1.31.2006

heritage, home improvement
and rent control


Image credit: Bahay na Bato in San Nicolas from Tom Cockrem's Travel Image Library.
"In many cases rent control appears to be the most efficient technique presently known to destroy a city—except for bombing."
Assar Lindbeck

If there is a third rail in Philippine politics, it is rent control. The law has been extended countless times (the latest incarnation is RA 9341 which extends RA 9161) and though each time the law is passed or extended and sunset date is set, it is nevertheless predictable that it will be extended or renewed next time the law is set to lapse.

Arroyo, who has a Ph.D. in economics, must KNOW about the damaging effects of rent control and so I DO NOT UNDERSTAND why she approved the current extension. Or why anyone who took some basic economics in college (i.e. -our lawmakers and policy wonks) would approve of it. -Apart from it being POLITICALLY UNTOUCHABLE.

I am by no means neo-liberal in my economics but the left and right sides of the spectrum of economic thinking (from the chicago school/washington consensus to socialists and the welfare state architects of northern europe) agree on the destructive effects of rent control. It distorts not only the market but damages the built environment itself:
"...rent control diverts new investment, which would otherwise have gone to rental housing, toward other, greener pastures—greener in terms of consumer need. They have demonstrated that it leads to housing deterioration, to fewer repairs and less maintenance. For example, Paul Niebanck reports that 29 percent of rent-controlled housing in the United States is deteriorated, but only 8 percent of the uncontrolled units are in such a state of disrepair. Joel Brenner and Herbert Franklin cite similar statistics for England and France." (Walter Block, 1990)
Assar Lindbeck, whom I quote above, is a socialist. Paul Krugman has this to say:
"The analysis of rent control is among the best-understood issues in all of economics, and -- among economists, anyway -- one of the least controversial. In 1992 a poll of the American Economic Association found 93 percent of its members agreeing that "a ceiling on rents reduces the quality and quantity of housing." Almost every freshman-level textbook contains a case study on rent control, using its known adverse side effects to illustrate the principles of supply and demand."
And yet it continues to be untouchable -even by our columnists and pundits. (It could be that my google-foo is weak, but I can't find a single comment by Winnie Monsod on the matter, Raul Pangalangan condemns it but only in passing while criticizing tuition controls. Not even the ultra-conservative Bernie Villegas has critiqued it.)

It's not for a lack of local studies, either. A 2002 study by Marife Ballesteros for the Philippine Institute for Developmental Studies showed that:
"net benefits from rent control are positive and targets mainly the poor families. However, benefits have negligible effects on income. They also tend to be eroded by the regressive effects of rent control on supply of rental housing, in particular, the strict eviction provisions of the law. Stiff competition for low-priced rental housing, low quality of housing for the poor, higher rents for the uncontrolled sector, and misallocation of resources are the possible effects of rent control on housing."
Now why should this be important to the Heritage Conservation Society? Because the only real way to preserve our built environment is to make sure it is in the economic interest of the owners to invest in their properties. The Society may save a building or two by their current media strategy but they will do an even greater service to Metro Manila's heritage by making sure it is financially rewarding for landowners to reinvest in old buildings. Otherwise, the lack of actual income from rent causes disinvestment and decay. Landowners who can source new capital will more likely tear down their old buildings, while those who do not have the resources will not even be able to re-finance enough so that they can invest in the upkeep of their old buildings.

Want to know why Metro Manila is in a state of disrepair? Five decades of rent control. Want to know why we have squatter colonies? Rent control. Want to know why we're losing beautiful old homes? Rent control. Want to know why we have a small middle class? Rent control.

Now what about the poor? Won't lifting rent control make it more difficult for the majority of our population to find housing? We've had rent control for over 5 decades. As Dr. Phil likes to ask, "How's that working for you?"

