The current government of Mexico City and President-elect Sheinbaum have expressed their vision of government around the construction of a greater number of popular housing. Therefore, the reform recently approved by the Congress of Mexico City to articles 60 and 73 of the local Housing Law becomes important, which clearly lays the foundations for what is being glimpsed to replicate in other entities, and for the federal policy of massive housing construction. The central idea is to achieve income redistribution through a government policy of low-cost rents to people in poverty, young people between 18 and 35 years old, single mothers and workers. How will these measures affect the real estate market and what international lessons can we consider to avoid making mistakes?
The capital’s leader, Martí Batres, has declared that these reforms are an act of social justice for low-income families since they aim to stop the excessive increase in rents between individuals. The aim is to close the gap between inflation and rental costs, prevent abuses of tenants and stop the phenomenon of “gentrification,” or the process by which a neighborhood is transformed by attracting more affluent residents, displacing the original inhabitants due to the increase in living costs.
The reforms that Batres is currently promoting also involve other aspects of state intervention in private law, such as establishing a digital registry of rental contracts, with immediate authorization, which will be managed by the Government of Mexico City through control of the information and the deadlines that landlords will have to register their contracts; for now, it established a deadline of no more than 30 days from the signing of the contract.
The Secretary of Urban Development and Housing (SEDUVI), Inti Muñoz Santini, justified the new policies on the grounds that during Enrique Peña Nieto’s six-year term, a significant increase in rents was observed, which led to the advancement of housing construction as a business, and not as a human right. In his opinion, that was the reason why between 2012 and 2018 rents in Mexico City rose above the 10 percent annual limit, the threshold established by the Civil Code before the reform. This capitalist phenomenon, he said, caused a retreat in social housing policy, and unleashed real estate corruption phenomena.
Although the diagnosis of the director of the housing institute points to the market as the main responsible for the increase in rents, state intervention, far from correcting the problem, could generate distortions that aggravate the situation, harming both owners and tenants. Let’s look at some international cases.
It is clear that the common good must guide order when failure to comply with ethical duties, such as corruption, causes social problems. However, it is important to recognize that the fight against corruption follows its own legal channels. Therefore, the review of public housing policy should focus on the incentives it establishes to trigger behavior in individuals, and on the decisions of economic agents regarding investment, purchase and rental of properties. In addition, an issue of utmost relevance for determining prices is to review how regulations can really achieve the desired public policy objectives. If they negatively and retroactively affect existing contracts by incorporating spaces for uncertainty, government interventions could certainly cause undesirable effects. For example, they could generate tensions between the contracting parties, sow fear in view of future relations and the renewal of contracts, influence the peaceful or violent behavior of residents, and affect trust and social cohesion between individuals, groups and communities.
The responsibility of the government in this is very great and requires very serious examination. Hence, a measure designed in terms of social justice does not necessarily resolve a crisis of access to the real estate sector.
Regarding prices, establishing caps or thresholds can alleviate the situation of some tenants, but at the expense of the owners, which generates a new problem of mistrust on the part of the owners, which will naturally encourage them to withdraw rental properties from the market, making it more difficult for those seeking to rent to access housing as they cannot raise prices above the threshold.
This type of result has been documented in scientific studies. In fact, there is consensus among economists of various ideologies on the negative effects of rent control (Alson, 1992). An economist critical of the free market, Gunnar Myrdal, stated that rent control has constituted in certain Western countries, perhaps, the worst example of poor planning by governments since it entails distortions in terms of distribution such as market efficiency, that is, there is a waste of space and/or little access to housing.
In terms of distribution, the relatively competitive nature of the rental market must be taken into account. The randomness and imprecision of available spaces, costs and benefits caused by price controls affect the expectations of potential future tenants, reducing transparency and formality in the market. That is, black markets appear, incentives to maintain properties and invest in new construction are reduced. All this leads to the scarce available supply being allocated using criteria other than price, which are potentially discriminatory.
In another study, Diamond, McQuade and Qian (2019) show that rent control in San Francisco has reduced the supply of rental housing by 15%. Consequently, although rent control reduced the departure of current tenants in the short term, it caused a reduction in the supply of rental housing that ended up raising the price of long-term rents.
Similarly, price controls in the housing market in Berlin were implemented in 2020, through a law known as the Mietendeckel or “rent ceiling.” This legislation set a limit on rent increases for properties built before 2014, with the aim of curbing the rapid rise in rental prices in the city. However, this law was invalidated by the Federal Constitutional Court of Germany in 2021.
For their part, Gibb, Soaita and Marsh acknowledge that a “state-of-the-art” rent stabilization policy coupled with the establishment of landlord-friendly conditions can achieve modest results if it does not encourage landlords to raise rents on new leases, as landlords require resources for maintenance and reinvestment.
At the beginning of the 20th century, Spain had a buoyant housing rental market, with a variety of offerings and numerous landlords. Many of the buildings from that era, which we so admire today, were built to be rented out in flats. However, this market lost its professional character and became informal after a series of regulations were enacted in favour of tenants.
In the Spanish case, rental regulation policy has created a phenomenon known as cyclical contractual enforcement. This occurs when laws favour tenants with political rights over landlords, which discourages investment and slows economic growth. During the dictatorship of Francisco Franco, by restricting the enforcement of rental contracts, the supply of rental housing was drastically reduced, forcing new tenants to pay higher prices.
Subsequently, regulatory changes in 2013 managed to make the rental market in Spain more flexible, increasing supply after the 2008 crisis. However, current regulations continue to harm the development of a modern rental market. Laws impose mandatory extensions that affect both landlords and tenants by reducing contractual flexibility. In addition, favourable treatment towards small landlords discourages the entry into the market of professional landlords who offer more stable contracts and a greater supply of better quality. Current regulation, tightened by exceptional rules arising from the pandemic that are here to stay, has created an environment that makes it even more difficult for an efficient and accessible rental market to grow.
In conclusion, and returning to the ideas of John Locke, the centrality of property rights policies must be in the economic dynamism aimed at triggering social well-being. In contrast, the confusion between collectivism and socialism in this type of policies could reinterpret “economic democracy” as a way for the government to influence giving the population a promise of social protection, difficult to fulfill without adequate incentives for supply to expand based on demand. It is crucial that public policy and regulation promote integrity in markets and address access to human rights; to achieve this, they must first resolve, at the same time and with a fair balance, the most appropriate measures for the protection of property rights and access to housing for tenants.
*The author is Director of Inteligencia Más and holds a Master’s degree in Government and Public Policy from the Universidad Panamericana.
Source: eleconomista
