Venezuela's housing situation could be about to get worse. Much worse, if the new right-wing National Assembly gets its way. Among the first concrete demands to emerge from the right-wing has been a call for people who have received housing to also receive property deeds. Just days after the new National Assembly began being sworn in, the proposal was presented on January 12 by Julio Borges, from the majority right-wing MUD coalition.
Borges has claimed this major reform to public housing would basically be a “democratization of property,” giving residents greater control over their lives. Borges and other advocates of the reform claim it will stimulate construction in the housing sector, easing the housing problems in many of Venezuela's major cities.
None of this is even vaguely true.
Venezuela's Housing Problem
First of all, it's important to note that Venezuela's housing program is quite unique. The housing units Borges wants to hand over to residents were all constructed under the GMVV, or the Great Venezuelan Housing Mission. The initiative has long been one of the flagship social missions of the socialist government, with poor families being prioritized for getting their own homes.
The housing mission began as a disaster relief program, but has since emerged as pillar of government efforts to alleviate Venezuela's housing problems.
Almost all of Venezuela's major cities have been facing housing shortages for decades. Indeed, among the first sights that hits most visitors to Caracas are the barrios – shanty towns crawling up the hillsides of the city's peripheries. These barrios had become a permanent fixture of the capital by the 1980s, when poor Venezuelans from the countryside flocked to the city in search of work. These poverty stricken rural migrants were totally priced out of Caracas' housing market, forcing them into substandard dwellings. The situation has dramatically improved in recent years, but the housing market is still a major source of frustration for ordinary Venezuelans. There is a severe shortage of rental properties in many cities including Caracas, and average prices there are now above the minimum wage. Even middle class Venezuelans can struggle to find decent, affordable homes.
Given these circumstances, it's no surprise the Housing Mission has been extremely popular.
Through the mission, residents are given low cost homes under a permanent lease system. The houses are built by the state and / or local communes and communal councils. The residents own the home permanently to live in, but are generally barred from sale.
What is the MUD Proposing?
The MUD's proposal would effectively allow these residents to easily sell the homes they were given by the state. The suggestion is certainly an unusual one: how many countries can you think of where public housing residents can sell those houses?
In the Venezuelan context, there's a good reason why residents aren't currently entitled to sell their homes: the specter of speculation. After the 2008 global financial crisis, the risks associated with unbridled speculation in the housing sector should be abundantly clear. Assuming the supply of housing remains relatively stable, it's also a no brainer that deregulation of public housing will lead to an increase in housing prices, as some residents will seek to cash in on their new property deeds. Of course, the vast majority of housing mission homeowners are unlikely to sell their homes anytime soon. In a high inflation economy like Venezuela, people tend to prefer investing their savings in assets that won't lose value as fast as the currency. For example, Venezuela is one of the few countries where buying a car is actually a half-decent investment decision, as even vehicles lose value slower than the currency. Naturally, housing is even more desirable as an investment than a car.
Further, those awarded housing actually really need it. The priority system, while imperfect, gives priority to single mothers with children and other families with children who don’t have their own home, to people living in high-risk housing – such as on steep slopes that are liable to collapse, and to people living under tin roofs or without basic services like running water.
The claim that deregulating state built housing will lead to lower property prices also makes very little sense. This claim largely rests on Borges' belief that deregulation will somehow lead to faster construction.
It's hard to see how this will happen overnight. Venezuela's private sector productivity has been weighed down for decades by Dutch Disease, and isn't likely to suddenly explode anytime soon. But for argument's sake, let's assume the MUD somehow manages to stimulate the construction sector overnight. Even then, building more houses probably won't help much. Increasing supply of products used for speculative investment doesn't always reduce consumer prices. For evidence of this, look no further than Australia's housing market.
The Australian Comparison
For years, Australia's housing market has seen both a construction and investment boom, alongside soaring prices and dwindling home ownership for ordinary Australians. According to a 2014 International Monetary Fund report, Australia now has the world's third highest housing prices. In the country's largest city, Sydney, housing prices surged five times faster than average wages in 2013 and 2014, according to data compiled by Bloomberg. The reason for the simultaneous increases in both supply and prices was due to a problem that many Venezuelans should immediately recognize: speculation.
As Kate Shaw from the University of Melbourne told housing website Domain, prices kept going up due to “infinite demand.”
“Speculative property investment … is creating extraordinary churn. We are buying, selling, demolishing, rebuilding, selling, buying more than ever before, and this is pushing up prices,” Shaw explained in mid 2015.
Since then, housing prices have begun to stabilize, but not because the country finally built enough houses to satisfy infinite demand. Instead the slowdown was precipitated largely by new regulatory measures.
More Housing Doesn't Mean Cheaper Houses
Broadly speaking, the differences between Venezuelan and Australian housing markets are like night and day, but the Australian experience clearly shows that construction booms don't necessarily lead to cheaper housing. While increased supply can reduce costs, it doesn't always, especially in conditions where chronic speculation has taken hold. Venezuela is an economy rife with speculative business practices. This is a country where unscrupulous businesspeople routinely hoard all kinds of consumer products for speculation. People buy basic products like cooking oil while they're cheap and plentiful, only to sell them at inflated prices when supply dwindles. The real kicker here is that these hoarders play a role in exacerbating supply problems in the first place, by purchasing in bulk before ordinary Venezuelans can get their fill. It's hard to believe these same people wouldn't take advantage of a deregulated housing market to hoard newly available state built homes – just like they currently hoard everything from canned sardines to spare vehicle parts.
Will Reform Hurt the Broader Economy?
In short, deregulation of state housing will have no positive impact on Venezuela's housing market, even if the MUD can snap its fingers and end decades of low private sector productivity and varying inflation. A more likely scenario is that deregulation will lead to more speculation in the housing market, pushing up prices and gouging consumers. Poor Venezuelans that are currently struggling to pay their rent will be at risk of being forced back into substandard housing, and middle class families will see a decline in disposable income.
This, in turn, will deal a major blow to one of the cornerstones of Venezuela's economic development over the past decade: effective demand. One of the few things that everyone on all sides of the political spectrum can agree on is the simple fact that throughout the 2000s, Venezuelan effective demand (the amount of cash Venezuelans are spending on stuff) has been on the rise. Once poverty stricken rural migrants moved towards the middle income, and began supporting businesses by purchasing more than they needed for basic survival. However, increased housing prices will inevitably harm effective demand elsewhere in the economy. When Venezuela eventually recovers from its current economic downturn, consumer demand should have a role to play. However, if consumers have already had their hands tied by a speculative housing market, this could harm prospects of an economic recovery.
The Sad, Sad Irony
The reason behind the calls for housing reform appear fairly straight forward: the notion of handing out property deeds is widely seen as a vote winner. After all, who doesn't want a free house that can be sold? The irony of this shouldn't be lost, though. For years, the MUD has accused Venezuela's socialist governments of Hugo Chavez and Nicolas Maduro of pursuing populist policies that have undermined the economy. Then, as one of their first moves in power in the National Assembly, the MUD has sought to undermine an economic policy that almost everyone agrees has been hugely beneficial. It's hard to escape the fact that the MUD is seeking to sacrifice Venezuela's economic interests purely to boost poll figures. It's astoundingly ironic, but by no means a joke. state housing reform could be a disaster for ordinary Venezuelans.