Multiple Choice Quiz: We add over 100,000 people to the population of Metro Manila each year. And because we build so few new apartments, where do you think most of our new internal migrants wind up living?
  • a) In dilapidated housing
  • b) In crumbling apartment blocks
  • c) In old, over crowded boarding rooms
  • d) In squatter colonies
  • e) All of the above

22 comments:

Anonymous said...

I suppose it's hard to argue with your economic arguments, but I think I fear being on the losing end as a tenant and not being able to afford to live where I want to!

Urbano dela Cruz said...

anonymous,

that of course, is always the fear as removing ceilings or floors on rents will always have winners and losers. but removing market distortions are always pareto optimal -the market will distribute to the optimum as suppliers compete and buyers become more discriminating.

it will be rough for a while as the market finds equilibrium. specially so in the property market where new supply (new buildings and apartments) will take 2-3 years to respond to demand. (which is why good policy will take into account the transition -you can't switch off an addiction overnight.)

in the end though, when supply normalizes, you might wind up paying much less for where you want to live -or getting much more for what you are willing to pay.

Sidney said...

I am not so familiar with the subject but from what I understand rent control is ONLY for units rented out at less than 5,000/10,000 pesos. Those units have maximum allowable annual increase of 10% yearly (which in my opinion is not bad).

Do you really believe higher increases (more than 10% a year) will motivate owners to do the necessary renovations?

10% rental increase is a fair increase. Even the middle & high-end housing, rental rates (which are not regulated) are not increasing with more than 10% yearly. (I even think the increases are less than 10%)

In my opinion a lot of owners just don't have the capital to do major renovations to their properties.
(lack of capital).

In Belgium the State helps you (financialy) if you can prove that you renovated your house/property and they fine (tax) you if your house is not well maintained or empty.

Urbano dela Cruz said...

sydney,

RA 9341 caps the increase for units already renting for less than PhP 7,500 a month in the NCR and PhP 4,000 for units outside the capital. this version of rent is called "tenancy rent control" so it benefits existing tenants -the units get to "de-control" once the tenant leaves or is evicted. (hence the accompanying extensive rules for eviction.)

it's not a question of "fairness" but a question of market response.

at first blush, it does sound reasonable (10%) but if you take it in the context of 5 decades, then the picture changes. the rent ceiling distorts the supply at the low end of the market because the supply is restricted by the ceiling and is not allowed to respond directly to market demand.

you're right, there is no capital. in a normal market, the equity in the property itself could be used as collateral to reinvest but because of the rent ceiling (esp. on older units), banks can't see a clear profit and will not lend. -owners can't see earning potential and will not reinvest.

neither will you see anyone building new apartments that could lease for 7500 or lower. so that end of the market is not served by the private sector and leaves it to: 1) the government 2) the black market (slumlords).

is it any wonder that we get a lot of very tall apartment buildings (the citylands)? but there are no mid-rise buildings (say 5-10 stories) in the rental market?

as you walk around the city, you'll see new condos, new high rises but very few new apartment buildings. that's the market's response to the ceiling.

here's europe's working paper on housing policy.

Sidney said...

Thanks for the clarifications. I got your point now.

carlosceldran said...

I actually go to that house every month. It's part of my Chinatown tour.

There are ten families renting in that house. Each family paying Php2000.00.

Still too much I have to say.

Urbano dela Cruz said...

ten families? in how many square meters?

I agree: way too much for the condition of the place. but then that's typical, isn't it?

the owner only gets 240K a year out of the rent (pre-tax). it'll cost way more than that to even do a basic upgrade. -even then, he'll have to evict everyone first before he can up the rent.

notice how the "reinvestment" in the buildings next to this house take the form of new buildings.

Sidney said...

This is a very good case study.
For sure the "average" owner can't renovate a house like this one in its original state. (style/wood/architecture). Even without the rent control. The owner can't increase his rent as long as he don't makes major renovations. And indeed it will be (business wise)more profitable to tear down the old structure and build some high rise.
And another nice house will be gone for ever.
What is the solution?

