rent control redux

"High transaction costs, rent control linked to RP slums"

So goes the headline of this Inquirer article (archive copy) reporting the research findings of the Global Property Guide. Which pretty much confirms the points I made about how our intractable rent control law is to blame for the size of our squatter communities.

This from the article (emphasis mine):
The Philippines is the only country -- other than Taiwan -- in East Asia with a rent control law. Rent control and high transaction costs tend to discourage property owners from participating in the market, leading to lower supply.

If households cannot buy or rent housing due to prohibitive costs and lack of options, they may turn to self-built houses, or worse, illegally built houses on lots owned by other entities (squatting).

The GPG report itself highlights the high real estate transaction costs in the Philippines ("roundtrip" transaction costs can take up to 35% of the total property value) - and GPG reports the process of registering property in Metro Manila as "the most cumbersome in Asia."
There are eight procedures in registering property...

“In addition, payments must be made to three different offices: the Register of Deeds for the registration fee, the BIR for all the taxes and the City or Municipal Treasurer’s Office for the transfer tax. With each office and payment, there is always room for corruption and extortion.”
The report makes the following recommendations to reduce transaction costs:
  • The establishment of a one-stop-shop for property registration and payment of taxes;
  • Centralization of property valuation records held by the BIR, city and municipal treasurer’s offices, banks, Register of Deeds and other agencies;
  • Establishment of a standard property valuation system;
  • Creation of a website for all the necessary data for the real estate market; and abolition of the rent control law (the government should instead provide a standard contract for rental agreements).
Doubtless this will help people who want to buy and sell property but to expand the rental market and provide better housing options for the poor, we have to touch that third rail and find a path to gradually but definitively eliminating rent control. This is the only way to create a large scale, market-led response to creating better housing for the poor.

In my post last year, I focused on why eliminating rent control should be high on the Heritage Conservation Society's strategic goals:
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.
As to the effects of lifting rent control on the poor, I had this to say:
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
(Take the time to read through the extensive and thoughtful comments to that post.)

Image credit: 960618-Payatas-22
by KarlMarx


peterangliongto said...

While I'm no fan of any market distorting regulation. I'm not too sure I agree with the view that there is a big correlation between MM squatter problem and rent control. http://serp-p.pids.gov.ph/details.php3?tid=2312
As a housing person I know we can and do develop shelter options for people who earn minimum wage (this is of course higher by definition than the poverty line but a lot of these people make up the 4 million informal settler population anyway). A big big problem is identified by the study posted above that the nature of land owning in the Philippines is monopolistic. It's in the hands of a few and many times this is very market distorting. This is not so easy to regulate even with idle lands tax and as discussed previously property taxes, the differential between the property owning class and the buyers/renters population is many multiples higher than in other markets in the region. The ironic part is the rental law should actually incentivize landowners to redevelop as their rental/capital yields diminish yet this is a very slow process as many landowners don't feel this so much. Again I'm no fan of either the rental control law and specially it's friend the Lina Law but we may be looking at the wrong solution.

Urbano dela Cruz said...

hi peter,

sorry for the delayed reply. I took the time to read Marife Ballesteros' 2001 report closely to fully understand what she was trying to say.

It is interesting that in DP 2001-23 (the abstract you quoted) published in december 2001, Ballesteros says

"overall empirical analysis on rent control suggests, 'there is little convincing evidence that rent control hampers construction
and maintenance'."

Although her paper looked mainly into the relative strength of the rent control regime in Metro Manila (using Malpezzi and Ball's index) and the distributional effects of the regime -and gives no support to her contention (which she interestingly puts in quotes) that the rent control law had no effect on the supply of housing.

But, in her 2002 report, Ballesteros talks about the

"regressive effects of rent control on supply of rental housing."

When she reports that the rental housing market is "monopolistic" -she means there are very few or no substitutes to renting (rent-to-own, or buying).

She does not deal with land ownership distribution. (Though I agree with you that that does probably have an effect on the supply of housing.)

