The President of the Spanish Government has announced the construction of 43,000 public homes to provide accessible rent to people unable to obtain it on the market. This initiative occurs in parallel with the processing in the Congress of Deputies of the government bill that introduces very deep changes in the regulation of urban leases and that has unleashed sharp criticism from the opposition and most experts in this matter . Although the debate has focused on this legislative text, it is an opportune moment to analyze the other proposal of the Executive: the offer of residential parks owned by the state, regional or local, whose destination is to be leased to individuals and households with low income levels.
Before anything else, it is essential to point out something obvious: the lack of faith of the head of the central government in the ability of his bill to increase and make cheaper the supply of rental apartments for people with less resources. Otherwise, the State would not be driven to become a builder, which, ceteris paribus, means assuming the ineffectiveness of the legislation sent to the Lower House to achieve the objectives pursued by the government coalition and its parliamentary partners, not to say, that he anticipates and discounts his failure to achieve them. But it doesn’t end here, the story begins.
First of all, experience shows that large public housing projects under a lease regime have created, wherever they have been undertaken, negative environments for the balanced and sustainable development of cities. By remaining out of the market in perpetuity, this type of urban centers are not able to adapt to the process of recycling residential property, essential for cities to be dynamic, grow and offer housing opportunities for all inhabitants.
They tend to become islands with declining value, even if the surrounding urban environments have modernized and prospered. In colloquial terms, they have been transformed into ghettos. This has often led to the need to destroy them, as happened with the famous Towers of Chicago and Saint Louis in the United States (H. Husock, “Public housing becomes the latest progressive fantasyâ€, November, 2019).
The reason for the ghettoization dynamic is very simple. On the one hand, there is the negative impact on the job offer of people accommodated in, let’s say, social rents. These are placed at a lower price than the result of the intersection of supply and demand in a free market, which creates incentives for their “beneficiaries”, people in the lower income levels, to accommodate to this situation and have no incentives to get out of it.
If, in addition, the “benefit” is perpetual and is complemented by transfers from welfare state assistance programs, the recipients have little interest in improving their economic position and moving to a better apartment and neighborhood. Thus the habits of work, savings and education that allow individuals to raise their living conditions disappear or, better, are weakened.
On the other hand, the classic axiom of the tragedy of the commons: “What does not belong to anyone, no one has an interest in keeping it”, manifests itself with great clarity in the case of public rental housing. This causes, once again experience shows, a pronounced deterioration of the areas where they are located.
If you live with private residences, the value of these is significantly reduced, which impoverishes the owners; in the assumption of being isolated, those who live there fall into the so-called “poverty trap” which feeds back. And all this without taking into account the appearance of very negative and common externalities, for example, an increase in crime, the most well-known expression of which is that of large American cities.
Finally, there are very serious management issues. To begin with, if the demand for this type of residence is greater than the supply, which always happens, the public sector must resort to rationing to allocate them. This implies not only the existence of long waiting lists, of twelve years in Holland, for example, but also opens the door to favoritism and corruption.
Similarly, the authorities may face significant obstacles in enforcing the tenant’s contractual obligations. A Government, let’s take the Spanish one for example, which does everything possible to prevent the owners of private flats from evicting non-compliant tenants, it is unthinkable that it would do so as the landlord.
The case of Holland is very significant because it is the State of the European Union with the largest public housing stock as described; by a third of the population. In the Netherlands, the citizens who have the right to request this type of flat are those who receive the bulk of the income from social programs and those who have a salary below the average. Once residence has been granted, the conditions of eligibility to continue living there are not re-evaluated and the home is only lost if the tenant decides to leave it voluntarily.
What’s going on? What I pointed out in the previous theoretical exposition. The vast majority of tenants end up living there permanently and only a tiny minority move to another home after time. In other words, they decide to stay in low-income apartments and neighborhoods voluntarily because they have no incentive to improve their financial or social position (W. Dijk, “The socio-economic consequences of housing assistance”, Mimeo, November, 2018).
The emergence of a broad and accessible rental market for individuals with fewer resources means increasing supply and this is achieved neither with more public housing for rent nor with regulations that restrict it, but with regulations that offer security legal to lessors and allow the parties to agree freely on the contractual conditions. The housing problems in Spain are not a “market error”, but a monumental and verifiable “state error”.
