The Spanish transition from Franco to a Democracy, far from marking a breakpoint, gave continuity to the housing policies of the previous era. Gradually, the newly formed democratic government strengthened reforms that transformed renting into an unstable, expensive and even disgraceful option, pushing most of the population into taking on a debt in order to obtain housing.
The privatization of the banks and the outsourcing of economic policy
The privatization of the banks not only meant the loss of the one of the most important economic policy tools within the hands of the state, such as the creation of money, but also meant the loss of a basic tool for designing a production model on which our economy would be based. Suddenly, the savings of millions of citizens were being managed by private initiatives. With a much higher volume of private deposits than public budgets, the large investments being made within the banking industry were those which were determining the productive fabric of the country. It was the bank, from that moment on, who started to decide which national project to invest in and in which not, which activity to finance and which not. Why strategically bet on a certain sector and why not. Privatization left decisions in the hands of private interests which until then had been taken within the public sphere. Accordingly they told us that the privatization within the financial sector ensured the most efficient use of resources. The market would take care in directing our savings into the most productive activities and everybody would win. But it turned out that boards of directors of banks were more interested in obtaining short-term benefits than ensuring the sustainability of their investments. Thus billions of euros of savings from the accounts of millions of depositors went towards the real estate sector, where the highest performance and benefits could be obtained within the shortest time.
If the State wanted to straighten out the economy, it had to make use of fiscal policy to develop a model that would get it back on course. But instead of setting limits, the fiscal policy did nothing but reinforce the tendency towards rewarding speculation.
In this way they were solidifying the foundations for an insufficiently diversified economy. An economy that operated more like a pyramid scheme that needed more and more capital in order to propogate itself. When all resources had finally depleted themselves at home, they went looking for more outside of the country. The Spanish economy became more dependent on international capital and thereby increasingly more exposed to the cyclical swings of the global economy. For years, this model, based on the housing market and cheap labour, seemed to work. The real estate market had been converted into a hen with golden eggs. But everybody knows that it is very risky to put all eggs into one basket, as all of them would break if the basket were to fall. And the basket did break the moment that Lehman Brothers fell and international capital stopped flowing, a collapsing house of cards that turned the Spanish miracle into a distant mirage.
The deregulation of the credit market and its effect on prices
The privatization of the banking sector during the 1980s followed a progressive deregulation of the financial market which completely did away with any credit control mechanisms which had existed before. This deregulation encouraged a policy based on credit and facilitated debt within families, which went from 55 to 130% of all disposable income from 1997-2007. The State defended these reforms saying that a flexible financial market would benefit society and would allow more people to buy a home through mortgage loans. Of every three Euros of debt, two are attibuted to mortgage debt. Therefore, for years they made us believe that democratizing access to credit was the most efficient way of guaranteeing the right to housing. The reality was, however, that this policy of easy credit contributed in a straightforward manner to the rise in housing prices, multiplying the effort that people had to make in order to access housing. If in 1997 a family needed 3,8 annual gross earnings in order to buy a house, in 2007 they would need 7,6 annual payments. Measured in another way, the amount household income that a family had to use towards monthy mortgage payments went from 37,6% to 51,2%.
Given the capacity that real estate vendors had in fixing housing prices, this corresponded with the maximum amount that the consumer was willing to pay. The maximum that the consumer was willing to pay for a basic good, of which one cannot do without, was determined by ones debt capacity. Thus, housing prices were set by the capacity for most of the population to indebt themselves and not an exchange between supply and demand. Therefore, the maximum debt capacity translated into higher prices. If, for example, a law passed that limited the length of mortgages to twenty years, then the borrowing capacity of a single family unit would be drastically reduced, therefore influencing the price of housing which would immediately collapse. For this reason, banks and savings banks financed 100% of the sale of houses within their portfolios. If they didn't do this, then people wouldn't be able to buy them and they would be forced to lower their prices.
Tax incentives for purchasing and their effects on prices
In tax matters, in 1978 a tax relief was introduced towards the purchase of a home, that during the years in which the Partido Popular was in power was extended towards second and third homes. This sent out a new message that influenced people to go further into debt. Tax reliefs towards deposits within home savings accounts or reductions in value added tax (VAT) towards the sale of property, implemented both by the left and right wing governments, entended tax benefits in favour of home owners and not renters.
But despite enjoying positive public support throughout the country, it was only the large real estate companies that benefited from these tax reliefs, which helped raise prices. We will see how.
Given the capacity for major land owners to set prices within an imperfect real estate market, tax breaks for housing purchases caused the housing prices to rise according to the same amount that had been originally exempted. In this way, it used a logic similar to what we have seen before. That is to say, a consumer could claim a tax break for ten units for the purchase of a home that cost ninety units which the developer would then apply towards the final increased price of one hundred units. The consumer who was ready to pay ninety would also be willing to pay one hundred after the State returned ten to him. The promotor immediately incorporated and absorbed any state subsidies directed towards the consumer into the final price.
With this type of policy, who won and who lost?
Tax reliefs and other reductions towards the purchase of a home had a neutral effect on the consumer, since the housing price increase was offset by tax subsidies already received from the State. The only one benefiting from this type of policy was the seller, as he could push the housing prices upwards. The State always lost as thousands of Euros coming from tax contributions went directly towards the seller, that is the major land owners.
