A Cheap Way Of Adding To The Stock Of Public Housing

Every liberal democracy has some need for public housing. There will always be people who want employment but cannot find it, often because of physical disabilities or low intelligence and educational achievement. These people cannot afford to rent the vast majority of private accommodation in a prosperous society. In periods of low rental vacancies, landlords will not rent to unemployed or very low income people anyway, since they are greater risks.

If an economy is in recession, the proportion of such people will significantly increase, as people lose their jobs because their employer is struggling financially, or even went broke. Of course, for people in such positions, a mortgage is out of the question. In fact, an increasing number of people lose their homes due to an increase in mortgage defaults.

When there is an oversupply of residential property, due to a combination of speculative construction and poor financing decisions, property prices can fall rapidly. This is what has happened in the USA and Europe, particularly Ireland and Spain.

Although the governments of these countries have greatly decreased revenues, they are attempting to stimulate recovery, or at least ameliorate their recessions by continuing spending on infrastructure, while running large deficits.

If the alternative is massive social unrest due to large scale homelessness, public housing is an imperative. It seems that the massive residential property oversupply and greatly reduced prices in all three of Ireland, Spain and the USA present their governments with a cheap solution to the need for quality public housing: wait for the owners or in particular, the developers to default, then buy the properties cheaply from the bank’s receiver.

The government has no responsibility to bail out speculators, or even people who cannot repay their mortgages. In fact, governments may well have a responsibility not to do so, to avoid the moral hazard of private and corporate investors believing they can socialize losses.

Governments often worry that making large investments in public housing will be inefficient by leaving them overcapitalized when the economy recovers and many public housing tenants can afford private rents or even mortgages.

Firstly, most nations’ populations grow over time. Currently, the populations of the USA and Spain are growing at an average rate of approximately 1% per year, with Ireland (Eire) at about 1.5% after a decline until the late 1960’s. So, long term, the amount of public housing probably needs to increase at these rates.

But it can mostly be built during recessions, when it is needed at a faster rate, then none built in more prosperous times. In fact, some public housing can be sold off to free up government capital for other public works. Alternatively, as more public housing tenants regain employment, they can stay where they are and their rents can be increased to market rates.

Why should governments give people rental vouchers to rent properties from investors who have bought them cheaply from receivers when the government can buy those same properties, then rent them to public housing tenants, at far lower all up cost? When the economy improves, home ownership can be encouraged through purchase schemes, while returning the government’s capital, together with a profit as the property values increase.