Liberalizing the rent market: Real estate speculators to evict both tenants and landlords

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An aerial view of Beirut, Lebanon, taken on February 24, 2014. (Photo: Marwan Tahtah)

By: Mouhamad Wehbe

Published Sunday, June 8, 2014

Over 200,000 apartments in Lebanon are vacant. This figure raises legitimate questions about soaring apartment prices, when the population in Lebanon has been more or less stable. In this context, it seems that speculators are capitalizing on the drama involving landlords and tenants renting their properties on old contracts. In other words, one outcome of the affair could be not only the eviction of old tenants by their landlords, but eventually, also the “eviction” of landlords by real estate speculators.

“Our cities are a bomb rigged to explode,” says former Director General of Housing Mohammad Younis. In Lebanon, there is a housing crisis revolving around the two dynamics of demand and prices. Demand is rising exponentially without a corresponding increase in the population, while prices continue to rise at an accelerating pace in parallel with supply-related problems.

The paradox is not an accidental anomaly. It is the result of deliberate policies that are currently pushing for the liberalization of lease contracts, with one goal being to get old tenants – but also old landlords – out of the picture. Ultimately, the issue is not about property rights, but is about speculation.

Younis’ reference to the vacant 200,000 apartments highlights the essence of the housing crisis in Lebanon. Indeed, why do apartment prices continue to increase when there are so many that are in supply? What is the real nature of the demand for these apartments? And which segments in Lebanon are buying them up and for what purpose?

In effect, the answers to these questions can be found in a number of real-estate phenomena, including urban concentration, rural migration, and the glaring disparities between income levels and property prices – in addition to secondary factors such as sectarian, political, and regionalist stratification.

According to Younis, urban centers in Lebanon are extremely overcrowded. He said, “In Lebanon, population density in the Jounieh-Damour-Broummana triangle is such that it accounts for 65 percent of the population of Lebanon.” This assessment could explain the concentration of demand in that particular region, and the new sprawls spiraling out in all directions. What it cannot explain, however, is the level of demand, given that the population in Lebanon has stabilized between the range of 3.9 and 4.1 million people. To be sure, this figure means that demand for apartments should not reach more than 15,000 units per year, according to estimates by some banks.

According to former minister Charbel Nahas, rural migration alone does not explain high demand for housing and unnatural real estate prices either. He said, “In fact, it is immigration that explains what is happening because despite population stability, demand for apartments is still extraordinary.” “The Lebanese immigrate to improve their incomes in the Gulf countries…which allows this segment to invest in Lebanon and earn rents,” he added.

In Nahas’ view, exceptional demand for apartments does not correspond to exceptional need for housing, as evidenced by the large number of vacant apartments. He said, "demand from expatriates and rent-seekers alone explains high apartment and land prices.”

Interestingly, this demand is in a self-reinforcing feedback loop, where prices increase, demand is sustained, the population is decreasing, and immigration is rising, meaning more rentier opportunities for a growing number of expatriates.

It is not easy to get out of this cycle, or to regulate prices, since they are fueled by high incomes earned abroad and that are linked to a large extent to oil prices. According to Nahas, “expatriates see speculation in real estate in Lebanon as a way to make easy profits.”

In this sense, investments in real estate seek not to develop properties to sell apartments, as much as to speculate in search for huge returns. This makes real demand for housing an irrelevant factor in that dynamic, “since the crisis is not one of demand that the market cannot meet, but is one of a system that facilitates rent-seeking, and a crisis of income that is not proportional to apartment and land prices,” as Nahas says.

Equally irrelevant in explaining prices would be to invoke rural migration into cities, though it is important to note that this is the context currently framing the debate over liberalizing old rent contracts, and the need to unlock new lands for developments to feed the same decades-long vicious circle.

Younis says all the solutions that have been proposed for the housing crisis in Lebanon failed to include a comprehensive economic approach, instead deepening the problem, citing in this regard the new rent law and the settlement recently approved by parliament.

There have been proposals including rent-to-own schemes and waiving registration fees for buyers if their mortgages are worth 800 million L.L. (US$ 533,000) or less. “However, all these proposals do not address the heart of the problem, and do not constitute a solution to the housing crisis, the issue of vacant apartments, or actual demand in the market for housing, that is, the demand coming from residents in Lebanon,” Younis said. “Those who have money must pay taxes, while rent-to-buy schemes mainly help young low-income segments [of the population] who cannot afford to buy homes,” Younis explained.

Some of these proposals were touted as a solution to issues arising from liberalizing old leases. However, the interest groups seeking to free up some land in Beirut put tremendous pressure on politicians to expedite the new rent law. In truth, the law in question could very well lead to a huge demographic upheaval since it might drive old tenants out of the areas in which they now live, while their landlords, who would probably sell their properties, could also be pushed out, possibly to be replaced by large-scale vacancies.

What housing policies should be pursued then? Is it necessary for all the Lebanese to own their homes? Should there be more regulation by the state on the relationship between tenants and landlords?

Nahas gives a simple diagnosis that can help answer these questions. He said, “If you develop a building and decide to rent out apartments, you have to pay tax on your earnings from rents, while making a return on your investment in the medium and long terms. By contrast, selling apartments in the presence of demand financed by foreign sources (e.g., expats in the Gulf countries) will spare landlords from having to pay income tax, and any kind of real estate betterment tax, meaning quick and large profits.”

“This would allow owners to repeat the cycle every 3 or 5 years max,” he continued, saying the issue is ultimately not about owners and tenants, but about speculators and rent-seekers, who need to tap into more land in Beirut for more profits.

This article is an edited translation from the Arabic Edition.

Comments

This is a nice post in an interesting line of content.Thanks for sharing this article, great way of bring such topic to discussion.

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