In the current situation, banks and saving banks have become the biggest real estate companies in the country, las desgravaciones fiscales por la compra de una vivienda, recuperadas por el Partido Popular nada más llegar al Gobierno en diciembre de 2011, así como la reducción del IVA por la compraventa de inmuebles, se traduce en una transferencia de rentas encubierta al sector financiero. Even international institutions like The World Bank, the IMF or the OCDE publicly denounced the return of the same policies that have brought us towards the abyss.
The insecurity of renting
The coup de grace that put an end to the possibility of renting as a viable option to buying came at the hands of the "Law of Urban Renters" (LAU) in the 1985. The famous "Boyer Act" completely deregulated the renters market. From that point on, rental prices were no longer protected and limited to five year contracts. This reform converted renting to an expensive, unstable and temporary option. Why would people risk renting a place that in five years they could be evicted from or asked to pay ten times the rent? What kind of security would this offer to middle-aged people and with retirement just around the corner?
In May 11, 2012, the Council of Ministers announced new measures which further deregulated the renters market. Once again, under the mantra of mobilizing the stock of empty housing and stimulating the rental market, it announced a new reform within the Law of Urban Renters (LAU) in order to guarantee the maximum security towards property owners; rental contracts went from five to three years, more expedient procedures for evicting people because of nonpayment and disassociating itself from statistical updates of rental income provided by the Spanish Statistical Office, allowing owner could raise the rent above rising living costs. On top of this, if the landlord wanted to take back the property for either himself or other family members he only had to give two months notice to tenants living there. This reform definitively discouraged the possibility of renting as a viable option for the future or any real alternative to buying.
If the Adminstration implemented free market policies clearly committed to promoting access and favorable treatment towards owning property, public policy wasn't that far behind.
Public policy and housing: the annihilation social housing
During the last two decades of the dictatorship, public policies on social housing experimented with a change in course into a emerging project based on homeownership which facilitated the gradual dismantling of allotted public housing, converting old renters into homeowners. A turning point occured and was consolidated during the transition to democracy, when more than 90% of constructed social housing went up for sale and public rental became a residual option. This took place over the period of a half a century, starting with one scenario during the first stage of the dictatorship when the State constructed public rental housing which was entrenched in the outskirts of major cities, passing into the second scenario in which the State constructed public housing for purchase to the present scenario in which private initiatives substitute the State in the production of housing. As of now, private operators construct housing, including public housing, while the Administation is responsible for supplying land to companies, speeding up certification processes, work permits, endorsing buyers and subsidizing interests on loans to individuals.
Once again, José Manuel Naredo sums it up brilliantly: "There was only one change worth highlighting in the transition to democracy: the abandonment of a public policy towards housing linked to paternalism and Francoist corporatism, substituted for another in which businesses and government administations dismantled the stock of public housing, selling it at a reduced price to its renters. This reducing the concentration of public housing to the extent that Spain has the lowest percentage of social/rental housing within the entire European Union." A public housing stock that constitutes only 1% of the total constructed and that, within the context of the present crisis, would have allowed thousands of evicted families to rent instead.
The case of Badia del Vallès
Badia del Vallès is a pathetic example of the terrible consequences of the main drive towards private property, and even more, in the access to social housing. It deals with a municipality within Barcelona created by the dictatorship in the 1960s and consisting of large tenement buildings designated as public housing for the working class. It is known as "bedroom city". As a result of the large speculative wave, certain financial entities (basically CatalunyaCaixa) initiated speculation of this public housing, financing illegal purchases. So, public housing that by law could not be valued at more than 40,000 Euros were turned into mortgages of more than 200,000 euros, signed by notaries that turned a blind eye. When the holders of these mortgages (workers within the construction sector, mostly immigrants within some cases little basic knowledge of Catalán or Castellano) were some of the first to suffer from the crisis and when they became unemployed, they discovered the massive fraud.
As they didn't pay their mortgages, CatalunyaCaixa started the foreclosure process and widespread evictions for amounts much higher than official prices of their homes. Faced with this scandal, the government, negotiating with CatalunyaCaixa, attempted to cover up this corruption case of such a large scale with public housing. Finally CatalunyaCaixa agreed to pay back the mortgage debt "only" if they could also repossess all the homes, and was able to get the Catalan Administration to double the value of the apartments by law, apartments that in a few years would be deregulated. And evidentally nobody was investigated or convicted of fraud. The bank never loses.
The absence of any alternative and its effect on prices
Continuing on with the allegory of the perfect market, within the abstract theoretical model that economists use to represent the ideal market, there is something called "substitute goods". A good is substituted by another when one of them can be "consumed" or "used" in place of another. Examples of this typology could be between margarine and butter. In this way, when the price of margarine goes up, people stop buying it and start to use butter instead. In the case of the real estate market, we can confirm that the bubble could have been avoided if they hadn't strangled the rental market and if a viable alternative was developed. If renting had been a stable option and easy to access, then housing rentals would have been a substitute good, therefore influencing a decrease in housing sale prices. In the same way, a stock of affordable public housing, more than providing a solutions to an emergency situation, would have acted as a counterbalance to rampant speculation within the free market.
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