Her main thesis in the 2001 study is that rent control fails as an income transfer strategy (i.e. -supporting and enabling the poor).

In her 2002 study, she proposes alternative strategies that could better work at income tranafers including

"the provision of rental allowances to the poor; provision of low-cost financing to landlords, including those who are into self-help housing; and rent of government land on leasehold basis to developers interested to go into rental housing."

I do think that uneven land ownership distribution does have an compounding effect, especially when paired with the constraints on expropriation (eminent domain).

I am still studying this matter, but apparently RA 7279 explicitly prohibits the expropriation of lots under 300 sq meters in highly urbanized areas (800sqm in other urban areas). This basically prevents governments (local and national) from assembling land within cities to deliver lots large enough for housing.

I believe it would be way to costly for the private sector to assemble land themselves so they wait for larger lots to come on stream (hence the history of Fort Boni and the look ahead to the sale of the NMH and Camps Crame and Aguinaldo).

In your own experience, are housing providers able to assemble land within the cities? or do they wait for large parcels (basically tabula rasa) to come into the market for development or redevelopment?

(I'll write more about this in later posts.)

But back to the point, I still contend the rent control law, originally a straight price freeze when re-enacted in 1970 and only moved to a tenancy based rent adjustment ceiling in the late 80s, has a significant effect on the market supply of low cost rental units.(Thereby encouraging informal settlements as a housing solution.)

Moving away from the regime would help immensely but neither is that a silver bullet.

It should be considered only within the framework of an overall urban redevelopment plan.

peterangliongto said...

Hello, Sorry at minsan minsan lang ako nakakabisita sa blog mo!

In any case re consolidation, here in our fair Republic of MM, it's hard to wait for big redevelopments of sites instigated by the GOP. There are only a few parcels most of which are listed under the privatization program. i.e. they are few and far between. Hence most private developers, specially 2nd tier ones would consolidate land as they would have a more difficult time participating in big bids.
This being said the scope would not be very big and most of the consolidation is ussually for a few key parcels adjoining large pieces. You'll usually see more of the consolidation in large horizontal developments not urban redevelopment. Much easier and worthwhile to do.

Consolidation is of course a very tedious process but not neccesarily expensive on an absolute basis. Perhaps on an activity and cost accounting type analysis it would be but capital here can be strange in that way specially since options are seldom valued so ultimately it's not necessarily expensive.

But if you mean actual tabula rasa like razing parts Manila (e.g. like the hudongs in Beijing), I don't think that even the GOP is capable of that . (haha) Taking out the squatters for North/South Rail is a good example. This is a black and white issue of land use from every angle:safety; ownership; etc. Yet the GOP experience great great difficulty in expelling them.

Btw I know of no expropriation limitations under 7279. Perhaps it is in some other law.

I do not see many projects which would qualify to my mind as true housing (addressing the needs of mass population for shelter) within the city. Most developers in MM at least would be looking at mid income markets s they find it difficult or not worthwhile to do such projects. The biggest problem is the price of land and compounding it the geology of a big part of MM, making it expensive in many places to build walkups -at this point the only way to economically build unsubsidized low cost housing.

Anyway back to rent control, I've seldom seen rent control as an issue for not building residential rentals. Most capital here requires a very high payback hence the type of projects that most people , specially mom and pop developers who are more attuned and intersted in this market, may forego a higher NPV project with a long payback compared with a quick return. So escalation is not that big a deal with new residential projects for rent. The bigger problem I see is that rental yields in general are very small here, specially when you start computing in the transaction costs and taxes, the only type of new residential rentals we will see for a while I believe will be the dormitory type projects which would cater to office workers saving on their fare. Families will more commonly be raised outside of MM but within GMA like in the bedroom communities of Cavite, Bulacan or Rizal.

Urbano dela Cruz said...

sorry peter,

i just haven't had the energy to put together the long answer your comment deserves.


peterangliongto said...

Don't want to impose, just reacting and learning. I always find your posts thoughtful and insightful. Hope all goes well with the rest of the Blog!

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