population is one-eighth that of the US, and more houses than Germany, Italy and France combined) to around 30,000 in 2012. By then, the army already had about 20 potential recruits per place. Today, Spain builds fewer than 100,000 houses a year, about two per 1,000 inhabitants, compared to its historical average of seven and Western averages of about five (see chart below).

 

       

 

Developing activity will gradually go back to normal in Spain. Meanwhile, a building renovation wave will spread across Europe fuelled by EU funds. It will have an obvious consequence: labour will get significantly more expensive, with the subsequent impact housing prices, and the risk of causing a real estate bubble in the medium term. Young people, with their lower and less certain income, will pay the price. 

Third, since some construction costs are market-driven (steel, concrete…), it is necessary to bear in mind the developer margin, since it will be used to meet the financial expenses involved in home building.  If countries have a ‘state’ strategy for building houses, with clear rules, whether good or bad, the developers’ financial costs will be lower. If regulations are continually changing and used as a political talking points, markets will respond by ‘raising’ discount rates in the sector in order to hedge the policy risk. The increase in financial costs will be afforded by the home buyer. This has straightforward implications: the eventual price paid by young couples for their home depends on the sensibility and stability of regulation. 

Fourth, and related to a ludicrous situation: it takes two years to build a house in Europe, but three in Spain, with the financial cost of building nearing 15%.  As such, the extra expenses incurred in during that additional year, for which inept regulation is to blame, means that any young couple wanting to buy a 100,000-euro house will end up disbursing 115,000 euros. And, there is another key aspect, which I will detail further another time: the day you buy a house is the day you pay the most taxes in your whole life. Up to a quarter of the price of a home is linked to some kind of tax and charge. 

Problems bring solutions: a country as great as Spain should produce more land for development, train its enormous active population to build homes at competitive prices and cut its high unemployment rate, and streamline home building and handover procedures, thus lowering their selling price. The benefit is not sectorial, it is ensuring that young couples can face the life project of homebuilding that dates back to the Neolithic period and ensures our future. 

Edmund Burke stated that society is a partnership between the generations. Housing is key in such a pact. We are aware of the problems. Will we demand solutions?

TePuedeInteresar