Online dialogue "Spanish housing market conditions in a changing world".

Summary:

On 18 September 2023, the Rafael del Pino Foundation and the Spanish Regional Science Association organised the online dialogue "Housing Market Constraints in Spain in a Changing World". Albert Saiz is Daniel Rose Associate Professor of Urban Economics and Real Estate at the Massachusetts Institute of Technology and Paloma Taltavull, Professor of Applied Economics at the University of Alicante.

According to Albert Saiz, the difficulties of access to housing are a global problem. It is happening in Madrid, Tokyo, Singapore, New York, Toronto or Beijing. Therefore, we have to think that the causes are global in nature, because it is happening all over the world in all cities.

One of the first causes is the low interest rates we have had. In the seventies, eighties and nineties, mortgages were higher, interest rates were higher. Capital was much more expensive, but it has become cheaper for many reasons. One of them is because core inflation fell in the late 1990s and early 2000s. The reasons for this have to do with globalisation, which means that products don't become so expensive, so core inflation goes down, and it causes exporting countries to accumulate very large capital reserves, which they necessarily put into global financial markets, so interest rates tend to go down. The housing market lives on credit. Very few people can afford to buy a house by paying cash, but almost all of us need credit. So, as credit becomes cheaper, people demand more housing and prices go up.

A second factor, which is also global, although it is not true for all cities, is that many cities have become more attractive in terms of lifestyle. We don't see it as much of an affordability problem in industrial and post-industrial cities because they are losing population. In the US, Rust Bell cities, like Detroit or Cleveland, are not getting very expensive because people don't want to go. But other types of cities, the so-called consumer cities, are becoming more attractive. When people get richer, they want to spend more on a lot of things, many of which only a city can provide, like going to a restaurant or walking around a nice place. When people become wealthier, they want to consume more of those amenities that can only be enjoyed in cities. The most attractive cities are becoming world leaders in terms of attracting people, not just from their own countries, but even globally, like New York, Toronto and Dubai. We have a hundred or two hundred cities globally that are attracting lots and lots of people and they are the ones that are experiencing the biggest problems with affordability.

There is another problem in the developed world. In their cities, it is very difficult to boost housing supply. Nobody wants development to happen in front of their house because you lose the view, you lose the sun, you get more traffic. In democratic countries, these local interests, which do not represent the common interest, are very important in blocking real estate development. This is happening and we see it very clearly in many countries around the world.

The fourth factor would be productivity. The productivity of exportable goods, such as a mobile phone, which are produced in other countries and cost much less than they did twenty or thirty years ago, is rising sharply. Brick, on the other hand, is produced locally. Therefore, the price of exportable goods is falling relative to non-exportable goods, such as real estate. This is causing real estate to become more expensive in relative terms.

Finally, there is the issue of growing income inequality. The segment that has more income can go into the housing market and compete by raising the price. Unfortunately, there are also the people with low incomes, who are not growing at the same rate as the demand from the richest.

As far as Spain is concerned, Paloma Taltavull indicated that she would look at our country with a long-term perspective from the supply side. Interest rates have a clear impact, but in terms of supply, the supply constraint has a lot to do with the productive structure, not with land. The argument that you don't want to build high does not apply to Spain because our regulatory system allows you to build a tower next to an old house if the municipality allows it. We have a structural problem, which is that the specialised productive structure has disappeared. It will take a whole decade to rebuild it and when we have it sized again we could return to the levels of construction we have had in the past. We already saw this in the real estate crisis of the 1980s. This latest crisis is very similar. Prices rose because there was no production, we had no productive structure, it was destroyed by the crisis.

This is the phenomenon of hysteresis, says Albert Saiz, that is, when you have a crisis, you tend to create another crisis that has effects not only in the short term, but also in the long term. There is something in the Spanish economy that goes beyond the housing crisis. Every economic crisis has much longer-term effects than in other countries, where recoveries tend to be quicker. That tells us something about the Spanish economy.

Housing, recalls Paloma Taltavull, is a long-term market in terms of supply. You have to build, which takes two and a half years, plus the time it takes for documents to be accepted and licences to be granted. All this means that the building cycle is out of sync with the economic cycle. When this cycle is broken, recovery is very difficult. In Europe, everyone falls at the same time and some countries have recovered. Spain, on the other hand, is recovering little by little because it has a problem of supply structure. This is generating a ten-year lag in the whole accessibility process.

In this regard, Saiz recalled research in the United States on the determinants of construction costs. There are many differences in the United States because it is a very federal system and each city is its own world. There are cities where there are few companies with a lot of union presence and others where there is more competition, many companies, more immigration, labour that is not unionised. But in Europe not much is known about this, which is an issue that should be studied more, especially in Spain.

It is no longer enough to say that we have accessibility problems. We have to start thinking and coming up with solutions because when we do come up with solutions, proposals are put forward that do not make economic or financial sense. Solutions must have a solid financial basis. We are in an era of populism in which housing economists must propose positive proposals. We need to think about what kinds of instruments to bring. In the first dimension of housing policy we have to distinguish between demand policies and supply policies. Demand-side policies help people directly to buy housing. On the supply side, subsidies are given to the developer, or to cooperatives to facilitate their formation or the acquisition of land. Both types of policies are important, but they have to go hand in hand. There are countries where everything is demand-driven, for example, the tax deduction of mortgage interest. This is a good policy, but if the supply side does not respond, the price of housing becomes more expensive.