Urbano dela Cruz said...

nice questions sidney,

some (hopefully not too complicated answers):

1)

first step, of course, is to gradually but definitively lift rent control -but that doesn't solve improving the property in the here and now, and making it profitable for the owner to do so.

so

2)

historic tax credit - which gives the owner an equivalent (or higher) tax credit for any amount he spends to restore (emphasis on restore) his property. this allows the landowner to recoup expenses at year 1 of the pro-forma

2.1)

to avail of the credit, the property has to be declared a heritage site -the declaration should be done at the community level NOT by a national bureaucracy

2.2)

restoration should be under the review of a historic conservation agency -but you have to watch this because this often becomes burdensome when the agency gets too high and mighty about historicity (c.f. -the experience of Intramuros)

3)

there should be a local fund for low cost loans to improve shop fronts (creating a Business Improvement District could help source the funds)

4)

a radical step: government should buy the property, create a "land trust" (an organization that will own the land) sell the building to someone who will restore it -but it has to stay on property.

the building can be resold but not the land, giving the government control of its use and keeping the entry price low.

(and the declaration of a heritage site will bind the government -keeping them from redeveloping or reselling the property to some monster mall developer)

...I could go on for days.

Sidney said...

Why don't you run for Mayor of METRO Manila !
If I was allowed to vote I would vote for you ! :-)

Urbano dela Cruz said...

(what's up with blogspot? i posted this yesterday and it disappeared today?)

sydney,

all in good time, my friend. ("MWAHAHAHAHAHAHAHA!!!" SFX: thunder. VFX: lightning.)

but seriously, I'd really like to be a barangay captain of a neighborhood just outside makati (like say the zobel roxas area just north of the Buendia/G.Puyat and SLEX intersection - or near La Salle on Taft Ave.)

I'd like to see what changes can be done at ground level by the smallest units of government. (i think a lot can be done - but that's me in my armchair away from the trenches)

so, vote for me as barangay captain so I can learn some (hopefully valuable) lessons! hehehe.

and that goes for you too, wysgal, for that very flattering comment that I can't seem to find on the blog.

thank you. -but better have your brother checked as he might have BSE.

wysgal said...

Mad Cow? Not from anything I cooked I hope. My comment did mysteriously disappear but let me repost it here:

I said that I received a random text message from my brother the other night saying you (i.e. Urbano dela Cruz) should run for president because he agrees with everything you say. And I agree. =)

(And it was just pointless fan-posting that made me feel like commenting).

But if you want to run for Barangay Captain, that could work as well!

Pia Faustino said...

Just a firstperson validation from the trenches.

Over the past three weeks, I've experienced just how unfriendly the housing market can be to 22-year-old working attempting to leave home for the first time.

Most of the living spaces (apartment is too kind a term) I've found are either decrepit and falling apart, or tiny and located at the umpteenth floor of some character-less skyrise.

AND in all cases, overpriced. The only liveable spaces priced below P7,500 are bedspaces.

I wonder if this issue would be a good story for Reporters Notebook? Hmmm...

Urbano dela Cruz said...

pia,

I'd strongly encourage it. I'd like to see what Winnie or the other economists have to say about it.

Maryanne Moll said...

as a city dweller, i believe that rent control's effects can pretty much go hither and thither. it can burden landlords, but it can also burden tenants.

i've never really thought this issue before, but urbano has got me thinking now.

Urbano dela Cruz said...

maryanne,

thanks! Our aim to disturb!

Anonymous said...