The second dimension refers to the fact that housing policy can be local, national or federal, or autonomous. All levels have a role to play and need to be coordinated. You always have to think about how local governments react and try to help them. You cannot create policies that are perceived as barriers to be jumped over. You have to think about policies that incentivise, help, finance local governments that have to think about supply-side policies. Demand policies tend to be national, but supply policies are almost always local. Mayors are the ones who are going to create housing policies.

The other dimension is that we tend to think about de iure policies, laws, regulations. There is no doubt that they are very important. In Spain we have done a lot of work on regulation in laws. But sometimes we have to think about the area of the pact, rather than the laws and their application. This also means thinking about judges, about local actions, municipalities, what developers are doing, social factors, the project approval process, what transparency there is in these processes.

Housing policy in Spain, adds Paloma Taltavull, has been one of the most stable policies. The general scheme comes from the sixties and it has worked. Combining all of the above, we are focusing the problem of accessibility on a problem of supply. If we think about the regulatory capacity of supply at the municipal level, we might be able to unblock the supply of housing. There is no incentive to build, so prices are rising. One of the answers is the inaction of housing policy.

In Spain we can be proud of our regulatory framework, continues Albert Saiz, and we should not have any complexes. But we have to tighten the screws on the local councils because sometimes it is easier to put the blame on someone else than not to look at what the local councils are doing. One of the problems of housing is, in fact, the problem of ideology versus results. Privatising everything won't work; blaming the market for everything won't work either. We need to get out of these disquisitions and implement policies in a practical way and with metrics of how many homes are produced each year. Those responsible must also be held accountable so that these populist dynamics come to nothing.

Another interesting aspect is to think about quantity versus quality. This is a very difficult issue because we are not asking for bad housing to be built, far from the city, without productive fabric or transport. In housing policy there are several objectives and we have to be careful not to emphasise one objective and forget about others. We want quality in terms of the location of housing, close to public transport, parks, schools, facilities, and this is also linked to the provision of municipal infrastructure. Funding is important to make sure that the mandate for municipalities to provide more housing is matched by the necessary funding. Regarding social housing, we don't want to put poor people together in the same urban development. This creates population centres with low education, without access to the labour market, and that is a source of instability.

A third problem is whether we want to help a neighbourhood or a family. There are two approaches. The first is to improve the infrastructure of a neighbourhood, to build housing. But other times we want to help a family, to provide them with help to buy housing, etc. The two dimensions are important, but sometimes they are in opposition to each other.

When you improve the neighbourhood, it usually becomes more attractive and sometimes generates a gentrification effect. This generates two visions. The first one is that if a family had their property and the price of housing becomes more expensive and they can sell it with a capital gain, what is the problem? The other view is the one that refers to people who were renting. It depends on the specific neighbourhood and what would have happened if it had not been improved. If no action had been taken, the neighbourhood would have deteriorated further, so gentrification is one alternative, but the other would have been worse. Sometimes we can fight the effects of gentrification by helping a family that has a problem. Maybe they stay in that neighbourhood, but maybe they go to a middle-class neighbourhood where they have better services, according to their personal and individual situation, than in the other neighbourhood.

Spain is a country of homeowners, recalls Paloma Taltavull. But with the financial crisis we have lowered the rate of ownership in a very tough adjustment in households. The effect of gentrification is to increase families' housing wealth, in a tremendous distribution effect associated with the fact that we are a country of homeowners. If we were a country of tenants, the impact would be much harsher because gentrification implies the entry of capital and the expulsion of tenants simply through the increase in rent and they leave. That is very painful socially. The social effects are brutal. It seems that Spanish cities are better off because we are a country of landlords.

There is a certain tension between renting and home ownership, adds Albert Saiz. The way to resolve this tension is: at 35 or 40, established homeowners with families who are not threatened by fluctuations in the housing market; at 22 or 23, renters because it's OK if you have to move from one place to another. It is healthy to have a society in which young people can leave looking for opportunities, looking for work. The problem, in many countries and in Spain, is that a person who is 23 is still living at home. The important thing is that people who want to leave home can do so. There, the rental market is very important.

The Rafael del Pino Foundation is not responsible for the comments, opinions or statements made by the people who participate in its activities and which are expressed as a result of their inalienable right to freedom of expression and under their sole responsibility. The contents included in the summary of this conference, written for the Rafael del Pino Foundation by Professor Emilio González, are the result of the debates held at the meeting held for this purpose at the Foundation and are the responsibility of the authors.

The Rafael del Pino Foundation is not responsible for any comments, opinions or statements made by third parties. In this respect, the FRP is not obliged to monitor the views expressed by such third parties who participate in its activities and which are expressed as a result of their inalienable right to freedom of expression and under their own responsibility. The contents included in the summary of this conference, written for the Rafael del Pino Foundation by Professor Emilio J. González, are the result of the discussions that took place during the conference organised for this purpose at the Foundation and are the sole responsibility of its authors.

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