Hello, I'm Vic, a Fil/Am from New York City.I thought I'd just add some remarks. First, I own a few apartment buidings here in New York so I have some experience with rent control. I read your post with some mixed feelings. As a business man whose main objective is to ultimately make money, I HATE rent control. It definitely hinders my ability to turn a profit and selling a property with tenants under rent control is a deal breaker. But, as a person who comes from a modest backround, whose mother was a nurse and had to work two jobs to support the family and pay the rent, I can relate to those living under rent control.
There are facets to the rent control issue that you have left out. Here in NYC, for the last decade or so, gentrification of entire neighborhoods have taken place to the effect that middle income families have fled manhattan. A one bedroom apartment in a average neighborhood goes for about $2000 a month. If you are rich that is no problem but what if you are not? A family that is not rich must move further away from the city or the source of work, further putting a strain on the family income.
I also took some economics classes in college and back then I may have agreed on some of your points on looking to the market for solutions. However, I know now from experience that you cannot use the market economy as a guide line for setting public policy. We don't live in a vacuum, there are too many forces that manipulate supply and demand. One strategy for large companies here is to hold large numbers of apartments vacant. These apartments are held for some time until rents and values go up and up. You see the demand is always the same but they manipulate the supply and they make a ton of money by doing so.
Your ideas sound very much like "trickle down economics" or better known here in America as "Voodoo Economics" coined by George Bush Sr. It did not work here for the 12 years employed by Reagan and Bush and I do not think it will work there in the Philippines. The hope that the rich or property owners would reinvest into the economy utimately improving it and its positive effects would somehow trickle down to the poor is just too much to ask for.All it did was make the rich even richer. Lets face it a slum lord will never change. I personally know slum lords here in New York and there in the Philippines. Their properties are dilapidated for a reason other than lack of capital. They are content with the low rents they get even if they can get more if they improved their properties. If given more capital, they would just turn more properties into slums.Here in New York, slum lords are fined heavily for having sub-standard housing. But also given tax breaks and other concessions for building low income housing. For example for every skyscraper condo without rent control Donald Trump builds here in NYC he also has to build some housing units for the poor.
Rent control is a public policy created to help the poor stay in urban places like manila and new york. Somehow, I feel that throwing the poor unprotected into the market economy not to mention an unstable and corrupt government is too harsh. You have not addressed an answer for creation of low income housing except by saying "when supply normalizes" people may be able to get affordable housing. Even if I concede your ideas that market solutions will somehow create lower income housing, when will that take place? For the meantime, where shall the poor live? Your ideas may change the physical landscape of manila for the better but ultimately, as gentrification dictates all you will be doing is forcing the poor to relocate to further distances in the outskirts of the city not unlike leper colonies of old. My family and countless others lived under rent control and we were able to stay in manhattan. There, the salaries were higher and consequently enabled my parents to put me in the best schools. Without having the fruits of living in the city I would not be the success I am today.

critoone said...

seems the rent control is the same anywhere in asia, there's actually none or very little to impose. in singapore the slums live not on the streets but on top of the buildings, i hear they are doing the same thing in u. a. e. they try to hide poor people. that would be very difficult to duplicate in the philippines.

Urbano dela Cruz said...

"in singapore the slums live not on the streets but on top of the buildings, i hear they are doing the same thing in u. a. e. they try to hide poor people"

not sure what you mean, critoone. are you referring to putting affordable or subsidized housing units in regular developments? in which case, that's not "hiding the poor" as it is providing equitable housing.

Anonymous said...

rent control is a huge issue - if you care about the tangible intangible and subtangible heritage, rent control cannot be lifted overnight - you will destroy the cultural value and simply be left with pretty badly restored buildings.
Why are you quoting out of date american text - get out into Asia and see for yourself what both keeping and lifting the rent control can do?
Its all a question of establishing a balance - Penang is a prime example - with rent control the buildings were hardly touched and yes there was decay of the built fabrich, but the community fabric was to be admired, little unemployment and low crime. Now the RA has been lifted, the citiy is dead, restoration is tragic as there are too few people who known what to do, crime is high and although gentrification is taking place for tourism the city is not worth coming to see any more - It seems there is currently no answer world experts can't even grasp the enormity of the issue- but it must be a balance between realistic rents and maintaining a safe environment which = community.
leave american models for the americans and check out Asia.

Anonymous said...

Nice post and helpful to take out the good information.

Deirdre G

homes for sale philippines said...

Nice post and helpful to take out the good information.

Deirdre G

Quick Links

Notable posts on the metro